The Professional Contractors Group took the government to court in 2001 to have IR35 struck down, shortly after its controversial introduction in April 2000.
This wasn’t a challenge to a specific IR35 case; it challenged the legislation itself, arguing that the new rules were incompatible with European Community law.
The case failed in the High Court and again in the Court of Appeal.
IR35 had only just been introduced
The government first announced the measures that became known as IR35 in a 1999 press release.
By 2000, the legislation had been enacted through the Finance Act 2000 and separate National Insurance provisions.
The rules were aimed at people supplying their services through an intermediary, usually their own limited company, where they would have been treated as employees for tax purposes if they had contracted directly with the client.
You can read more on the history of IR35 and the off-payroll rules.
The Professional Contractors Group was formed to oppose IR35
The Professional Contractors Group Ltd was one of three parties which brought the judicial review.
The other applicants were Ruud Van Zundert, a Dutch national who operated an IT service company in the UK, and Square Mile Projects Ltd.
By the time the case reached the Court of Appeal, the PCG had around 11,000 members.
Although this site is not related to the PCG in any way, we use the same domain name (IR35Update.co.uk) that was originally used to provide updates on the progress of the court cases. Our editor, James Leckie, also reported on each stage of the court case at the time.
The court recorded that it had originally been formed specifically to oppose IR35. Its membership was concentrated in areas including IT, engineering, telecommunications and management consultancy.
The challenge started in 2000
The applicants sought permission for judicial review in June 2000.
Permission was granted in October that year, and Mr Justice Burton heard the substantive case in the High Court.
The central argument was that IR35 was incompatible with European Community law.
The applicants said the legislation amounted to unlawful State aid because it placed small service companies at a competitive disadvantage compared with larger businesses.
They also argued that IR35 unlawfully interfered with European rights relating to the free movement of workers, freedom of establishment and freedom to provide services.
The High Court rejected the challenge
After a four-day hearing, Mr Justice Burton dismissed the application on 2 April 2001.
He also refused permission to appeal.
Lord Justice Laws later granted permission, allowing the case to proceed to the Court of Appeal.
The Court of Appeal looked closely at how IR35 worked
The appeal was heard by Lord Justice Auld, Lord Justice Robert Walker and Lord Justice Dyson.
Robert Walker LJ explained that IR35 only applied where the worker, if engaged directly by the client, would be regarded as an employee for income tax purposes.
The court therefore had to decide whether the worker would have been an employee under normal employment status law.
IR35 still works this way today: courts decide whether someone would have been an employee under normal employment status law.
See our IR35 case law guide for the main authorities used in employment status disputes.
The State aid argument failed
The PCG argued that IR35 effectively favoured larger consultancy businesses because they did not face the same tax treatment as small service companies supplying an individual worker.
The Court of Appeal rejected the argument that this amounted to unlawful State aid under European law.
The legislation did not provide a selective State advantage as required for the State aid rules to apply.
The free movement arguments also failed
The applicants also relied on European rules protecting free movement, freedom of establishment and freedom to provide services.
The court accepted that tax rules can affect commercial decisions and the way businesses operate.
That was not enough to make IR35 unlawful.
The Court of Appeal was not persuaded that the legislation created the kind of prohibited restriction required under European law.
The court refused to send the case to Europe
The PCG asked the Court of Appeal to refer questions about European law to the European Court of Justice if it was not prepared to allow the appeal itself.
The court refused.
Robert Walker LJ considered that the relevant European law principles were sufficiently clear and that the real issue was their application to the facts.
The appeal was dismissed
The Court of Appeal dismissed the PCG’s appeal on 21 December 2001.
It also refused permission to appeal to the House of Lords.
As a result, IR35 remained in force.
The judgment made clear that any further attempt to change the legislation would have to come through the political and legislative process rather than through this challenge under European law.
Why the PCG case still matters
The PCG case occupies a different place in IR35 history from contractor status cases such as Dragonfly, Atholl House or PGMOL.
Those cases examined whether particular working arrangements amounted to employment.
PCG challenged the legal foundations of the IR35 regime itself.
The challenge failed, but the Court of Appeal judgment also confirmed something fundamental to IR35: whether the worker would have been an employee must be decided using ordinary employment status case law.
That principle remains central to IR35 today.
Judgment
Professional Contractors’ Group & Ors v Commissioners of Inland Revenue [2001] EWCA Civ 1945.
The Court of Appeal judgment was handed down on 21 December 2001 by Lord Justice Robert Walker, with Lord Justice Auld and Lord Justice Dyson agreeing.