England and Wales High Court (Administrative Court) Decisions

The Queen and Commissioners of Inland Revenue ex parte Professional Contractors Group Ltd; Ruud van Zundert and Square Mile Projects Ltd [2001] EWHC Admin 236 (2nd April, 2001)

Case No: CO/2302/00

Neutral Citation Number: [2001] EWHC Admin 236

IN THE HIGH COURT OF JUSTICE

QUEENS BENCH DIVISION

ADMINISTRATIVE COURT

Royal Courts of Justice

Strand, London, WC2A 2LL

Monday 2nd April 2001

MR JUSTICE BURTON:

1. This application is by way of challenge to the legality of composite legislation which has become known as IR35 (which name I shall also apply to it) because that was the reference number for a Press Release issued by the Inland Revenue on 9 March 1999, the day of the Chancellor of the Exchequer's Budget statement for that year, which announced the proposed legislation. It relates to what are called `service companies'. They are primarily one man or one woman companies, which charge out the services of that one man or one woman - whom I shall call the `service contractor' - to a client, in return for remuneration paid by that client to the service company. The whole of the remuneration is thus received by the service company, and out of it the service contractor pays to himself or herself a salary, from which PAYE income tax and employees' National Insurance Contributions (NICs) are deducted, and the service company pays the employers' NICs. Such balance of the remuneration is retained by the service company. The balance will be dealt with in a number of ways: first of all, expenses, normally deductible by any company, will be paid and allowable against corporation tax, including training costs, professional fees etc for the service contractor: there may be a salary paid to the spouse or partner of the service contractor: a substantial dividend out of the profit will in due course be paid to the service contractor, which will not attract NICs, and in respect of which income tax will only be payable as and when the dividend is declared: and any retained profit in the service company will be liable to corporation tax, but at the special low rate attributable to small companies. Services have been provided to clients in this way by service companies for many years, although it is clear from the evidence I have seen that the number of such service companies has been increasing, as have been the fields in which they have operated.

2. In the I.T. sector with which, because of the identity of the Claimants, to which I shall refer below, I have been particularly involved, such service companies have been particularly common. Such services could also be provided to a client by the client's own employees: by individuals as sole traders or partners trading on their own account as independent contractors: or by employees of service providers, being small, medium or large companies who employ staff whom they second to clients (a practice known, it seems, as `bodyshopping'). The clients, it seems, much prefer to do business with or through agents and with limited companies, because, unless they positively choose to have employees, they do not wish to take the risk of finding themselves in an employment relationship. This has been a reason for the proliferation of employment agencies, particularly in the I.T. sector, who have a contractual relationship with a client and then enter into a contractual relationship with the service companies: and it has also been a reason why the clients themselves, if they do not contract with bodyshoppers, have preferred to contract, usually through an employment agency, with a service company rather than with an individual sole trader.

Advantages of the Service Company Structure

3. I summarise the benefits of the structure:

i) Fiscal Advantages. It is plain that most, if not all, service contractors have set up service contracts on good accountancy advice, more particularly as such companies have recently proliferated, right up to and including, as I have seen from articles in 1993, the former Director General of the BBC. It is already clear from my brief summary what the advantages are fiscally:

a) The service contractor can decide how much salary he wants to take and pay the relevant income tax (by reference to his personal allowances or tax bands and/or to the timing of payment of tax) and NICs: and how much he prefers to defer, by putting it through his service company and in due course paying himself a dividend, with the tax deferred until then and no NICs payable upon it.

b) He can claim considerably more by way of expenses than if he were an employee: in particular he can claim expenses that are not specifically referable to the services he is providing to a particular client, such as training costs.

c) He can fix the amount of his own remuneration and also provide for a salary to a spouse or partner.

d) He can retain profits within the service company and pay Corporation tax at the lowest rate.

ii) Commercial Advantages. The commercial advantages, particularly in the I.T. sector, to which specific evidence has been mainly addressed, were fully and cogently set out in the lead affidavit filed on behalf of the Claimants by the Chairman of the first Claimant Company (`PCG') Mr David Williams, and, although, given that I have just referred to the fiscal advantages, there is consequently a small amount of repetition, it seems to be sensible to set out the whole of the relevant paragraph of his affidavit (paragraph 11):

"A [service contractor] almost invariably supplies his services by trading via a limited company rather than as a sole trader for the following reasons:

* A limited company affords him the protection of limited liability under company law;

* Most agencies and clients will only agree to work with [service] contractors who trade in such a way, as a means of removing them the need to operate a payroll for contractors and of minimising the danger of employment status disputes arising;

* A company supplies a suitable vehicle for the development of additional business interests and protection of intellectual property rights;

* Various tax benefits accrue from the operation of the company;

* It is generally true that the greater risks taken on by the [service] contractor allow him to charge a premium rate for his services, when he is working;

* The agencies may themselves have tax liabilities if they incorrectly employ sole traders or partnerships and trading therefore with limited liability companies protect them from this;

* [Service] contractors setting up limited liability companies can use their equity to raise investment capital;

* Workers in the small limited liability company who are usually family members can have a direct stake in the business they work for but with limited liability, something which the Government supports;

* A company gives the [service] contractor control over his own destiny, allowing him for example to run his own payroll and company pension scheme, organise his own training and generally give him a degree of control over what is otherwise a very uncertain lifestyle. In addition, the status `director' is far more impressive than a technical description such as `programmer';

* Ultimately, a company allows the [service] contractor to trade in the same style and manner as his major competitors."

4. It remains to be said that a major advantage of the service company structure is that, unlike an individual sole trader, the service contractor does not need to be concerned as to whether in relation to any assignment or all he is acting as an independent contractor or as an employee, subject to PAYE and NIC requirements.

The Legislative Changes

5. It seems from the evidence that there was considerable activity in the early eighties on the part of the then Conservative Government to produce some change, and the 1981 Finance Bill included some provisions which the Inland Revenue in November 1981 described as having been introduced to "ensure that temporary agency workers who work under conditions which are typical of employment rather than self-employment are, like employees, taxed under Schedule E and subject to PAYE" whether or not they operated "through a company". But in April 1982 the then Financial Secretary announced that the Government had decided not to go ahead with the proposal.

6. The next relevant event came some seventeen years later, with the publication on 9 March 1999 of IR35. It read, in material part, as follows:

"The Chancellor announced today that changes are to be introduced to counter avoidance in the area of personal service provision. This move underlines the Government's commitment to achieving a tax system under which everyone pays their fair share. There has for some time been general concern about the hiring of individuals through their own service companies so that they can exploit the fiscal advantages offered by a corporate structure. It is possible for someone to leave work as an employee on a Friday only to return the following Monday to do exactly the same job as an indirectly engaged `consultant' paying substantially reduced tax and national insurance. The Government is going to bring forward legislation to tackle this sort of avoidance ...

DETAILS

1. The Government is committed to encouraging modern businesses which develop and build on the strengths and commitment of their workforce. The aim of the proposed changes is to ensure that people working in what is in effect disguised employment will, in practice, pay the same tax and national insurance as someone employed directly.

2. Businesses employing their workers directly say that they are unable to compete with those encouraging the avoidance at which the new legislation is aimed. As a result ordinary workers can find they are unable to compete for jobs with those willing to participate in such arrangements. But those who do participate often have to pay a price in terms of loss of protection under employment law ...

3. The proposed changes are aimed only at engagements with essential characteristics of employment. They should affect only those cases where these characteristics are disguised through use of an intermediary - such as a service company or partnership. There is no intention to redefine the existing boundary between employment and self-employment.

4. Legislation is to be introduced to address the problem ... However a primary concern is to minimise any impact these changes on ordinary businesses not involved in avoidance. To this end, the Inland Revenue will, over the next few months, be working with representative bodies ...

NOTES FOR EDITORS

These changes buttress the new measures to support small and medium size companies. Without the changes it would be very difficult to target support at genuine and entrepreneurial activity."

7. On 21 May 1999 the Department of Social Security, which was to be the first body involved in legislation, as the National Insurance legislation in the event was dealt with before the strictly fiscal, issued what is called a Regulatory Impact Assessment ("the First RIA"). This contained the following relevant passages:

"Risk Assessment

6. If the proposed changes are not implemented there will be a number of consequences.

* Individuals disguising employment in this way reduce their NICs liability compared to those who work directly to the employer. The loss of revenue to the National Insurance Fund is increasing and is, in effect, borne by other individuals and employers who do pay their fair share.

* The number of service company and other intermediaries used to disguise employment will continue to rise significantly. The number of service companies is estimated to have risen from the range of 20-50,000 to 33-66,000 in the past few years. ...

Compliance Costs

2. There are currently an estimated 33,000 to 66,000 service companies ... a high pay out rate in dividends is taken as indicating a service company that is seeking to disguise employment ...

7. ...

* It is thought that most businesses facing new liability for tax and NICs will wind up their service company and employ their workers direct ... the costs of setting up a service company are shown ... below for the estimate of between 33,000 and 66,000 that will cease their service company arrangements and migrate to the clients' payroll."

8. There followed the consultation which had been indicated. It would appear that very substantial representations were made, and matters were drawn to the attention of the Revenue, and the Government, which the Claimants would no doubt cogently say should or must have been known already. Some of what was said during that consultation, in addition to that which I have already set out from paragraph 11 of Mr Williams' first affidavit, is presumably what is contained in paragraph 16 of that affidavit:

"A client will require the services of a contractor (whether a [service] contractor or an employee of a larger service provider) for a number of different reasons; among others:

* The contractor can supply a rare skill that is needed for only a small part of a project. The client has no long term requirement for an employee with such a skill and could not justify the expense of employing permanently an individual whose skills were used only for a limited period of time;

* The client cannot recruit permanent employees with a particular skill, due perhaps to that skill being in demand. This is a common occurrence in the IT industry, which is characterised by rapidly changing technologies. Here, the client may wish to employ an individual on a permanent basis, but cannot. In this case, the client turns to the contractor market where individuals may be available immediately but at a higher cost than a permanent employee [though without the concomitant disadvantage to the employer of having an employee in permanent employment, such as redundancy etc.].

* The industry may operate under rapidly changing economic conditions, or may need to respond with fully formed teams at short notice, the canonical example here being the Oil and Gas industry. Under such circumstances, it makes no economic sense for a client to employ large numbers of permanent employees; rather the client must resource teams from those individuals available when the work must be done - the contractors.

* The client may wish to outsource a certain function to concentrate on their core competencies ...

* The client may not wish to employ a large body of permanent employees, but requires the workers for a specific project. This is true particularly where the employees are older and more experienced, with commensurate greater cost to the employer. Ageism is rampant ... a client who would not wish to employ an older worker on a permanent basis may be happy to do so on the basis of the short term contract, where the burden of employment rights falls upon the [service] contractor's own company, and not the client's."

9. On 23 September 1999 a new press release was issued by the Inland Revenue, which has been called, though incorrectly, the revised IR35. It announced as follows (in material part):

"PERSONAL SERVICES PROVIDED THROUGH INTERMEDIARIES

PREVENTING AVOIDANCE: PRESERVING FLEXIBILITY

New rules to tackle tax avoidance using personal service companies and similar intermediaries were published today.

