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Updated IR35, the controversial rule to reclassify most self-employed IT consultants as employees, will stay in place, following a High Court ruling today.

But in dismissing the application to overturn IR35 from the Professional Contractors Group, Mr. Justice Burton was critical of the Inland Revenue, ruling the government had failed to enforce IR35 correctly.

Furthermore he agrees with the argument of the Professional Contractors Group (PCG), which brought the case to the High Court, that the IR35 tests to determine tax liability were not applicable to the "knowledge-based sector", as the PCG refers to it.

PCG spokeswoman Susie Hughes said the group was very pleased with the guidance Judge Burton has handed down. "It has taken us a long way forward," she said. "It's not a bad consolation."

The PCG says the ruling means every IT contractor will have to reassess their tax situation, and any tax judgements made by the Inland Revenue will have to be reconsidered.

However the Inland Revenue is happy with its victory and says nothing will change. "All the ruling does is reaffirm IR35," said a spokesman. "Our guidance material is available online, so anyone in doubt about there own situation can check their and see the same instructions we see for making our decisions."

The PCG has said it wants to consult with the Inland Revenue about the situation now the judicial revue is out. The Inland Revenue spokesman doesn't see any point in that. "The rules are there. What is there to consult about," he said.

The government has always argued IR35 was introduced to close a tax loophole.

During his judicial review, the judge noted the seeming illogicality of taxing personal service company consultants as employees (IR35' essential intention) when they do not receive employee benefits (causing concerns that billions of pounds would have to be paid out by UK companies).

However, he wasn't persuaded that contractors other than those in the IT industry were affected. This was unhelpful to the PCG case, as it beggars the question of what exactly is a self-employed IT contractor, as opposed to other types of contractor.

Following Mr. Justice Burton's ruling, the Inland Revenue looks like it will have to rework the tests by which it counts contractors as employed or self-employed.

The first tax payments under IR35 are due on April 19. ®

Related Link

For briefing on the background to this case visit The Professional Contractors Group site.
Inland Revenue IR35 site

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IR35: the govt's viewpoint
IR35 judicial review over

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