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Gerald Barling finished strongly, contradicting some of Plender's assertions, and directing the judges to key points made in the earlier court case. Judgement has been reserved, so we will not know the outcome until later this month or even in January.
Deduction of expenses
Plender opened today's hearing by confirming to the judges that the five per cent cap was only intended to cover compliance costs, and not, for example, training or equipment. This was appropriately picked up by Barling as proof that the tax burden of contractors was higher than their competitor bodyshops and also higher than that of employees, as the latter had their equipment and training paid for by their employer.
Judge considers alternatives to IR35
Plender finished his defence by reviewing whether the judges should consider, as part of their role, whether there was a more proportionate way of tackling the problem than IR35.
Lord Justice Walker interrupted Plender's discourse to say that everyone knew there was a 'huge gulf' between Schedule E and Schedule D, and that the Revenue's attitude always was that 'this is a gulf set down…and we are going to stick with it.' This was so even though there is a significant grey area in practice between the two: the official response to this is 'Tough!'. He went on to describe IR35 as 'an elaborate scheme to make sure they [the contractors] are hit under Schedule E.'
Bravely, he concluded by suggesting that the government 'face the inevitable and bring Schedule E and Schedule D closer together.' Plender, unsurprisingly, rejected this, and said it was a solution 'disproportionate to the present case and a matter for parliament.'
Revenue dodges issues of employee comparability
It is a question of fact that contractors do not obtain employment benefits from their clients. It was depressing to watch Plender evading that simple truth. He said that the view that the contractors are 'denied the social and economic benefits of employees' had probably arisen because small companies in which they operate are 'more precarious' than larger companies, and are 'less likely to make social provision'.
It seemed that when it suited Plender he considered the contractor to be a quasi-employee of the client, but when it didn't he went back to considering them as an employee of their own companies. There was a clear refusal to admit the truth - that contractors are taxed as employees of their clients but do not receive the matching social benefits.
Conclusion
On the complex questions of EU law we must await the judges' considered decision. They will review the arguments - both Counsels provided the judges with their speaking notes - and come to a view as to whether IR35 is either a breach of freedom of movement and/or is a state aid. If the answer is yes, they then have to consider whether tax avoidance is a justification for this breach of EU law. Finally, they have to consider whether IR35 was a proportionate way of dealing with the problem which the government had identified.
While we must wait to know the answer to these issues, it was quite clear that the judges were uncomfortable with the lack of a deduction for genuine expenses, such as equipment and training, and it is to be hoped that this will be reflected in their final judgement.
Anne Redston 'IR35: Personal Service Companies' is available here.
PCG members are reminded they are entitled to a 10 per cent discount on Anne Redston's book on IR35 which can be ordered from the PCG's website
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The Editor
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