The rules, which were developed following extensive consultation, ensure that the legitimate use of service companies can continue, but they will no longer provide a means to avoid paying a fair share of tax and National Insurance Contributions.

Paymaster General Dawn Primarolo, said:

"Consultation has confirmed that there is a genuine issue of tax avoidance in this area, and there is widespread agreement that we are right to tackle it. I am determined that nobody should be able to avoid paying their fair share of tax and NICs just because of the way they structure their relationship with their clients. But we have always recognised that any action must do no unnecessary damage to the flexible labour markets where intermediaries are currently used. I have therefore asked the Inland Revenue to publish a number of changes to the proposals they distributed in April 1999. These changes mean that we will still be able to stop this avoidance, from next April, but in a way that is more tightly targeted and does not prevent the use of intermediaries where they provide non-tax advantages."

...

DETAILS

... The revised approach responds to concerns expressed during consultation that the new rules were too wide in scope, and that they would make it impossible for people to work through intermediaries even if they were prepared to pay the right amount of tax and NICs. The main changes are:

* The rules will rely on the existing tests which are currently used to determine the boundary between employment and self-employment for tax and National Insurance Contributions purposes ...

* The responsibility for ensuring that the new rules are followed will belong to the intermediaries themselves, not the clients, as originally proposed ...

* The intermediaries will be responsible for applying PAYE and National Insurance Contributions to all earnings from relevant engagements ..."

10. There then followed, in October 1999, a Second (revised) RIA. The relevant parts read as follows:

"2. The Government has put forward amendments to the Bill ... to reflect changes to the proposed method of implementing the policy. Individuals in circumstances which would be treated for NIC purposes as employment, if it were not for an intermediary such as a personal service company, will have to pay National Insurance Contributions on the outcome received by the intermediary in return for their services, after allowing for certain specified deductions. This will ensure that they pay a fair share of NICs compared with those directly employed.

3. The main effect of the changes on compliance costs is to remove any costs from the clients of the service companies, who under the original proposal would have been obliged to deduct NICs (and tax) from payments made to the service companies for the workers' services. The [RIA] issued in May 1999 assumed that the effect of these rules would be to make operating through an intermediary so unattractive in practice that they would cease to be used in cases to which the new rules would apply. The compliance costs in that Assessment were therefore based on the assumption that clients would incur the cost of taking the workers on to their payrolls as direct employees.

4. Following consideration of responses to consultation since the Budget, the Government has accepted that both workers and clients see advantages in working through intermediaries, in terms of the ability to take on staff for relatively short periods in a flexible way without taking them onto the payroll. The Government does not want to take away this flexibility, and the revised proposals are intended to make the choice whether to work through an intermediary or as a direct employee broadly tax and NIC neutral. If the worker pays tax and NIC on a basis which is fair in comparison with the direct employee, he or she should be free to choose to operate through an intermediary for other reasons ...

10. There has been an increase in the practice of hiring people through intermediaries, such as service companies, so that they can achieve the financial advantages offered by a corporate structure ...

12. The new proposal rule restores fairness by ensuring that, where an individual is engaged by a client through an intermediary and that relationship has the characteristics of employment, then the worker will pay tax and NICs on the money received from the client, after allowing for a limited range of expenses, on the same basis as an employee. The service company will be liable for the corresponding secondary NICs. ...

23. Under the new proposals personal service companies will have more choice, and so companies that would have wound up under IR35 may now continue ...

* It is expected that many businesses will choose to retain a service company basis and accept the compliance burden of operating with the liability for tax and NIC in their service company."

11. There is obviously a substantial change in the method of presentation by the Revenue and the Government as between IR35, and the first RIA and the revised press release and the second RIA. It appears to me wholly regrettable and unnecessary that such colourful language was used in the first press release. It does not now seem to me, on the evidence before me, to be greatly in issue that, put at its lowest, it is by no means all (and on the Claimants' case it is very few) service contractors who are what were characterised as `Friday to Mondays', cloaking a continued employment by the same employer under a different legal format. It seems however to have been assumed, without any or any adequate research, that all service companies fell within that category, simply by reference to the use in the initial publicity of words such as "disguised employment" and "ceasing their service company arrangements and migrating to the clients' payroll" and "most businesses ... will wind up their service company and employ their workers direct". I am sure there would still have been a vigorous resistance to the proposed legislation, however it had been presented; but there might have been a good deal less resentment and hostility had the proposals and the reasoning been presented from the start in the form in which they were subsequently presented in the revision, not all of which can possibly have resulted from unexpected information in the course of consultation, and certainly if the presentation had been in accord with the measured tones and persuasive eloquence of Dr Plender QC.

12. The IR35 legislation, now the subject of challenge before me, is contained, in relation to national insurance, in the Welfare Reform and Pensions Act 1999 sections 75 and 76 (the "WRPA"), as implemented by the Social Security Contributions (Intermediaries) Regulations 2000 (the "Regulations") and, in relation to income tax, in section 60 of, and Schedule 12 to, the Finance Act 2000 (the "Finance Act"). The IR35 provisions are triggered where:

i) A worker provides contracting services to a client company through an `intermediary'. The company is an intermediary where either:

a) the worker alone, or with one or more associates, has a `material interest' in the company: this is defined as ownership of more than 5% of the ordinary share capital of the company, entitlement to more than 5% of the company's dividends, or, where the company is a close company, entitlement to more than 5% of the assets on winding up, or

b) a payment not taxable under Schedule E (such as for example a dividend) is received or receivable by the worker directly from a company, and can reasonably be taken to represent remuneration for services provided by the worker to the client. I described this, in the course of argument, as being a situation in which the payment by the client is "traceable" through to a dividend; and I was told that there are companies, which have been called "composite companies", in which remuneration from the company, by way of dividend or otherwise, is specifically fixed by reference to work done by each recipient.

AND

ii) Those services are deemed to be performed by the worker in an "employee" capacity. As can be seen from the publicity quoted above, the original plan was to answer such questions by reference to a "control" test, but one of the important changes was to apply the ordinary common law of employment in respect of the distinction between employee and independent contractor. The IR35 provisions apply where the circumstances (to include, by Schedule 12 of the Finance Act "the terms on which the services are provided, having regard to the terms of the contracts forming part of the arrangements under which the services are provided") are such that "if the services were provided under a contract directly between the client and the worker, the worker would be regarded for income tax purposes as an employee of the client".

AND

iii) The worker receives or is entitled to receive a payment or a benefit which is not taxable under Schedule E provisions.

13. This test is applied in respect of each engagement, or project, which the service contractor takes on, and the test as to whether, if he were working under a contract with the client, he would be treated as an employee or self-employed, is tested by reference to each engagement. A deemed Schedule E payment is then calculated, in accordance with the legislation, to be made by reference to the actual remuneration paid by the client to the service company if in relation to that engagement it is concluded that the employee rather than self-employed test would have applied. But calculation and payment in respect of all such engagements only needs to be carried out and made once a year, at the end of the tax year.

14. Mr Barling QC, in his very able and lucid skeleton argument, summarised the effect of the IR35 provisions, which, with some small adaptations, I here adopt:

"Where the IR35 provisions apply, the effect is to treat the fees paid to [the service contractor] in respect of relevant [assignments] (i.e. those assignments which fall upon the employee side of the line) not as company revenue upon which corporation tax is payable after deduction of allowable expenses ... but rather as deemed salary to the worker. The worker is thus subjected to Schedule E income tax, and Class I NICs, on that deemed salary, subject to certain deductions. The company is liable for collection of that tax and NICs, together with payment of its own employer's contribution Class I NICs on the deemed salary. ... The deductions allowed for capital allowances and expenses are given by reference to the significantly more limited deductions an employee could make, i.e. sums which are wholly, exclusively and necessarily paid for the relevant contract of employment. [I add, save that the calculation of travel expenses is more generous, to allow for travel to and from site, which would not be recoverable if the service contractor were an employee working at the site.] The only allowance made for the expenses of running the intermediary company is a 5% deduction [said by the Revenue to be a `generous' allowance for the actual administrative, corporate and legal costs of setting up and running the service company]. Thus, where IR35 applies, companies will in practice no longer be able to set off against tax their general expenses, e.g in relation to equipment or training (above the 5% deductions figure permitted) unless those expenses are related specifically to a particular [assignment] and fall within the limited class of expenses deductible by an employee."

15. It is important to appreciate, what is not, so it seems, fully accepted by those opposed to the legislation, not least because of the way it was originally presented, that, because the incidence of tax and NICs is by reference to individual assignments, unless all or most of the services provided by the service contractor during the year are indeed services which would have been those of an employee had he been a sole trader, IR35 will not apply to all the earnings of the service company. There would thus remain some earnings of the service company against which, as confirmed by the Revenue, all proper expenses of the service company, including all training costs etc. which would not have been capable of being recovered in respect of assignments which have been taxed on the Schedule E basis, can be offset.

The Parties and the Relief Sought

16. The Defendants are the Commissioners of Inland Revenue. There are three Claimants. The first Claimant, PCG (Professional Contractors Group Ltd) is an organisation with around 11,000 members, originally formed specifically for the purpose of opposing IR35 and now more generally representing the interests of companies and individuals working in sectors that have been called the "knowledge-based contract industry" in the UK. The second Claimant is a Dutch national, resident in the United Kingdom for many years, who has been a service contractor in the UK, albeit now in Germany, who states that, by virtue of IR35, he is now reluctant to return to the United Kingdom. He explains in his witness statement how he has taken the benefit of the fiscal advantages referred to in paragraph 3(i)(a) above:

"I had to set up a limited company because it was made clear to me within the industry that agents would not put me forward for work other than through the vehicle of my own limited company. Throughout the time I have run [the service company] I have paid myself a £6,000 a year salary, I pay £6,000 a year into a pension scheme and pay the remainder of my income from [the service company] to myself and my wife in the form of dividends. I have done this on the advice of an Accountant."

The third Claimant is a small contracting company currently established in the United Kingdom. The second and third Claimants were chosen to typify those actually or potentially affected by IR35, and there are in addition a number of individual witness statements from members and supporters of the PCG setting out their own individual positions. I referred above to the evidence being largely in relation to the I.T. sector, more broadly defined by Mr Williams as the "knowledge-based sector". The relief that was originally in the Amended Notice of Application for permission to apply for Judicial Review sought general declarations of incompatibility of the IR35 legislation with European Community Law and the Human Rights Act. In the course of the hearing I gave leave to re-amend the relief (without opposition from the Defendants) so far as concerned the European aspect of the case, so as to read as follows:

"A declaration that the Regulations and the Finance Act are incompatible with European Community law as being:

(a) an unnotified State aid contrary to Articles 87 and 88 EC in respect of the following areas of business activity:

(i) Information Technology

(ii) Engineering (including oil and gas)

(iii) Telecommunications

(iv) Management and Business Consulting;

(b) an unlawful hindrance to free movement of workers, freedom of establishment and freedom to provide services, contrary to Articles 39, 43 and 49 respectively;

and cannot lawfully be applied."

