IR35 is challenged in the High Court

The Government but this time operating through their own service company rather than as an employee. The effect of IR35 is that the turnover of small companies is treated (for tax and National Insurance purposes) as salary.

Critics said this meant small businesses would be unable to operate as the legitimate businesses they are because they are unable to make or retain profits, unable to allow business expenses such as training and computer equipment against tax, and cannot therefore invest for the future or plan to grow and develop.

The action is being brought by the Professional Contractors Group (PCG) which was formed in May 1999 by a group of independent contractors from the IT and engineering sector, who believe that IR35 is likely to make it impossible for many small businesses to continue operating.

The Professional Contractors Group is seeking the permission of the High Court to proceed with a judicial review against the UK government relating to the introduction and implementation of IR35. PCG's case is that IR35 is contrary to EU law and should therefore be struck down. According to the claim:

• IR35 constitutes illegal state aid as the government is taxing small contractors more harshly than their larger competitors;
• It is a breach of the right of establishment, as it discourages contractors from trading in the UK (The EC Treaty provides that a Member State must not impose restrictions on the freedom of a national of another Member State to establish himself in the host state); and
• Under the Human Rights Act that came into force on October 2, it is de facto confiscation of property contrary to the European Convention of Human Rights because it prevents a legally constituted limited company from operating as such, allowing its expenses against tax and making a legitimate profit, and therefore prevents its shareholders from enjoying the benefits of owning the company.