The High Court today strongly criticised the Inland Revenue as it delivered its long-awaited verdict over the legality of the controversial IR35 tax clause.
It seems certain the Inland Revenue will have to change the guidelines issued to accompany the tax rules.
Although the IR35 rules themselves will remain in force, the High Court condemned the complex guidelines written to explain, unsuccessfully, whether a contractor falls under an employed or self-employed category.
The case, brought by the Professional Contractors Group, claimed the legislation unfairly imposed heavy tax restrictions on contractors, including the increasing number in the IT sector, who were being wrongly classified as 'disguised employees'.
Under IR35, contractors' rights to pay less tax on the grounds they do not receive company benefits were completely removed. The High Court agreed with PCG's claim that many contractors and small businesses had been forced to move abroad.
The decision marks the victory of an 18-month fight by the PCG, which has offered its assistance in the implementation of the new guidelines.
"The High Court has been the first authoritative body to listen to our concerns and has confirmed we were right," said Gareth Williams, chairman of the PCG.
The High Court criticised the Inland Revenue's employment tests and described the Revenue's guidance as 'inappropriate, unclear, inflexible, inaccurate and unhelpful'.
"The Court has fortunately intervened to restrict further damage with a much more relevant set of guidelines which prove that the IR35 was unfair," said Williams.
According to the Inland Revenue, the IR35 legislation can apply in "any business sector where an individual provides services to another person; under arrangements involving an intermediary; in circumstances such that if the contract had been made directly then the worker would have been an employee of the client".
Essentially, anyone who structures their working arrangements in this way could be affected by the legislation. These include IT contractors, medical staff, legal and accountancy staff, construction industry workers, clerical workers, press officers, night club bouncers and many others.