17. I shall in due course deal with the bases of these challenges, but for this purpose I set out the nature of the re-amended relief in order to show that the challenge under European law to this legislation, at least in respect of unlawful State aid, is by reference to this specific clarification of what has been generally referred to as the "knowledge-based sector" or "the know-how industry". It is in these now more specifically identified "areas of business activity" both that the PCG has the vast majority of its members, and consequently, that it has produced evidence of the impact and effect of IR35 that it alleges.

The Aim of the Legislation.

18. The Inland Revenue, through Dr Plender QC, submits that the increasing use of service companies has been a way of avoiding tax and NICs. Insofar as the service contractor provides services which, were it not for the service company, would be services given as an employee rather than genuinely as an independent contractor, then the existence of the service company allows the client to make payments to the company rather than the individual, without deducting PAYE or National Insurance, and the service contractor can then take the money out of the service company in the form of dividends, not liable to National Insurance, instead of salary. The Defendants explain that what was in 1981 reported by the National Audit Office to be 30,000 service contractors operating through service companies, causing an alleged estimated annual loss to the Exchequer of some £40 million, had, by 2000-2001, risen to what is now said to be between 90,000 and 120,000, and the alleged loss to the Exchequer some £350 million. If the service contractor is genuinely performing services as an independent contractor, as opposed to carrying out the job of an employee, then he will not need to make any payment in respect of any or all of his assignments under IR35. The Revenue has published substantial guidance, including a publication in February 2000 (the "February Guidance") which included illustrations of three imaginary I.T. consultants or contractors, with notional facts and factors ascribed to them, which led to the conclusion that on that basis Gordon would be liable to IR35, Henry would not and Charlotte, though borderline, would on balance also be concluded to be on the self-employed side of the line and not liable to IR35.

19. The Claimants believe that very few service contractors - probably less than 5% - are disguised employees or Friday to Mondays. However all service contractors will be affected by the legislation. Unlike any other company performing services for a client they will now be treated for certain purposes as though the company did not exist and:

a) as set out in greater detail below, they will as a result of IR35, pay more tax and/or be disentitled from recovering expenses than they should, and

b) even if, on analysis, any or all of their assignments would not fall foul of IR35, they are all now at risk and assailed by uncertainty.

If they are driven out of their service company structure they will either have to be employed, by the client or by a service provider, and thus receive less remuneration than if they were their own masters, or they will have to become sole traders, who would be unlikely to attract the attention either of the employment agencies or of the clients: and the availability of the corporate structure is important so that they can grow, entrepreneurially, in order to become service providers themselves: tall trees from small acorns grow. Hence they contend that the aim of the legislation is still to undermine the basis of the existence of the service companies, notwithstanding the change in the presentation.

Factual Issues

20. There are factual issues between the parties, but, from the very beginning of this application, when both sides were asserting that they were divided by such factual issues rather than by legal ones, I was doubtful of that. It seems to me that it is much more a question of a different approach, and a different mindset, and certainly a disagreement as to the applicability of legal propositions with which I must in due course grapple. There are some factual disputes, but at an early stage it became apparent to me that they could and should be easily resolved, at least for the purpose of this application, and my decision on it. Particularly so far as concerns the ten or twelve witness statements prepared by individuals, not to speak of the considerable number of e-mails from members of the PCG which I have read, plainly on the one hand I cannot possibly reject them, but on the other I must be conscious that, persuasive as some of them may sound, they have not been tested by cross-examination. I arrived at the following eight provisional conclusions as to the facts, based on the evidence, during the course of argument, and I put them to both Counsel, and they were amended to some extent in the course of argument. Neither side of course agreed all of them, and they are my conclusions: however equally neither side was able with any great vigour to contest that they were conclusions open to me upon the evidence. I shall set each one out with some short commentary, and each derives from an apparent factual dispute.

1. The intent of IR35 is to eliminate the avoidance of tax and NIC on payments made by clients in respect of services provided by those who are in fact equivalent to employees; and it has that effect on the companies to which it applies.

21. This is my first finding. By the time the legislation was implemented, and in the light of the revised publicity, I am satisfied that the Revenue certainly intended that some tax evaders - disguised employees or Friday to Mondays - would be captured by the legislation, but that the aim was not limited to such tax evaders.

22. Whereas there has been discussion of alternative descriptions, such as "tax mitigation" (e.g. IRC v Willoughby [1997] 1 WLR 1071 HL at 1079) or "tax planning", I am entirely satisfied that it is appropriate to use the phrase "tax avoidance" as relating to lawful steps taken to avoid tax which, but for the taking of those steps, e.g. the setting up of a company vehicle, would have been due.

23. Mr Barling QC understandably points out that it is inappropriate to talk in general terms simply about the loss of NIC payments. Although it is strictly accurate to say that, through the mechanism adopted, no NICs were ever paid on the balance of the remuneration paid by the client so far as it may subsequently have been paid out by the service company by way of dividend, nevertheless NICs are not hypothecated, and their absence may be made good by other tax payments, such as income or corporation tax. However in fact it seems to be common ground between the parties that service contractors who are captured by IR35 will now be paying more tax. Whether it is as much as the £350 million estimated by the Revenue remains to be seen, and the Claimants do not begin to accept that figure. However the Claimants themselves, with the benefit of the expert evidence of a Mr Elliott of Frontier Economics Ltd., have calculated that, if an entire year's fees of an average service company were to be subjected to IR35, the service contractor would be paying, after IR35, 11% more of his/the service company's net turnover than before IR35 and, indeed, if Mr Elliott is right, 6% more than a large contractor not subject to IR35. Whatever the precise figures are, the reality is that if the service company is indeed substantially or wholly captured by IR35, then it will pay more tax. Hence the Revenue's desire for change and the Claimants desire to challenge it.

24. The Revenue points out that the methodology of treating part of the income of a company as in fact taxable as if it were the income of the individual is not unprecedented, and illustrate this by reference to the, now repealed, Taxes Act 1988, sections 423-4, whereby certain of the income of a close company was treated as the income of its participators. Equally, the targets of IR35 are easily explicable. So far as concerns the definition of "material interest" by reference to a 5% shareholding, this is a sensible test, previously adopted in the Income and Corporation Taxes Act 1988, sections 164 and 168: while the "composite company" with `traceable' dividend is an additional and necessary alternative target.

2. Many service contractors will be required to pay more monies and earlier to the Inland Revenue under IR35 than under the previous arrangements.

25. The Revenue emphasises the point that if a service contractor is in fact carrying out no services that would, if he were a sole trader, be categorised as a contract of service, but all his services can be categorised as equivalent to contracts for services, then he will not be liable to make any payment under IR35. If all or most fall under the "employee" rubric then those service contractors are the Revenue's targets, and it would be expected that they would be paying more tax. As to those in between, they take issue with the Claimants' case that they will be worse off under IR35, but if necessary would again justify that position.

26. So far as the Claimants are concerned, they emphasise the consequences of the service contractors being in whole or in part "captured" by IR35. In calculating the notional Schedule E payment, they are entitled, as has been expressly confirmed in the course of this hearing, to deduct in full any commission, be it 10% or apparently often 20%, that they will have been charged by the employment agency. They will then make the other deductions, including contributions made by the service company to an approved pension scheme, any NIC to be paid by the service company and expenses and capital allowances expended by the service company which would have been deductible by the service contractor if he had been employed by the client. Then there is the general 5% expense deduction allowed by the legislation. But though, as set out in paragraph 14 above, calculation of travel expenses would be more generous than if he had been an employee, it is quite plain that the calculation of expenses, other than travel, and of capital allowances would be considerably less generous. The estimation by Mr Elliott of Frontier is that, after allowing for the 5%, there would be slightly over a 5% shortfall in the recoverability of the service contractor's expenses. I have set out in paragraph 23 above his calculations about the extra tax payable.

27. The Defendants contest these figures in general, and further point out that, as set out in paragraph 15 above, insofar as the service company receives fees in respect of assignments that are not covered by IR35, it is possible that the shortfall in expenses could be so recovered.

28. Nevertheless I am satisfied that I can and should make the second finding set out above.

3. At least two-thirds of service contractors are in the sector referred to in the Amended Relief.

29. It is not now, if it ever was seriously, pursued that the legislation is targeted against this particular sector, but I am satisfied that the effect of the legislation will be most heavily felt in these sectors which have substantially fed the membership of the PCG, and it is no doubt for that reason, as well as the reason given by the Revenue that specific questions were raised about the IT sector because there were no reported cases in that area, that the imaginary Henry, Gordon and Charlotte notionally work in the IT industry. Though there is some dispute as to the figures, neither side contest that "at least two-thirds" is a finding I can comfortably make.

4. Instead of certainty as to the impact of tax and NIC, service contractors as a result of IR35 have uncertainty as to whether IR35 will or will not apply to a particular engagement.

30. This is very much a part of the Claimants' complaint. The Defendants cannot really deny it, although they have been, as I understand it, prepared to offer informal advice prior to the entry into of a particular assignment, and a formal and binding opinion once such engagement has been entered into, and before the end of the tax year when the notional Schedule E payment has to be made. But of course what was prior to IR35 an immunity from consideration of employment or self employment in relation to any services provided by the service contractor has now gone, and thus the service contractor is in the same position as he would be if he were a sole trader or a partnership, deciding in relation to a particular project or projects how he should treat them for tax purposes.

5. In respect of engagements or contracts sought, or services to be provided, by service contractors, there is or would be competition with companies who would be unaffected by IR35.

31. There is a considerable amount of evidence in this regard, produced by individual witness statements, by a report from Mr Elliott, by e-mails, as referred to above, and from Mr Williams. The simple point which the Claimants make is that, in relation to some contracts at least, or even some parts of some contracts, in practice the service contractor, through his service company, is in competition with large companies, or even with small companies, who have staff which they could supply as an alternative. Even if the bodyshoppers or the service suppliers have more to offer than the service contractor, nevertheless the service contractor might still beat them, whether on price or on expertise, in relation to an individual project. The Claimants complain that, insofar as service contractors will or may now have to put up their prices, if the service companies remain in business but subject to the higher tax burden, then they will be less able to compete with the larger companies. It is necessary for the Claimants to establish the existence of competition for the purpose of their case under Articles 87 and 88, to which I shall turn.

32. Of course the real answer by the Defendants is that which was adumbrated by Dr Plender QC in argument, namely that, if and insofar as the service companies have been able to keep their costs down as against the large companies, it has only been as a result of an overfavourable tax regime in which they did not have to pay tax and NICs on the full amount of the remuneration they were in fact getting; while those companies who were not service companies, in which the service contractor was able to apportion his remuneration between salary and dividend, have to provide for tax and NICs on the actual remuneration which is being paid to the employee. But in order to contest the issue of competition, an argument was formulated which was similar to that put forward by the Minister, Mr Timms, in the House of Commons on 3 November 1999, namely "Where there is evidence of tax avoidance by large companies we are just as ready ... to act against that. The real competition that we should be concerned about is that between people who are employees and others doing substantially the same job, but using a service company to pay much less in tax and national insurance". The Revenue submits that the real competition was between those who were doing the work at the clients' premises, sometimes in the same team: on the one hand employees, whether of the client or of the service provider, and on the other the service contractor. That is the competition that Dr Plender QC submitted to be the relevant one.

