One of the surprises of today's (December 4) court proceedings was that the judges did not seem to accept that the contractors' position should be compared to that of other companies. Instead they took the Revenue line that contractors were employees of the client in all but name, and implied that their tax position should be similar.
This point had been decided as a question of fact before Mr Justice Burton in the High Court in March, who heard extensive evidence on the competition between contractors and bodyshops, and had accepted that it was the commercial reality. The PCG's Counsel, Gerald Barling QC, took this point as a decided fact and then had to backtrack to try and deal with it.
However I was not convinced that the court had been persuaded - Judge Walker said at one point "Why should the contractor be able to set aside earnings for future investment - what does this mean?" [i.e. when he is only acting as an employee]. When Barling finished explaining a point on state aid, the lead judge, Judge Auld, said "we have to decide what category of being [i.e. individual or company] we are applying this to."
Despite Barling returning to this point several times my impression was that the judges were still inclined to the Revenue's point of view.
Hopefully this issue will be addressed again on the second day (December 5), perhaps in the summing up.
Overtaxed and misunderstood?
The PCG needed not only to make the point that they are in competition with body shops but also that they pay more tax than these competitors.
Although Barling several times made the point that contractors cannot deduct all their expenses, this didn't seem to be followed through to its logical conclusion - that this means that they are bearing more tax on a lower net income. Again, this is a fundamental point which one would have hoped would not need to be reviewed at the Appeal, but which needs more emphasis tomorrow.
Barling reviewed the arguments set out in the PCG skeleton (available to PCG members on their site) and the points made in the original judicial review.
For him to succeed he has to show that IR35 is not part of the general tax system in the UK. This is of fundamental importance because the EU has held that, for IR35 to be a breach of EU law it must be "an exception to the application of the tax system." It is thus necessary to establish what is meant by 'the tax system' - and whether IR35 falls outside it.
Clearly the IR take the view that IR35 is acceptable because it forms part of the general tax system. Barling argued the contrary, that IR35 is not
inherent in the UK system, which deals separately with personal and corporate taxes. He described IR35 as "a cross over which...involves grafting bits of one onto the other".
It remains to be seen whether the judges were convinced of this point, or more generally that IR35 constituted a negative state aid.
Freedom of movement
One hopeful sign is that the court seemed more sympathetic to Barling's arguments on a freedom of movement.The arguments in this area were always stronger than those on state aid: Burton had found that IR35 had breached EU law on freedom of movement, even though he then held that this breach was justified because it was to counter tax avoidance.
The judges seemed genuinely surprised by and interested in some of the case law presented by Barling, and more open to his arguments than on state aid.
However, they several times returned to the question of the tax regimes in other EU countries and whether they were similar to IR35. They wondered whether IR35 could be a barrier to free movement if other countries had similar legislation.
Barling argued strongly that what happened in other countries was irrelevant, and in my view this is the technically correct view. He will continue his arguments tomorrow and hopefully consolidate his position.
Tomorrow and tomorrow and tomorrow?
Barling hopes to finish his arguments before lunch tomorrow December 5),
and then Dr Plender takes over for the Revenue. Barling still has everything to play for, and like a football match,