Mr Barling's address to the courts finished shortly before lunchtime. Much of Dr Plender's case consisted of European case law, large parts of which were questioned by the judges for their relevance.
Anne Redston, leading tax expert and author of the book 'IR35: Personal Service Companies,' provided her opinion of the day's events. Her report follows...
Today Barling finished his evidence and Plender explained why the Revenue disagrees. Plender will continue in the morning, and Barling will then reply. It is hoped the case will wind up on Thursday, though an overspill into Friday is possible. The judgement will be given later, perhaps before Christmas but maybe in the New Year.
Comparison with employees
The court returned again to the question of whether contractors should be compared to employees working for the client or whether they should be compared to the bodyshops (see previous day's report). Despite Barling raising the point several times, it seemed to me that the judges were still of the view that the correct comparator was with the tax position of employees. In his submission, Plender re-emphasised that IR35 dealt with 'regulating the taxation of employees not companies.
In this context it is important to note that Mr Justice Burton found, as a question of fact, that there was competition between bodyshops and contractors. Plender today, in a different context, emphasised that the court should be bound by the findings of fact made by Justice Burton and, of course, this finding should be no different. It is for Barling to return to this point when he wraps up the case tomorrow.
The five per cent cap and expenses
One area where judges showed particular interest was the availability of a deduction for contractors' legitimate expenses. Barling asked 'why should [contractors] have to fund their ordinary business expenses out of taxed income' and this seemed to strike a chord with the judges.
When Plender was explaining the five per cent cap, Lord Justice Dyson asked him whether this was intended to cover costs such as equipment and training. Plender prevaricated, but the judges are used to this from barristers. In my view they understood and accepted that this is an unfairness within the legislation; they may also agree that this is an area where IR35 is not proportionate.
What is the tax system?
Yesterday, the court considered what 'the tax system' was for the purposes of EU law, because if IR35 forms part of that system, then its introduction can be more easily defended. However, to the surprise of observers, Plender argued that the tax system in this context was in fact IR35 itself and that the PCG were simply complaining about one small part of IR35, namely FA 1998 Schedule 12 para 3(4).
This is the sub-para which sets out the material interest test, and it thus catches many small companies where the worker owns five per cent or more of the shares. Plender argued that this subpara was justified because 'it was related to the logic of the scheme', i.e. it was intrinsic to IR35.
It is expected that this interpretation of the PCG's case will be strongly contested by Gerald Barling when he stands up tomorrow.
Alternatives to IR35
Some time was spent discussing whether the court should consider alternatives to IR35 in order to see whether or not it was 'proportionate.' Lord Justice Auld asked Barling: 'How far the judge should go in looking at possible alternatives?' Barling said that it was for the Revenue to show that they had looked at other ways of dealing with the problem they had identified, and could demonstrate that IR35 was the least restrictive.
The burden of providing this proof, and thus of suggesting alternatives, was thus with the Revenue. Auld clearly thought that expecting the Revenue to put forward other ways of solving the problem was unduly optimistic. He smiled and said: 'They're not going to do it.'
A number of alternatives had in fact been put forward during the High Court case, although Lord Justice Watkins was dismissive of these, implying that they were less appropriate than IR35. However, his analysis of the alternatives was undermined by the fact that he seemed to be confused between employee, corporate and shareholder taxes.
The best attempt at a realistic alternative was a minimum salary proposal put forward by Barling, but this was not followed through. This was probably deliberate - no doubt the PCG's Counsel didn't feel that suggesting another way to tax contractors was part of his brief!
It is always hard to bet on a result before the end of the match. It is clear that difficult hurdles remain for the PCG if it is to succeed either in overturning IR35 or having a point of law referred to the EU. But either remains a possibility. The warmest response from the judges came during the discussions on the expense reliefs, so one may see some positive comment on this area in the final judgement.
Richard Powell, Shout99