33. As I have set out above, it seems to me that this dispute is one of approach rather than one really indicating a dispute of fact. I am satisfied in the light of the evidence to make the finding above.

6. Companies unaffected by IR35 will have greater flexibility to arrange their tax affairs, to allocate tax between income tax and corporation tax, to defer tax liabilities, and to pay lesser salaries to those providing the services and higher dividends to shareholders, than service contractors.

34. This is the respect in which the competitors of the service companies will now be better off, because they can continue to operate the flexible arrangements which go with corporate liability, while the service companies who are caught by IR35 may have to raise their prices. This seems to me again a finding I am entitled to make on the evidence. The Defendants of course point out:

i) The companies with such alleged greater flexibility are already deducting full PAYE and NICs from the remuneration actually received by those doing the work, unlike the service companies and service contractors.

ii) A level playing field is thus being restored.

iii) Insofar as the service contractors in fact do work which is not captured by IR35, because it is genuine "independent contractor" work, then they too will retain the same flexibility in relation to that part of their fees.

7. Some service contractors may not continue to operate in the United Kingdom as a result of IR35, and some who have intended to come to the United Kingdom to set up or work as service contractors may not now come to the United Kingdom.

35. This is a finding of fact again for which the Claimants contend with an eye on their European case. The Defendants do not accept it. I have some nine witness statements and the evidence from Mr Williams and from another expert, Professor Willcocks, none of which has been cross-examined. The evidence that is given is very much hedged about, whether because it is hoped that the litigation would be successful or because it is hoped that the legislation will be not as bad as feared is not clear. However given that all I am deciding is that they "may not" stay, or come, I am prepared to make that limited finding.

8. Factors 5, 6 and/or 7 above may have an effect on trade between Member States.

36. I again make this very limited finding of fact. I note that the Paymaster General herself wrote to different fellow MPs acting on behalf of constituents who are members of the PCG: severally on 11 January "we recognise that by making sure that people pay their fair share of tax and NICs the price their clients have to pay for their services may rise and this may in turn affect the competitiveness of UK workers. The size of any such effect would depend on market conditions and response from other countries. However this is not a justification for continuing a hidden subsidy for workers who choose to set up their engagements in a particular way" and on 9 May 2000 "it will be for individuals to decide how to act in the light of the changes we propose. Clearly some people may look abroad, though many other countries already have tax rules similar to the ones proposed".

37. I turn to consider the law and my conclusions.

Human Rights Act

38. Although very much a fall-back argument by the Claimants, I take it first, because there is not only a self-standing challenge to the legislation under the Act, by reference to Article 1 Protocol 1 of the European Convention on Human Rights (`ECHR'), but it has a separate impact also in relation to European law. In this latter regard, insofar as justification is put forward for any conduct alleged to be in contravention of an Article of the EC Treaty, it would be a relevant consideration if such conduct, or any measures relied upon, were incompatible with "the fundamental rights the observance of which the [European] Court ensures, and which derive in particular from the [ECHR]", see for example Elliniki Radiophonia Tileorassi AE v Dimotiki Etariia Pliroforissis (C-260/89 [1991] ECR 1/2925 at 1/2964 paras 42-43). Article 1 Protocol 1 of the ECHR reads as follows:

"Article 1 - Protection of Property

Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.

The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties."

39. The Claimants' case is that the IR35 legislation offends against the ECHR. The case is put on the following basis:

i) A right to enjoy the benefit of a shareholding in a service company is a right of property.

ii) By virtue of the legislation, the enjoyment of that right is interfered with:

a) by being rendered more expensive, because of the imposition of income tax and NICs on the notional remuneration and the disallowance of expenses, and/or

b) by being uncertain in its impact and/or creating such uncertainty among service contractors that their enjoyment of their shareholding in the service companies and/or the very existence of the service companies are jeopardised.

The case originally put forward in addition by reference to retrospectivity of the legislation is not pursued.

40. I deal first with the expense. I have referred to the evidence and made my finding in paragraphs 25 to 28 above. There is a possible increased impact of taxation on the service contractor of some 11% of turnover, as set out in paragraph 23 above, on that part of the remuneration for his services which, albeit retained by the service company, is now going to be captured by IR35, and/or a loss of recovery of some 5% of his expenses, insofar as they are not otherwise able to be recovered out of that part of the earnings of the service company (if any) which is not affected by IR35. This assumes that he continues to operate the service company. It may be that he may choose no longer to operate the service company and to become an employee, which may mean that he would incur less expenses but also that he would be likely to receive less remuneration overall: although on the evidence it appears to me likely that to choose that course might be less beneficial to him, at least if some of his engagements will remain uncaptured by IR35, than continuing with the service company subject to the provisions of IR35.

41. The question then is whether the impact of IR35 is sufficient to amount to a breach of Article 1 of Protocol 1. The two material authorities to which I have been referred by Mr Barling QC are neither of them helpful to him. In X v France Application 9908/82, 32 DR 266 (1983), the Commission rejected the application of a French national seeking to challenge a provision of the General Tax Code which stipulated that, in cases of obvious personal expenditure exceeding the declared income, tax would be assessed on the basis of that expenditure, without the taxpayer being able to counter that assessment by alleging that he had drawn on capital, or received gifts from a third party. The applicant complained that this amounted to a "de facto confiscation of his property". The Commission concluded, in rejecting that application, as "manifestly ill-founded", at 272-3 that:

"The legislation of most of the States Parties to the Convention provides that the authorities should, when assessing income tax, take account in some cases of certain other factors distinct from income in the strict sense. ... Regulations of this kind should not generally speaking be considered incompatible with Article 1 of the First Protocol, except in cases where, by taxing a straightforward investment - apart from measures to counter tax avoidance or fraud - it amounted to a de facto confiscation of some part of the taxpayer's possessions."

42. In Svenska Managementgruppen AB v Sweden Application 11036/84, 45 DR 211 (1985), the applicant complained of the imposition of a new profit-sharing tax together with a supplementary pension charge. The Commission concluded (at 222-3) that:

"A financial liability arising out of the raising of taxes or contributions may adversely affect the guarantee of ownership if it places an excessive burden on the person concerned or fundamentally interferes with his financial position. However, it is in the first place for the national authorities to decide what kind of taxes or contributions are to be collected. Furthermore the decisions in this area will commonly involve the appreciation of political, economic and social questions which the Convention leaves within the competence of the Contracting States. The power of appreciation of the Contracting States is therefore a wide one. ... The Commission cannot find that these obligations affect the applicant's guarantee of ownership or interfere with its financial situation to such an extent that this could be considered disproportionate or an abuse of the Contracting Parties' rights. ... to levy taxes."

Karen Reid in A Practitioner's Guide to the European Convention of Human Rights points out that:

"The Commission has found no problems regarding the imposition on employers of the costly PAYE system, the increase of contributions on certain categories of persons to benefit others and the imposition of retrospective tax measures."

43. The consequence to the Claimants, or some of them, in this case, even if the full amount of the service company's earnings in a given year were subject to IR35, does not seem to me to be even arguably so severe as to amount to a de facto confiscation of their property, to fundamental interference with their financial position or to an abuse of the United Kingdom's rights to levy taxes. Dr Plender QC has referred to the decision of the European Court of Human Rights in the National and Provincial Building Society and Others v United Kingdom [1997] 25 EHRR 127, in which the Court concluded as follows (at 171, para 80):

"According to the Court's well established case law, an interference, including one resulting from a measure to secure the payment of taxes, must strike a `fair balance' between the demands of the general interest of the Community and the requirements of the protection of the individual's fundamental rights. The concern to achieve this balance is reflected in the structure of Article 1 as a whole, including the second paragraph: there must therefore be a reasonable relationship of proportionality between the means employed and the aims pursued. Furthermore in determining whether this requirement has been met, it is recognised that a Contracting State, not least when framing and implementing policies in the area of taxation, enjoys a wide margin of appreciation and the Court will respect the Legislature's assessment in respect of such matters unless it is devoid of reasonable foundation."

44. In this context, I must therefore consider, alongside the additional expense, the Claimants' case on uncertainty. The continued enjoyment by the Claimants of their shareholding is, they assert, jeopardised by the new uncertainty. Under the old system, by acquiring and operating through a service company, the service contractor was immune from the uncertainty as to whether in relation to any given contract he was operating as an individual contractor or an employee. Now he has to ask himself that question, either in advance or at any rate retrospectively when it comes to self-assessment for tax purposes. Mr Barling QC refers to The Sunday Times v UK [1979-80] 2 EHRR 245 at 271, para 49, in which the European Court of Human Rights gave its opinion that:

"A norm cannot be regarded as a `law' unless it is formulated with sufficient precision to enable the citizen to regulate his conduct: he must be able - if need be with appropriate advice - to foresee, to a degree that is reasonable in the circumstances, the consequences which a given action may entail. Those consequences need not be foreseeable with absolute certainty: experience shows this to be unattainable. Again, whilst certainty is highly desirable, it may bring in its train excessive rigidity and the law must be able to keep pace with changing circumstances. Accordingly, many laws are inevitably couched in terms which, to a greater or lesser extent, are vague and whose interpretation and application are questions of practice."

45. There are also European cases, in which, for the reasons discussed in paragraph 38 above, the principles have been discussed in similar terms (see the judgment of the European Court in Commission v Italy Case C-119/92 [1994] ECR 1-393 at para 17 and the Opinion of Advocate General Cosmas in Duff v Minister for Agriculture Case C-63/93 [1996] ECR 1-569 at 581).

46. Is there uncertainty? Dr Plender QC says not, by reference to a 1999 report relied upon by the Claimants, called the Burchell Report, which concluded, after research, that a very small proportion of people indeed is unable to tell whether they are employees or self-employed (of those who reported themselves as being employees only 0.3% were found to be self-employed: and of those who reported themselves as being self-employed only 1.4% were found to be employees). Mr Barling QC responds that this Report excluded reference to those who were company directors, who might be expected to have the greatest uncertainty about their status - and of course would be the most relevant in our case. I find it, however, sensible rather to address objectively the common law of employment, which is now to be applicable to service contractors, engagement by engagement, as it would have been if they had been or remained sole traders.

47. The first point to be made is that already clear from the above. The legislation does not create a new category of law. It submits the service contractors to the same law as they would have been subject to, but for the interposition and/or operation of the service company.

