The IR35 legislation came into force in April 2000. It treats small businesses in the knowledge-based sector as "disguised employees" for tax and National Insurance purposes, thereby preventing them, argue its critics, from operating on similar terms to their larger competitors.
Stutchbury, a 42 year-old former policeman from Sunderland, was supported in his appeal by the Professional Contractors Group (PCG), an organisation set up specifically to lobby against the IR35 tax. It sought judicial review to have the legislation wiped from the statute books, arguing that it was illegal under European law. In 2001, the PCG lost its case.
Stutchbury ran an IT consultancy called Synaptek Ltd. for 12 years and at times employed up to four members of staff. He wanted to know his status under the IR35 legislation in respect of contracts with three clients, so he submitted the contracts to the Revenue. Two of the contracts were deemed outside the IR35 legislation; in the third, he was deemed to be a disguised employee. He appealed the ruling, first to the tax commissioners, then to the High Court.
PCG Spokesman David Ramsden said of Friday's ruling:
"This is a bitter blow for Britain's freelance community. After three years of confusion, we are no closer to knowing who's inside the legislation and who's outside. We have always believed the government's assurance that genuine businesses are not affected by IR35 and we will work with the government to clarify the position. Clearly today's court ruling will be of great concern to small businesses throughout the country."
The court's task was to determine whether the tax commissioners had made any legal errors in their decision. Justice Hart ruled on Friday that they had not. But he made some comments on the differences between a contractor and an employee, which could be useful for other contractors confused by the IR35 legislation.
Simon Juden of the PCG has summarised the factors identified by the court as relevant to determining whether someone is a contractor or an employee.
The key points from the judgment include:
Construction of the notional contract is a matter of mixed fact and law.
While it is an "important contextual circumstance", the "in business on own account" test is not determinative in the assessment of IR35 status.
The "arrangements" to consider include all contracts in the chain and the detailed day to day performance of those contracts including matters not expressly stipulated in those contracts.
The "starting point" is the contractor-agency contract.
Even when the right of substitution in a contract is not strong enough to decide the matter, the existence of any such right is a pointer towards self-employment.
The requirement for mutuality of obligation is whether the client is obliged to offer work and whether the worker is obliged to do the work. In particular if, on a given day, the client can say that there is no work for the contractor to do then there is insufficient mutuality of obligation for employment and IR35 cannot apply.
Having Professional Indemnity insurance is a pointer to outside IR35, contrary to Revenue assertions that because employees like surgeons have it, it is a neutral factor.
The PCG has fourteen days in which to consider an appeal.
Simon Juden's full article, including a list of factors that point to a small business and factors that point to employment, is at this page of the NamesFacesPlaces.com web site.
Friday's judgment is available from the PCG's web site as a 20-page PDF:
www.pcg.org.uk/resources/Synaptek%20Judgement.pdf