Case Name: R v INLAND REVENUE COMMISSIONERS, EX PARTE (1) PROFESSIONAL CONTRACTORS GROUP
LTD (2) RUUD VAN ZUNDERT (3) SQUARE MILE PROJECTS LTD (2001)
Court: QBD Administrative Court (
Subject: TAX - EMPLOYMENT - COMPANY - EUROPEAN - HUMAN RIGHTS - COMPETITION
Descriptors: INCOME TAX : AVOIDANCE : IR35 LEGISLATION : SERVICE COMPANIES : SERVICE CONTRACTORS
: PERSONAL SERVICES PROVIDED THROUGH INTERMEDIARIES : TAXATION : REMUNERATION
: NATIONAL INSURANCE CONTRIBUTIONS : NICs : PAY AS YOU EARN : PAYE : SCHEDULE
E : S.75 AND S.76 WELFARE REFORM AND PENSIONS ACT 1999 : S.60 AND SCHED.12
FINANCE ACT 2000 : PROTOCOL 1 ART.1 EUROPEAN CONVENTION ON HUMAN RIGHTS AND
FUNDAMENTAL FREEDOMS 1950 : ECHR : PROTECTION OF PROPERTY : EC TREATY : UNLAWFUL
STATE AID : SELECTIVITY : FREEDOM FOR WORKERS : FREEDOM OF ESTABLISHMENT :
FREEDOM FOR SERVICES : JUSTIFICATION
Summary: IR35, the legislation that sought to eliminate the avoidance of income tax
and national insurance contributions by the use of service companies, did not
infringe the human rights of service contractors nor was it incompatible with
provisions of the EC Treaty.
Text: Application to challenge the legality of the composite legislation, contained
in s.75 and s.76 Welfare Reform and Pensions Act 1999 and in s.60 and Sched.12
Finance Act, known as IR35, which sought to eliminate the avoidance of income
tax and national insurance contributions ('NICs') by the use of service companies
as recipients for payments in respect of services provided by contractors who,
in the opinion of the Revenue, were de facto employees. The essential thrust
of IR35 was that those payments should be treated not as company revenue, but
as deemed salary to the service contractor whose services the company provided,
thereby subjecting the service contractor to Schedule E income tax and Class
1 NICs. The grounds of challenge were that IR35: (i) was incompatible with
the service contractors' right to protection of property under Protocol 1 Art.1
European Convention on Human Rights and Fundamental Freedoms 1950; (2) constituted
unlawful state aid, contrary to Art.87 and Art.88 EC Treaty; and (3) infringed
Art.39 (freedom for workers), Art.43 (freedom of establishment) and Art.49
(freedom for services) of the Treaty. The following facts were agreed, assumed
or found by the court: (i) the purpose of IR35 was as set out above; (ii) because
of IR35, a substantial proportion of all service contractors, of the order
of two-thirds, would have to pay more tax and/or National Insurance and earlier
to the Revenue; (iii) IR35 introduced greater uncertainty than had prevailed
under the previous arrangements; (iv) those affected by IR35 would face competition
from those who were unaffected by it, with the latter enjoying greater fiscal
and commercial advantages; (v) some service contractors would either close
their existing UK business or would not start a contemplated UK business; and
(vi) IR35 would thus have an effect on trade between EU member states.
HELD: (1) The impact of IR35 was not even arguably so severe as to amount to
a de facto confiscation of service contractors' property, to a fundamental
interference with their financial position or an abuse of the UK's right to
levy taxes. Subjecting service contractors to the common law of employment
did not interfere with their human rights. (2) IR35 did not give rise to an
unnotified state aid as no one could be specifically identified as the recipient
of any such aid. (R v Commissioners of Customs and Excise ex parte (1) Lunn Poly Ltd (2) Bishopsgate
Insurance Ltd (1998)
TLR 11/3/99 considered). (3) The court was satisfied that the imposition of
IR35 could be said to be an impediment to mobility, in the sense that a positive
incentive for service contractors to come to the UK had been removed. However
any such impediment was justified by reference to tax reform, the prevention
of tax avoidance and the protection of the Revenue.
Application dismissed.
Appearances: Gerald Barling and Kelyn Bacon instructed by Bond Pearce for the claimants.
Dr Richard Plender QC and Rabinder Singh instructed by the Solicitor for the
Inland Revenue for the defendants.
References: LTL 2/4/2001 (Unreported elsewhere)
Judgment: Approved subject to editorial corrections - 50 pages
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