48. There is a very heavy responsibility laid upon the tax inspector, as indeed there is in respect of the position of any individual taxpayer. It is essential that there is a sensitive and co-operative approach taken by such inspectors, and that the Revenue guidance is clear and helpful. Dr Plender QC's submissions have been both, but the Revenue documentation produced by the Claimants has not always been either:

i) In one case illustrated by the evidence, accountants on behalf of a service company had correspondence with the Inland Revenue, seeking guidance as to whether a contract which that company had entered into fell within the provisions of IR35. The result of the accountants' enquiry was that two different inspectors wrote, quite independently, to the accountants a month apart, without reference one to the other, giving entirely inconsistent answers: the one who gave the answer that IR35 would apply relied upon an entirely erroneous construction of the contract in question.

ii) It is, as Dr Plender QC accepts, essential to any consideration of the common law test as to whether an individual is trading as an employee or as an independent contractor, that consideration should be given to whether he is in business on his own account: see for example Market Investigations Ltd v Minister of Social Security [1969] 2 QB 173. The legislation requires consideration on an engagement by engagement basis; the tax and NIC payments are required to be calculated by reference to each separate engagement, and the circumstances to be considered "include the terms on which the services are provided, having regard to the terms of the contracts forming part of the arrangements under which the services are provided". Notwithstanding this however, the question of whether the service contractor himself has, prior to that engagement, performed or is, simultaneously with that engagement, performing [an important contrast to the duty of fidelity ordinarily owed by an employee], or will subsequently, after the termination of that engagement, perform, services for others, and is to be construed as carrying on business on his own account, is and must be a central consideration. That this is in fact accepted by the Revenue is clear from the Examples given by the Inland Revenue in the February Guidance referred to in paragraph 18 above. The fact, as analysed in that document, that "Charlotte and her company have a `business organisation' - including an office and associated equipment based at Charlotte's home ... a variety of clients and all her contracts have been fairly short term" is said to be a "strong pointer to self-employment". Of course, whether such pointer is determinative may depend upon the nature of a particular assignment. She may be self-employed for much of the year, and yet, in relation to a particular assignment, perhaps by virtue of its length or its specific arrangements, she may be considered as an employee for the purposes of IR35. There must be careful consideration of this by the inspector; and sufficient information must be given to the inspector by the service contractor and his accountant in order for him to reach the appropriate conclusion.

iii) Equally, insofar as the inspector has access to something not available to the service contractor, such as the contract between the agency, which recruited him, and the client, which is or may be relevant, then it should clearly be supplied by the agency or the client or by the inspector. An answer simply by reference to the engagement itself, its length, and the terms of such written contract between the agency and the client cannot be acceptable if regarded as sufficient of itself. A guidance note, ESM 1004, sets out what is apparently the Revenue's position in relation to such written contracts. There is reference to the fact that the Courts "will not normally refer to evidence other than that of the written contract (for example, they will not refer [to] what the parties did in practice)". It concludes, "Written contracts are therefore extremely important. When dealing with a written contract you should not try to go behind a written term unless you can clearly demonstrate [that] it does not reflect the true agreement between the parties". It appears to me clear that the Revenue must bear in mind that under IR35 they are not considering an actual contract between the service company and the client, but imagining or constructing a notional contract which does not in fact exist. In those circumstances, of course the terms of the contract between the agency and the client as a result of which the service contractor will be present at the site are important, as would be the terms of any contract between the service contractor and the agency. But, particularly given the fact that, at any rate at present, a contract on standard terms may or may not be imposed by an agency, or may be applicable not by reference to a particular assignment, but on an ongoing basis, and may actually bear no relationship to the (non-contractual) interface between the client and the service contractor, such documents can only form a part, albeit obviously an important part, of the picture. It is, in my judgment, inappropriate that there should be in the February Guidance, which contains the helpful assessment of the positions of Henry, Gordon and Charlotte, the apparently inflexible stance that it is only where a contract in the agency's standard terms is for less than a month that the "status position will be considered on a case by case basis". Although it is right to say that the same Guidance makes it clear that in respect of such contracts for more than one month the Revenue will not automatically assume that it is to be treated as employment where the service contractor can "demonstrate a recent history of working including engagements which have the characteristics of self-employment", there may still be other factors to consider. Clearly some uncertainty could be resolved by the drafting, agreement and approval of a series of acceptable new standard forms.

iv) Further it cannot be right for the Revenue simply to conclude, as it does in another such guidance document, ESM 0514, that "mutuality of obligation" is not a relevant issue: "Do not consider this factor when reviewing a work status, unless the engager or worker raises it". It has now recently been emphasised, by the House of Lords, in Carmichael v National Power plc [1999] 1 WLR 2042, that the test adopted in Nethermere (St Neots) Ltd v Gardner [1984] ICR 612 CA by Stephenson LJ, of an "irreducible minimum of mutual obligation" is another central piece of guidance in the analysis of whether there is employment or self-employment. Of course there is in fact no contract between the client and the service contractor, and thus no obligation on either party owed to each other, but it must be significant, when applying the common law test, to consider whether, looking at the actual relationship, and a notional contract, between the client and the service contractor, any obligation would be owed by the client.

v) The Claimants are inevitably concerned that, with regard to an assignment by a software specialist at a client's premises, it would be unlikely that he would bring with him any tools or equipment, which might be one of the more obvious indicia of self-employment if, for example, he were a jobbing builder or a plumber. That must be right. However, all the aspects of the relationship must be considered. One of the questions that is addressed in relation to the ordinary issue of employee or not is whether there is a right of substitution in the contract with the client, or whether the services can only be supplied by the one individual. Again so far as computer services are concerned, the Claimants are concerned that, in practice, at any rate once a service contractor has commenced work at the client's premises on his equipment, his expertise will become such that no one else in fact would be able to replace him. Given that the issue is not determinative, but only one of the factors, that may indeed be right and may in a particular engagement be a strong counter-indicator against employment. On the other hand, once again, the terms of the contract, certainly a contract to which the service contractor has not been a party, will not necessarily be conclusive. There appears to be, in this regard also, a too inflexible approach by the Revenue set out in some of the guidance documents and responses. It is worth bearing in mind that in Express and Echo Publications Ltd v Tanton [1999] ICR 693, although there was a right for the delivery driver to arrange "at his own expense entirely for another suitable person to perform the services", which was held to be a crucial factor in deciding that the contract was not a contract of service, nevertheless there was a proviso that in such event "the contractor must satisfy the company that such a relief driver is trained and is suitable to undertake the services", which was not considered to neutralise the point; so that it would not be right to make an absolute statement, as the Revenue appears to do in another of its guidance documents, that the need to obtain the client's permission necessarily negates the existence of a right to substitution, and/or points to employment.

49. Notwithstanding these and other areas of potential dispute, however, I do not consider that it offends against the concept of certainty for the common law of employment to apply to a service contractor; and I find no difficulty with the concept of what the Claimants have described as the "entirely hypothetical relationship between the client and the [service] contractor, when no such relationship exists". Of course, the service contractor would prefer to have the protection of the service company, such that he would not even need to consider whether to deduct PAYE or NIC in respect of the payment from the client. But I do not consider that his subjection to the same law as if he were a sole trader or an individual is objectionable, or submits him to unacceptable uncertainty, any more than I conclude that it is contrary to Human Rights to apply such law in an ordinary case to an individual. There are going to be particular engagements which are borderline. There will be service contractors all of whose engagements fall clearly on one or other side of the line. There will be some who, even though normally in business on their own account, are deemed, in respect of a particularly long engagement, or one particularly subject to a client's instructions, or one where he is working alongside, or on exactly the same basis as, the clients' own employees, to be subject to IR35. But, as can be seen from the Sunday Times case, the concept of certainty certainly allows for the possibility of the need of legal or accountancy advice; and, in any event, employment law requires the degree of flexibility in approach (which indeed I hope will be adopted by the Revenue), which is again foreseen and approved of in the passage I have cited from Sunday Times. Attention was drawn by Mr Barling QC to the recent Court of Appeal decision in Montgomery v Johnson Underwood Ltd (9 March 2001 unreported), in which Buckley J, giving the leading judgment, indicated that it is "inevitable that different tribunals will, from time to time, reach different conclusions on very similar facts. But, unless the objectives of clarity and predictability in law are to be abandoned altogether, the principles upon which they base their decisions should be as clear as possible and adhered to. For my part I regard the quoted passage from Ready Mixed Concrete [[1968] 2 QB 497] as still the best guide, and as containing the irreducible minimum by way of legal requirement for a contract of employment to exist. It permits tribunals appropriate latitude in considering the nature and extent of `mutual obligations' in respect of the work in question and the `control' an employer has over the individual. It does not permit those concepts to be dispensed with altogether. As several recent cases have illustrated, it directs tribunals to consider the whole picture to see whether a contract of employment emerges". I do not consider therefore that to subject service contractors to the common law of employment interferes with their human rights, whether taken together with the additional expense discussed above or on its own: and insofar as the uncertainty may put the service contractor at risk of a wrong decision with regard to self assessment, by way of reassurance Dr Plender QC has, on instructions from the Revenue, referred to two documents:

i) An Inland Revenue penalty statement, issued on 13 March 2001, reads as follows: "Penalties may also be sought for an incorrect return ... An employer might fail to meet its obligations to file a correct return because of a genuine misunderstanding about the rules caused by their newness. This would be taken into account, along with the effort made by the employer to establish whether a contract is subject to the new rules, when considering penalties".

ii) When I raised with Dr Plender QC the fact that there may be continuing unsureness about whether a particular engagement is covered by IR35, quite apart from the "newness" of the rules, Dr Plender QC referred to the leaflet IR109, which expressly records "if you have taken all reasonable care, we do not seek penalties".

50. The last issue which is raised by Mr Barling QC is that there is an unfairness in being taxed as if an employee without gaining any of the concomitant advantages of being an employee. Of course, if the answer is that in respect of his entire annual remuneration he is going to be subject to IR35, whether because in fact he is engaged with one client all year or otherwise, he may indeed be better off simply to decide to become an employee: on the other hand it may be that he will only be deemed to be an employee in respect of one out of a number of engagements during the year, or perhaps even none. So far as he is treated as an employee for the purposes of IR35 however:

i) There is no binding conclusion that he is an employee simply because he is to be treated as if he were one for tax purposes, but if so advised he could seek to raise arguments to that effect.

ii) Although, as long as he retains the service company structure, he does not have automatic entitlement as against the client to all the benefits of being an employee (such as higher maternity pay or sick pay; or statutory holidays or unemployment benefit), nevertheless, insofar as NICs are paid on the higher notional remuneration, then he will receive the benefit of those higher payments.

51. I look again in totality at the increased tax burden for those who are `captured' by IR35, coupled with the uncertainty for those who are `affected' by it in the sense of having to ask themselves - if necessary taking advice - whether a particular engagement is captured. I do not conclude that there is a contravention of Protocol 1 of Article 1 of ECHR, nor that, as far as concerns considerations of Articles of the EC Treaty, there is in this regard an incompatibility with fundamental rights.

Article 87

52. Article 87 (formerly Article 92):

"Save as otherwise provided in this Treaty, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, insofar as it affects trade between Member States, be incompatible with the common market."

