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The evidence included a number of case studies detailing the counter-measures that successful limited companies had chosen to take to cope in the climate of uncertainty surrounding the legislation. The Judge duly acknowledged this, stressing to Mr Barling, ‘I don’t think I am sympathetic about anything other than the uncertainty caused’.
However, the Judge’s required clarification of the case study of the contractor Marc Deveaux, now based in the US, led him to suggest that the example was actually ‘working against’ the case until Mr Barling led him to the correct definition of a ‘sole-trader’ as regarding the operations of a contractor in the knowledge-based sector. The Judge had attempted to suggest that Mr Deveaux, ‘proves that a contractor can be successful through 12 years of uncertainty’.
Justice Burton received guidance from the PCG’s counsel to understand the finer points of why a contractor would want to remain a contractor and the desire they have to be able to grow a business using innovation and entrepreneurship.
At one point of the hearing Justice Burton asked whether an IT contractor would take a screwdriver with him to work as he attempted to link a contractor’s need to take tools to work with him in the same manner as a builder or plumber. ‘Am I right in thinking they only take their brains?’ he asked Mr. Barling rhetorically. ‘You can’t justify this sort of situation by adding the letters Ltd. after your name and having a clever accountant.’
Mr Barling QC also presented to the court, the Institute of Chartered Accountants for England and Wales’ (ICAEW) report in which IR35 was awarded a total of 0 out of 10 for fairness and 3 out of 10 overall. They were additionally presented with evidence backing up the fact that half of all contractors fell into the grey ‘Charlotte’ area where the Revenue’s assessment of whether they fall under IR35 could lead them to decide ‘either way’.
‘If there is a real tax dodge then the Revenue should have targeted it specifically rather than shooting everyone down’ Mr Barling told the court. According to Frontier’s expert evidence for the PCG, 24 per cent of a contractor’s income is paid as salary and subject to PAYE and NIC’. ‘What of the other 72% the judge asked Mr Barling. ‘It goes into expenses, investment, re-investment and dividends like any other business’, Mr Barling replied.
At the conclusion of the first day, it was felt that the Judge had taken on board a number of important issues. He appeared to recognise the inherent unfairness of contractors being tax as employees without receiving the benefits of employment from their ‘disguised employer’. He also appeared to be concerned that the focus of IR35 seemed to have changed significantly since its initial inception as a measure that was designed to protect employees from being forced into service companies by employers to one that was focused on perceived tax avoidance.
At the end of the afternoon,he appeared to be in full agreement that contractors working through their service companies were bound to be in competition with their larger body-shop competitor.
At the close of the first day of play PCG Chairman Gareth Williams said “The judge came in having not read the papers. I think he has accepted some of our points and think he understands the situation a bit better now. I’m positive after today’s session and he seemed to accept the points of competition and the questions raised regarding uncertainty’.
The Inland Revenue’s Sarah Walker whose evidence will be presented in court tomorrow (Wednesday March 14) declined to comment.
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Richard Powell, Shout99
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