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

QBD (Admin) (Burton J) 2/4/2001

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

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 Sch.12 Finance Act 2000, 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; (ii) constituted unlawful state aid, contrary to Art.87 and Art.88 EC Treaty; and (iii) 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) Times, 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.


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.

LTL 2/4/2001 : (2001) STC 629 : (2001) HRLR 42 : Times, April 5, 2001

Document No. AC0706090

Source: Lawtel http://www.lawtel.co.uk , copyright acknowledged.