53. Article 88 (formerly Article 93) by paragraph 3 provides for notification to the Commission as follows:

"The Commission shall be informed, in sufficient time to enable it to submit its comments, of any plans to grant or alter aid. If it considers that any such plan is not compatible with the common market having regard to Article 87, it shall without delay initiate the procedure provided for in paragraph 2. The Member State concerned shall not put its proposed measures into effect until this procedure has resulted in a final decision."

54. The basis of a complaint must be that there is such unlawful state aid, and that it has not been notified, and the direct effect is derived from Article 88(3). Whereas a statutory provision contained in an Act of Parliament cannot be normally be challenged before the Courts, nevertheless not only can its compatibility with human rights now be considered as a result of the Human Rights Act 1998, but its very legality can, and indeed must, be considered by the national courts if it conflicts with a requirement of the EC Treaty. This is what occurred in R v Commissioners of Custom and Excise ex parte Lunn Poly Ltd [1999] Eu LR 654 (CA), where the Court of Appeal upheld a decision of the Divisional Court on an application for judicial review, whereby it declared that the provisions contained in the Finance Act 1997 relating to travel insurance, providing for insurance premium tax to be charged at differential rates on premiums payable on such insurance, constituted unlawful state aid, contrary to what was then Article 92. The Claimants must satisfy the Court that there is unlawful state aid and that it has not been notified. If so, it is not for the national court to decide whether the Commission would have found that such aid was not incompatible with the common market and/or was justified. Thus it is accepted between the parties before me that `justification' per se is for the Commission and not for this court. However the same facts which may go to justification before the Commission may also be examined to consider whether or not there was state aid at all within Article 87: see Lunn Poly per Lord Woolf MR at 662g, 663f-664a and 664g-h and per Clarke LJ at 673f, which I discuss below.

55. There are six ingredients which must be considered by the Court, namely whether there is:

i) An "aid" in the sense of a benefit or advantage which

ii) is granted by the state or through State resources,

iii) favours certain undertakings over others (the `selectivity' principle),

iv) distorts or threatens to distort competition,

v) is capable of affecting trade between Member States and

vi) has not been notified to the Commission.

56. In this case, the decision to impose the provisions of IR35 on small or one-man service companies, so that, in respect of the remuneration paid by the client for services provided by the service contractor, the service company must pay tax and NIC, subject to appropriate deductions, as if it were salary paid direct to the service contractor, is said to be unlawful state aid to those larger companies unaffected by IR35 who are, at least in certain sectors, competitors of the service companies. The reamended relief sought, which I have set out in paragraph 16 above, identifies "the following areas of business activity (i) information technology; (ii) engineering (including oil and gas); (iii) telecommunications; (iv) management and business consulting". The Claimants thereby assert that the recipients of the unlawful state aid are those in such sectors who have not been made subject to IR35.

57. As for the six factors set out in paragraph 55 above, the sixth is admitted, because notification is submitted by the Defendants to be unnecessary. The second is not in dispute. It is accepted that money does not actually have to change hands, and that there can be aid to a recipient by the State by way of exemption or exoneration from a liability: thus per the Court in Italian Republic v Commission of the European Community C-6/97 [1999] ECR 1-2981 at 3004 para 15:

"The Court has consistently held that the concept of aid embraces not only positive benefits, such as subsidies, but also measures which, in various forms, mitigate the charges which are normally included in the budget of an undertaking and which, therefore, without being subsidies in the strict sense of the word, are similar in character and have the same effect."

Equally in the light of my findings of fact numbers 5, 6, 7 and 8 above, the fourth and fifth factors are, sufficiently for this purpose, established. The issues then arise in relation to the first and third factors, namely as to whether there is a benefit or advantage to anyone and the selectivity principle. At least in this case they are intertwined.

Positive and Negative Aid

58. In most, if not all, cases which have been considered either by the European Court or by the Commission, at any rate insofar as brought to my attention, the issues have been about aid to one company, group or sector, either by way of an actual subsidy or by way of a tax or other concession, complained of either by another company, group or sector within the same Member State, or by the equivalent sector of another Member State, as being an unfair advantage. This is what could be referred to as "positive aid". The issues are then whether the measure amounted to the giving of aid, i.e. was a material advantage and/or whether the recipient and thus the beneficiary of such advantage could be sufficiently identified. It may be difficult immediately to decide whether there was aid: as discussed in Italy above and in Steenkolenmijnen v High Authority Case 30/59 [1961] ECR 91, and Deufil GmbH & Co KG v Commission Case C-310/85 [1987] ECR 1-901; and see R v Attorney General ex p. ICI [1987] 1 CMLR 72 at 103-4, per Lord Oliver. There may be a further issue as to the identity of the recipient of the aid; for the recipient may not be simply one undertaking or group, it may be a whole sector, as in Belgium v Commission Case C-75/97 [1999] ECR 1/3671, (per the Court at para 33) and CETM v Commission Case T-55/99 (C.F.I. 29/9/2000):

"39. It should be observed that the specific nature of a State measure, namely its selective application, constitutes one of the characteristics of State aid within the meaning of [Article 87]. In that regard, it is necessary to determine whether or not the measure in question entails advantages accruing exclusively to certain undertakings or certain sectors of activity ...

40. The applicant's argument that there was no prior identification ... of the individual addressees of the measure contained therein must be rejected. The fact that the aid is not aimed at one or more specific recipient defined in advance, but that it is subject to a series of objective criteria pursuant to which it may be granted, within the framework of a pre-determined overall budget allocation, to an indefinite number of beneficiaries who are not initially individually identified, cannot suffice to call in question the selective nature of the measure ... At the very most, that circumstance means that the measure in question is not an individual aid. It does not, however, preclude that public measure from having to be regarded as a system of aid constituting a selective, and therefore specific, measure if, owing to the criteria governing its application, it procures an advantage for certain undertakings or the production for certain goods, to the exclusion of others ...

47. It follows from all of the foregoing that the [measure] was intended to, and did in fact, benefit, among users of commercial vehicles, only [certain parties]. Other users of vehicles of that type, namely large undertakings, were not eligible under the [measure] ...

48. Having regard to the foregoing considerations ... it must be concluded that the Commission was justified in taking the view that the measure ... was selective and therefore specific for the purposes of [Article 87]."

This was a subsidy for some parties within a sector but not others, particularly for large undertakings, and this was concluded to be sufficiently specific to amount to aid within the Article. Similarly so in Commission v Italy Case C-203/82 [1983] ECR 2525, where certain Italian industries could be identified as the recipients of a subsidy. This has been extended to cover a situation in which the recipient is not actually identified or in the first instance identifiable, but there is a wide latitude given to a Government as to who is to benefit: e.g. France v Commission Case C-241/94 [1996] ECR 1/4551, Ecotrade SRL v Altiforni e Ferriere di Servola SpA Case C-200/97 [1998] ECR 1-7907, Rinaldo Piaggio Case C-295/97 [1999] ECR 1-3735, and DM Transport Case C-256/97 [1999] ECR 1-3913 esp at 1-3935 para 27:

"It follows from the wording of [Article 87] that general measures which do not favour only certain undertakings or the production of only certain goods do not fall within that provision. By contrast, where the body granting financial assistance enjoys a degree of latitude which enables it to choose the beneficiaries of the conditions under which financial assistance is provided, that assistance cannot be considered to be general in nature."

59. The more difficult question which arises in this case, however, is what I have called "negative aid". A company or group alleges that it has been disadvantaged, in this case by the imposition of a tax liability for NICs etc., and seeks to assert that by virtue of the negative aid that it has received, the disadvantage to which it has been put, there is a corresponding advantage to someone else, who must thereby be the recipient of an unlawful state aid. It seems to me not inevitable that there will always be another party who has gained, just because one person has lost. If all individual taxpayers are required to pay an income tax increase, then companies, there having been no increase in corporation tax, or pensioners or the unemployed who pay no tax, may benefit. But that is obviously the very extreme of any such argument. If someone is favoured by legislation, then the argument "cui bono" (if I may be forgiven the Latin) is only a question of identifying the recipient, and, subject to the cases discussed above, such aid may be complained of by anyone, whether someone who feels that they themselves have been disadvantaged or not, subject to the court accepting that they have sufficient standing. In Lunn Poly at 668-D, Clarke LJ pointed out, in relation to a measure which created a differential tax rate, that it would not make any difference of substance whether the complaint was that the complainant had been disadvantaged by the higher rate or that the recipient of the favour had been advantaged by the lower one. It seems to me however to be quite a different and more difficult matter if there is a disadvantage imposed by a measure, and then the recipient of that disadvantage seeks to identify someone who, albeit not expressly within the legislation, has, as a result, obtained a favour.

60. It is in those circumstances that there seem to me to be three questions to be answered, all run together. By virtue of the disadvantage imposed upon the complainant:

i) Is there aid at all?

ii) If so, to whom?

iii) Is it identifiable with specificity? Is the person or undertaking or sector which is said to be benefited by virtue of the disadvantage imposed upon the complainant sufficiently identifiable as the recipient of aid from the Government? It must be recalled that this has been called, at least in the normal context of positive aid, the `selectivity principle'.

61. All three questions were answered in Lunn Poly relatively straightforwardly, for the disadvantage complained of was imposed in the same legislation which gave the benefit to the recipient of the lower rate of taxation, which was consequently said to be the state aid complained of.

62. I seek to arrive at an understanding of the principles which may assist in the conclusion:

i) The favour must be sufficiently specific and/or clearly directed. In Italy Case C-6/97 referred to in paragraph 57 above, the Court's conclusion was (in paragraph 17 at 1-3004) that the "contested decision was intended to reduce the tax burden on road hauliers. ... That legislation meets the condition that it should relate to specific undertakings, which is one of the defining features of State aid" In Sloman Neptun Schiffahrts AG v Seebetriebsrat Bodo Ziesemer Case C-72/91 and 73/91 [1993] ECR 1-887, the complaint was by a German shipping undertaking because Filipino seafarers were allowed to be engaged at lower home country rates. The conclusion was that there was no aid (per the Court at 1-934 para 21):

"The system at issue does not seek, through its object and general structure to create an advantage which would constitute an additional burden for the State or the abovementioned bodies, but only to alter in favour of shipping undertakings the framework within which contractual relations are formed between those undertakings and their employees. The consequences arising from this, insofar as they relate to the difference in the basis for the calculation of social security contributions ... and to the potential loss of tax revenue because of the low rates of pay ... are inherent in the system and are not a means of granting any particular advantage to the undertakings concerned."

ii) There is a broad leeway with regard to a Member State's direct taxation measures. There are specific Articles of the Treaty, Articles 90-93 (formerly 95-99), which proscribe certain fiscal steps: there is harmonisation of indirect taxation, but no harmonisation of direct taxation. If a fiscal measure, such as in Lunn Poly, amounts to unlawful state aid, then it will not be protected simply because it is direct taxation within such leeway (Italy v Commission Case 173/73 [1974] ECR 709 at 718-9 para 13). However Advocate General Fennelly in Ecotrade at para 25 opines as follows:

