Professional Contractors' Group & Ors v Commissioners of Inland Revenue

For State aid purposes, a tax measure is not selective merely because its practical impact differs between sectors. The relevant comparison is within the tax system addressed by the measure. Differences may reflect the nature or logic of that system. A measure imposing a detriment can amount to aid only where it confers a corresponding advantage on identifiable competitors. IR35 addressed the personal tax and National Insurance liabilities of individuals providing employee-like services, rather than competition between service companies and larger trading companies, and was a general measure. A neutral, non-discriminatory national measure engages Articles 39, 43 or 49 only where it has a direct and demonstrable inhibiting effect on the particular freedom asserted. Indirect or debatable effects are insufficient.

Professional Contractors' Group Ltd, Mr Ruud Van Zundert and Square Mile Projects Ltd sought judicial review of the IR35 legislation. They argued that the regime was incompatible with European Community law, including Articles 87 and 88 and the freedoms of movement of workers, establishment and services under Articles 39, 43 and 49.

Burton J dismissed the application on 2 April 2001, awarded costs and refused permission to appeal. Laws LJ granted permission on paper. The appeal concerned whether IR35 constituted unlawful State aid or imposed an unlawful restriction on one of the relevant freedoms.

Robert Walker LJ delivered the judgment. Dyson and Auld LJJ agreed. The appeal was dismissed.

1. State aid. The relevant inquiry under Article 87(1) required identification of the tax system concerned and the proper competitive comparison. A measure was not selective merely because its practical effects varied between sectors. Differences could arise from the nature or logic of the system. An apparent detriment could constitute aid only if it corresponded to an advantage for identifiable competitors. The relevant system was the United Kingdom’s personal taxation and National Insurance system as applied to individuals providing employee-like services. It was not the corporation tax system or a comparison between an IR35-affected service company and a larger trading company. IR35 was therefore a general measure and not selective State aid.
2. Free movement. Articles 39, 43 and 49 concerned different factual situations: employment, permanent establishment and cross-border services without establishment. A neutral, non-discriminatory measure contravened the relevant freedom only if it had a direct and demonstrable inhibiting effect on the particular right asserted. An indirect or debatable tendency was insufficient. IR35 did not restrict access to employment, establishment in the United Kingdom or the provision of services without establishment. Genuine self-employed activity remained unaffected.
3. Obiter observations. The court considered that prevention of relatively artificial tax avoidance might justify a non-discriminatory measure. Diminution of tax revenue alone could not justify unequal treatment. If proportionality had arisen, the State would have to show that the measure was appropriate and necessary, that the least onerous suitable measure had been chosen, and that the burden was proportionate to the objective. No final view was required.
4. Reference. The applicable Community-law principles were sufficiently clear. Their application to the facts was for the national court. A reference under Article 234 was neither necessary nor appropriate.

Appeal dismissed with costs. Permission to appeal to the House of Lords refused.

1. Court of Appeal (Civil Division): appeal from the Administrative Court decision was dismissed with costs; permission to appeal to the House of Lords was refused.
2. High Court of Justice, Queen's Bench Division, Administrative Court: Burton J dismissed the judicial review application on 2 April 2001, awarded costs and refused permission to appeal.
3. Permission to appeal: Laws LJ granted permission on paper on 16 May 2001.