R v INLAND REVENUE COMMISSIONERS, EX PARTE (1) PROFESSIONAL CONTRACTORS GROUP LTD (2) RUUD VAN ZUNDERT (3) SQUARE MILE PROJECTS LTD (2001)

[2002] EWCA Civ 1945

CA (Civ Div) (Auld LJ, Robert Walker LJ, Dyson J, Dyson LJ) 21/12/2001

TAX - ADMINISTRATIVE LAW - EMPLOYMENT - EUROPEAN UNION - HUMAN RIGHTS

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 : SELF-EMPLOYED : EMPLOYEES : S.75 AND S.76 WELFARE REFORM AND PENSIONS ACT 1999 : S.60 AND SCH.12 FINANCE ACT 2000 : EUROPEAN CONVENTION FOR THE PROTECTION OF HUMAN RIGHTS AND FUNDAMENTAL FREEDOMS 1950 : EUROPEAN CONVENTION ON HUMAN RIGHTS : ECHR : PROTOCOL 1 ART.1 : PEACEFUL ENJOYMENT OF POSSESSIONS : PROTECTION OF PROPERTY : EC TREATY : UNLAWFUL STATE AID : SELECTIVITY : FREEDOM OF ESTABLISHMENT : JUSTIFICATION : S.4A SOCIAL SECURITY CONTRIBUTIONS AND BENEFITS ACT 1992 : EC ARTS.39, 43, 49 : FREEDOM OF MOVEMENT OF WORKERS : FREEDOM OF PROVISION OF SERVICES : DEROGATIONS : RELEVANT COMPARISONS : COMPETING UNDERTAKINGS : EQUAL COMPETITIVE FOOTING : IDENTIFIABLE SECTORS : DISCRIMINATORY : DISLOCATORY : NEUTRAL : OBSTACLES TO WORKERS : OBSTACLES TO PROVISION OF SERVICES : DIRECT AND DEMONSTRABLE EFFECT

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 and nor was it incompatible with provisions of the EC Treaty.

Claimants' appeal from the decision of Burton J dismissing their application for judicial review of the IR35 policy of the Inland Revenue Commissioners.

IR35 was embodied in s.60 and Sch.12 Finance Act 2000 and s.4A Social Security Contributions and Benefits Act 1992 and was aimed at eliminating tax avoidance by individual workers using service companies as recipients of payments for their services.

The claimants argued that IR35 constituted unnotified state aid and contravened the principles of freedom of movement of workers, freedom of establishment and freedom to provide services, contrary to Arts.39, 43 and 49 EC Treaty respectively.

In dismissing the application for judicial review the judge held that IR35 was not targeted at a particular sector of commerce and so was not an exception to or derogation from a general measure that contravened EU law, but a general measure in itself.

It did not confer an advantage on any identifiable group of competing undertakings.

The judge concluded that Arts.39 and 43 did not apply but that it was "just arguable" that IR35 was a relevant restriction within Art.49 but that it was justified.

On appeal the claimants argued that the system that IR35 was concerned with was corporate taxation and that the relevant comparison was between small service companies caught by IR35 and larger trading companies in the same sector that were not so caught.

The claimants also argued that any substantial impediment on European freedoms, even if not discriminatory or dislocatory, would contravene in the "neutral" category.



HELD: (1) At first sight IR35 was imposing a detriment on service providers in order to prevent tax avoidance and restore fiscal parity.

The detriment could constitute aid only if it favoured other competing undertakings in breach of the selectivity principle, which was the primary means of differentiating between objectionable state aid that favoured identifiable undertakings or sectors of the economy and general measures that did not have that effect.

The mere propensity for a measure to favour one sector rather than another could not amount to selectivity.

(2) The heart of the matter was what system IR35 was concerned with and what was the relevant comparison for the purposes of judging whether it affected the equal competitive footing of undertakings.

The purpose of IR35 was to ensure that individuals who ought to pay tax as employees could not, by the assumption of a corporate structure, avoid personal taxation.

The judge had been correct that IR35 was not a state aid.

(3) IR35 was not an obstacle to anyone seeking work in the UK.

The judge had been correct in holding that Art.39 could not apply.

A neutral, non-discriminatory, non-dislocatory national measure would not contravene freedom of movement unless it could be shown to have a direct and demonstrable inhibiting effect on the freedom.

IR35 was not discriminatory or dislocatory, and did not provide a direct and demonstrable inhibition on the establishment of a business in the UK or on the provision of services even if a business were not established.

Genuine self-employed activities would not be caught by it.

It only applied to instances of artificial tax avoidance where employee-like services were offered under the guise of self-employment through an intermediary, which would be taxed as if there were a real employee situation.

(4) Therefore, IR35 did not contravene Arts.39, 43 or 49.

Appeal dismissed.


Gerald Barling QC and Miss Kelyn Bacon instructed by Bond Pearce for the claimants. Dr Richard Plender QC and Stephen Morris instructed by the Solicitor of Inland Revenue for commissioners.

LTL 21/12/2001 : (2002) STC 165 : Independent, January 25, 2002 : Times, January 14, 2002

Document No. AC0101035

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