"A distinction between aids, which are selective in nature, and State measures of general application in the fields of taxation, social security, regulation of the economy and so on, appears to me to be implicit in any Community State aids regime. ... The condition of selectivity, of a positive or negative alleviation in defined cases of generally applicable rules or burdens, is implicit in the Court's reference in [Steenkolenmijnen] to `interventions which, in various forms, mitigate the charges which are normally included in the budge of an undertaking'".

iii) I refer to two Commission notices, which are, although not binding upon me, persuasive and illuminating. The first is the Notice on co-operation between national courts and the Commission in the State aid field OJ 1995 C312/07. I refer in particular to paragraph 7:

"Of course a court will have to consider whether the `proposed measures' constitute State aid within the meaning of [Article 87] ... The notion of State aid must be interpreted widely to encompass not only subsidies, but also tax concessions and investments from public funds made in circumstances in which a private investor would have withheld support. The aid must come from the `State', which includes all levels, manifestations and emanations of public authority. The aid must favour certain undertakings or the production of certain goods: this serves to distinguish State aid which [Article 87] applies from general measures to which it does not. For example, measures which have neither as their object nor as their effect the favouring of certain undertakings or the production of certain goods, or which apply to persons in accordance with objective criteria without regard to the location, sector or undertaking in which the beneficiary may be employed, are not considered to be State aid."

iv) The other notice is the Commission notice on the application of the State aid rules to measures relating to direct business taxation OJ 1998 C-384/03. The relevant paragraphs include the following:

"12. ... The measure must be specific or selective in that it favours `certain undertakings or the production of certain goods'. The selective advantage involved here may derive from an exception to the tax provisions of a legislative, regulatory or administrative nature or from a discretionary practice on the part of the tax authorities. However, the selective nature of a measure may be justified by `the nature or general scheme of the system'. If so, the measure is not considered to be aid within the meaning of [Article 87] ...

13. Tax measures which are open to all economic agents operating within a Member State are in principle general measures. They must be effectively open to all firms on an equal access basis, and they may not de facto be reduced in scope ... However, this condition does not restrict the power of Member States to decide on the economic policy which they consider most appropriate and, in particular, to spread the tax burden as they see fit across the different factors of production ...

14. The fact that some firms or some sectors benefit more than others from some of these tax measures does not necessarily mean that they are caught by the competition rules governing State aid. Thus, measures designed to reduce the taxation of labour for all firms have a relatively greater effect on labour-intensive industries than on capital-intensive industries, without necessarily constituting State aid. Similarly, tax incentives for environmental, R & D or training investment favour only the firms which undertake such investment, but again do not necessarily constitute State aid.

15. In [Italy Case 173/73], the Court ... held that any measure intended partially or wholly to exempt firms in a particular sector from the charges arising from the normal application of the general system `without there being any justification to this exemption on the basis that the nature or general scheme of the system' constituted State aid. The judgment also states that `Article [87] does not distinguish between the measures of State intervention concern by reference to their causes or aims, but defines them in relation to their effects.' ...

16. The main criterion in applying Article [87] to a tax measure is therefore that the measure provides in favour of certain undertakings in the Member States an exception to the application of the tax system. The common system applicable should thus first be determined. It must then be examined whether the exception to the system or differentiations within that system are justified `by the nature or general scheme' of the tax system, that is to say, whether they derive directly from the basic or guiding principles of the tax system in the Member state concerned ..."

63. I turn to the most relevant authority, in my judgment, namely Lunn Poly. The starting point is that because it was the same measure which created the two differential levels of tax on premiums for travel insurance, the application of the selectivity principle was not difficult. The Customs and Excise submitted that there was no state aid because the higher rate applied to the generality of taxpayers. However Lord Woolf MR concluded (at 665E) that "those providing travel insurance, who were not subject to the higher rate of tax, are a clearly defined part of the group providing travel insurance and they received a benefit in the form of a lower tax rate which another defined part of those providing travel insurance, namely the travel operators and travel agents, did not receive. The aid was both specific and selective". The Claimants in this case assert that only some of those who compete for business in the sectors which they have identified in their reamended relief are affected by IR35; therefore there is a corresponding benefit to those who are unaffected by IR35 with whom, at any rate in such sectors, they are so competing.

64. Once that link, identified by Lord Woolf, is made, then on the facts of Lunn Poly it did not matter whether the position was expressed as positive aid to those with the lower rate or negative aid by virtue of the disbenefit to those with the higher rate, because the beneficiaries from that negative aid were easily identified (see per Clarke LJ at 667-670).

65. The question then arose as to whether the favouring of the one and the disfavouring of the other amounted to State aid. It was in this regard that the question of the nature of the assistance and the justification came together, as briefly referred to in paragraph 54 above. I recite first of all the three passages from Lord Woolf's judgment:

"Whether an aid is compatible with the Common Market, subject to the overriding jurisdiction of the European Court, is to be determined either by the Council or, failing the Council, the Commission. It is not for the national court to decide the issue of incompatibility. However, this does not mean that whether or not there is objective justification for what the Member State has done has no relevance. It can be relevant in answering whether the action taken by the Member State is in fact properly to be regarded as an aid." (662G).

"It is necessary to focus on the effect the introduction of the differential rate of tax had on the previous position in order to decide whether the change in the rates constituted an aid. In doing this I do not observe from the authorities any suggestion that it is not permissible to look at the reason the member state put forward for imposing the differential rate. Not to do so is to approach the issues in a vacuum. It is here that the question of there being an objective justification for the implementation of the measure could be relevant. To take an example relevant to the present case: if a higher rate of tax were imposed to rectify an actual loss of tax due to a tax avoidance scheme initiated by certain members of a group of taxpayers, that would not mean that the remainder of the relevant group of taxpayers was receiving an aid because of the higher discriminatory rate of tax imposed specifically on the tax avoiders. Nor should it make any difference if, instead of the rate of tax being increased for those who are involved in the tax avoidance, it is reduced for those not so involved. In both situations what is being achieved is a level playing field. Where an explanation of this nature is put forward, if the court is satisfied that what had happened is justifiable, the result would be there would be no discrimination which could constitute an aid." (663G-664A)

"[The Customs and Excise's] reasoning does not justify the difference in rates. The different rates are not making good a tax loss that would otherwise have occurred ... Having come to this conclusion, there is no loss of tax which provides an objective justification for the discriminatory rate of tax imposed on tour operators and agents providing insurance. The higher rate, contrary to the stand adopted by the Customs and Excise, cannot be objectively justified as an anti-tax avoidance measure." (664G-H).

Then per Clarke LJ at 673F:

"It is not sufficient simply to ask whether a particular measure has the effect of distorting or threatening to distort competition by the indirect transfer or use of state resources. Some measures are not state aid even if they have that effect. The Court has tended so to hold where the provision concerned is not a fiscal measure but, for example, a labour or social measure. It was I think in that context that the Court said in van Tiggele [Case 82/77 [1978] ECR 25] ... that the potential loss of tax revenue was `inherent in the system and ... not a means of granting a particular advantage to the undertakings concerned."

66. Clarke LJ persuasively ended his judgment with the view that the question whether there is State aid "should be approached on a broad pragmatic basis in the light of the policy underlying the Treaty".

67. It is not, or at any rate no longer, suggested by the Claimants that the object of the legislation was state aid; their case is that there is such effect. I am satisfied that Article 87 is not contravened:

i) The measure was, in my judgment, one which applied "to persons in accordance with objective criteria without regard to location, sector or undertaking in which the beneficiary may be employed". The reason IR35 did only apply to the service companies and service contractors was because they alone were not paying income tax and NICs on the full amount of the remuneration being received directly or indirectly by the service contractor doing the work. Those companies unaffected by IR35 were already doing so in respect of the equivalent employee. The distinction between the two, by reference to the 5% of shareholding as indicating sufficient control, was, albeit rough and ready, adopted as a definition and not by way of discrimination.

ii) The measure was a general measure aimed, as the Revenue saw it, so that so far as possible all those supplying services as an employee rather than as an independent contractor would be paying tax and NICs accordingly, without reference to the existence of a service company. This was seen and intended and had an effect as a tax avoidance measure.

iii) It was not, in the circumstances, an exception to or derogation from a general system, but was intended to ensure compliance with it.

iv) I agree with Dr Plender QC that the very reamendment to the relief sought indicated, or indeed emphasised, the generality, or non-specificity, of the measure. The measure itself was not limited to any particular sector. What the reamendment sought to do was to identify certain sectors only, and then allege favouring and disfavouring of certain parties within such sectors, without considering the effect in other sectors in which the measure also applies. The measure is also not limited to service companies, but has effect on partnerships and individuals too, which has not been explored in this application, and on "composite companies". It seems to me difficult, and in the present case impossible, to be able to spell out of a general measure, applicable to all sectors, a case of selective benefit within certain sectors. Though I entirely see that it would be possible to allege that a general measure also had the effect of being selective aid for its beneficiaries, that is not this case. What has happened here is that it is said that in relation to some sectors some were especially disadvantaged, and that within those sectors there were competitors who were thus advantaged. Although there may be a price consequence, it is arguable that the competitors were not materially advantaged, because they already had to pay tax and NIC on the same basis as IR35 now requires of service contractors. However in any event this general measure did not have the object, and, in my judgment, also did not have the effect, of amounting to State aid to those competitors. Put another way, any consequence in respect of such competitors in certain sectors was an incidental side-effect.

68. I am therefore clear that answering separately and together the three questions that I have posed in paragraph 60 above, the measure that imposed obligations to pay tax and NIC on service companies in those cases where in fact the principal was providing services to a client as an employee was not aid to anyone. No one can be identified as a recipient of that aid, certainly no one sufficiently specifically identified or identifiable: and looking at it, as Clarke LJ suggested, on a broad pragmatic basis in the light of the policy underlying Article 87, this was not state aid, and consequently did not require to be notified.

Restrictions on Movement

69. The other `European' challenge to the legislation was by virtue of three Articles of the Treaty, Articles 39 (formerly 48) [`freedom for workers'], 43 (formerly 52) [`freedom of establishment'] and 49 (formerly 59) [`freedom for services']. The relevant Articles are (in material part) as follows:

"Article 39:

1. Freedom of Movement for workers shall be secured within the Community.

2. Such freedom of movement shall entail the abolition of any discrimination based on nationality between workers of the Member States as regards employment, remuneration and other conditions of work and employment.

3. It shall entail the right, subject to limitations justified on grounds of public policy, public security or public health:

(a) to accept offers of employment actually made;

(b) to move freely within the territory of Member States for this purpose;

(c) to stay in a Member State for the purpose of employment in accordance with the provisions governing the employment of nationals of that Member State laid down by law, regulation or administrative action;

(d) to remain in the territory of a Member State after having been employed in that State, subject to conditions which shall be embodied in implementing regulations to be drawn up by the Commission."

"Article 43:

Within the framework of the provisions set out below, restrictions on the freedom of establishment of nationals of a Member State in the territory of another Member State shall be prohibited. Such prohibition shall also apply to restrictions on the setting-up of agencies, branches or subsidiaries by nationals of any Member State established in the territory of any Member State.

Freedom of establishment shall include the right to take up and pursue activities as self-employed persons and to set up and manage undertakings, ... under the conditions laid down for its own nationals by the law of the country where such establishment is effected, subject to the provisions of the Chapter relating to capital. "

"Article 49:

Within the framework of the provisions set out below, restrictions on freedom to provide services within the Community shall be prohibited in respect of nationals of Member States who are established in a State of the Community other than that of the person for whom the services are intended ..."

"Article 50:

...Without prejudice to the provisions of the Chapter relating to the right of the establishment, the person providing a service may, in order to do so, temporarily pursue his activity in the State where the servcie is provided, under the same conditions as are imposed by that State on its own nationals."

70. There are in addition Articles relating to freedom of movement of goods (Article 28, formerly Article 30) and of capital (Article 56, formerly Article 73b).

Justification Generally

71. Dr Plender QC rightly points out that each of these Articles has its own provisions and must be considered separately. However, together with the other Articles relating to restrictions on movement referred to above, they do share some common jurisprudence:

i) The onus is upon the claimant to show a contravention of the Article.

ii) The onus then shifts to the defendant to justify the restriction. Such justification is then governed by general principles of Community law: see Cassis de Dijon Case 120/78 [1979] ECR 649 at 662 para 8: "Obstacles to movement within the Community resulting from disparities between the national laws relating to the marketing of the products in question must be accepted insofar as those provisions may be recognised as being necessary in order to satisfy mandatory requirements relating in particular to the effectiveness of fiscal supervision, the protection of public health, the fairness of commercial transactions and the defence of the consumer". This was put slightly differently in Kraus v Land Baden-Württemberg Case C-19/92 [1993] ECR 1-1663 at 1697 para 32, requiring that "such a measure pursued a legitimate objective compatible with the Treaty and was justified by pressing reasons of public interest ... it would however also be necessary in such a case for application of the national rules in question to be appropriate for ensuring attainment of the objective they pursue and not to get beyond what is necessary for that purpose." And finally in Gebhard Case C-55/94 [1995] ECR 1-4165 at 1-4197 para 37 the Court put it succinctly as follows, namely:

"National measures liable to hinder or make less attractive the exercise of fundamental freedoms guaranteed by the Treaty must fulfil four conditions: they must be applied in a non-discriminatory manner; they must be justified by imperative requirements in the general interest; they must be suitable for securing the attainment of the objective which they pursue; and they must not go beyond what is necessary in order to attain it."

72. In general therefore any justification for restriction on freedom of movement must be non-discriminatory, that is it must not discriminate between nationals of different Member States: it must be justified by pressing reasons of public interest: and it must be proportionate.

Freedom for Workers

73. As can be seen from its terms, the primary areas of concern of the Article are as follows:

i) to prevent discriminatory treatment of nationals of another Member State ("discrimination") in respect of employment in a Member State (Article 39(2) and Article 39(3)(a)).

ii) to promote mobility of, and access to, employment - e.g. as in Bosman Case C-415/93 [1995] ECR 1-4921 and Lehtonen Case C-176/96 (E. Ct. 13/4/2000): with particular emphasis on eliminating restrictions on movement - transfer fees etc.

74. However it is clear that:

i) the effect of the Article is not limited, as it has developed, to an actual restriction on movement, but extends to an obstacle which may amount to a discouragement to mobility.

ii) there has been extension to a case where there is complaint of a measure which is not discriminatory, because it applies equally to those who are nationals and residents of the host State as much as to those coming in from other Member States, but creates an obstacle as a result of what one might call geographical dislocation; what might be called de facto discrimination or, as I should prefer to call it, dislocation. Such a case was Bachmann Case C-204/90 [1992] ECR 1-249, where a Belgian measure was passed which made deductibility of sickness and invalidity insurance contributions or pension or life assurance contributions conditional on those contributions having being paid in Belgium, because of the deductibility of those contributions as against the taxation of payments made by insurers. There are clearer cases of dislocation in relation to what are now Article 43 (Futura Participations SA Case C-250/95 [1997] ECR 1-2471) and Article 49 (Säger v Dennemeyer Case C-76/90 [1991] ECR 1 4221) to which I make further reference below. There is no case, at any rate drawn to my attention, relating to contravention of Article 39 where there is not a complaint that the obstacle either rises out of discrimination or dislocation, and indeed the European Court judgment in Kenny v Insurance Officer Case C-1/78 [1978] ECR 1489 at 1498 para 20, suggests that this is no coincidence:

"[Article 39 does] ... not prohibit - though ... [does] not require - the treatment by the institutions of Member States of corresponding facts occurring in another Member State as equivalent to facts which, if occur on the national territory, constitute a ground for the loss of suspension of the right to cash benefits; the decision on this matter is for the national authorities, provided that it applies without regard to nationality and that those facts are not described in such a way that they lead in fact to discrimination against nationals of the other Member States."

There is no discrimination, nor dislocation, alleged in this case, but merely that workers in other Member States may be discouraged from coming here (or workers here may be encouraged to leave and go to other Member States) because they would be treated, in the same way as nationals of the United Kingdom, as subject to IR35.

75. It was submitted by Dr Plender QC that Article 39 does not apply at all, as service contractors are not, on their own case, employees, and workers within Article 39 must be equated to employees (by reference to Brown v Secretary of State for Scotland Case 197/86 [1988] ECR 3205 at 3244 para 41). However Mr Barling QC points out that service contractors are employees of their service company, even though not of the client, and hence fall within Article 39. I accept that submission. Dr Plender QC further submits that in fact it is unlikely that anyone would regard the imposition of Article 39 as an obstacle to coming here, because in fact, on the evidence before me, the United Kingdom is only following in the footsteps of others in the way it now proposes for tax purposes to treat those who, through service companies, are supplying services to clients, in circumstances in which they would in fact, if they were individuals, be employees. He points to literature, put in evidence by the Defendants, but which emanates from an organisation called Contractor UK which is related to, or at any rate is supportive of, the Claimants, and which contains such relevant advice as:

"If your goal in going overseas is to escape IR35, the best plan is to ditch your UK company before you move overseas ... Not every country has historically been as laid back as the UK in allowing individuals to restructure themselves overnight and repackage their employment as a service from company to company! In fact in some countries the concept of the one-man service company does not exist (e.g. some Scandinavian countries) whereas in others (e.g. Spain, Italy) the concept is generally `looked through' by the social security authorities and the contractual arrangement is re-categorised and assessed as employment ... Most countries have some sort of legislation similar to what we have seen with IR35, and therefore spending all your time in one place for the reward of a regular income would be deemed to be `employment' rather than `self-employment'. Furthermore one of the most popular destinations for UK contractors, the Netherlands, has specific legislation which insists that all foreign contract staff must be payrolled by a Dutch-registered wage-tax company, therefore self-employment is a strictly `no-go' solution ... The financial advantages of remaining in the UK system are significant, when you consider that employer's social security is 12.2% of income, whereas in Europe it often reaches as much as 35% of income!"

76. Again however this powerful argument by Dr Plender QC appears to me not in the end to be determinative of the unavailability of Article 39 (or indeed the other Articles, insofar as relevant) because (a) I suppose it could be said that the introduction of IR35 has meant that the incentive to come to the United Kingdom, which up to now there has been because it has apparently been more attractive for service contractors, has thus now been removed and/or (b) I do not have evidence about the position in every other Member State, and I am mindful of the words of Advocate General Lenz in Syndesmos Case C-398/95 [1997] ECR 1-3091 at para 11 of his Opinion, that "with regard to a possible infringement of the fundamental freedoms guaranteed by the Treaty, the scale of any such infringement is irrelevant. Even minor breaches are contrary to Community Law".

Freedom of Establishment

77. The freedom is said in the Article to include a right not to be discriminated against. It plainly therefore also deals with obstacles which do not have the effect of discrimination. However I take two matters firmly into account. First, albeit that in those circumstances the reference to obstacles which discriminate is not exclusive, nevertheless, as I recently indicated in A and Others v National Blood Authority (26 March 2001 unreported) at para 34, there is some support in European jurisprudence for the proposition that, where one example is given in European legislation, it is intended to be the one most worthy of mention. Secondly in Article 50, the relevant part of which I have set out above, relating to the providing of services in another Member State by way of temporary establishment, such freedom is expressly limited to doing so "under the same conditions as are imposed by that State on its own nationals". Indeed there is much to be said for a distinction between those established or working or living in another Member State who wish to come to a Member State and work or provide services there, and those who actually wish to move their establishment. It could be said that in relation to the latter there is a considerable incentive, or at any rate should be no discouragement, for the applicability of the maxim `when in Rome, do as the Romans do'. This was certainly the opinion of Advocate General Jacobs in Säger (a case under what is now Article 43) at para 23 of his Opinion:

"The United Kingdom sought to support the view that Article [43] applies only to discriminatory measures by invoking the case law on freedom of establishment under Article [48], which, in its view, makes it clear that only discrimination is prohibited. But, even if it were right to suggest that discrimination alone is prohibited under the case law on freedom of establishment, the analogy with establishment is not in any event decisive; there are obvious differences between the situation of a person who permanently establishes himself in a Member State and the situation of a person who merely provides services in a Member State, whether occasionally or on a regular basis. It does not seem unreasonable that a person establishing himself in a Member State should as a general rule be required to comply with the law of the State in all respects. In contrast, it is less easy to see why a person who is established in one Member State and who provides services in other Member States should be required to comply with all the detailed regulations in force in each of those States. To accept such a proposition would be to render the notion of a single market unattainable in the field of services."

78. In any event, once again, there is no case which has been brought to my attention in which any obstacle has been complained of under Article 43, save by reference to discrimination and, in one case (Futura) dislocation: the latter was a Luxembourg case in which a rule applicable to all companies of preparing accounts complying the relevant national rules was, as will be seen, successfully challenged by a non-resident company with a branch in Luxembourg.

79. Once again the case that is made by the Claimants is of a reluctance by, or discouragement of, those presently established abroad in other Member States to come here and be established (and/or of those here to remain here rather than seek to be established elsewhere) by reference to the new IR35 obstacle. This is asserted, though not tested on cross-examination, by a number of witnesses; and the same points as are referred to in paragraph 75 above, relating to the fiscal inhospitability of other Member States, apply.

Freedom for Services

80. Article 49 relates to those who are established elsewhere in the Union, and wish to remain established there, but to provide services in the United Kingdom, and are said to face the obstacle of IR35. This is unlikely to apply to many, if any, of those contained within the Claimants' group, and, so far as I understand it, is not the position of any of the witnesses, for if service contractors are in fact going to remain established in another Member State and simply wish to come to the United Kingdom from time to time to provide services, then they are unlikely to be inhibited by IR35: for IR35 would only bite if the person or company was subject to United Kingdom taxation, and it would require continued establishment abroad but lengthy provision of services (perhaps rendering them the more likely to be treated as by an employee) in the United Kingdom before the problem arose. There is no mention in Article 49 itself of any restriction being by reference to discrimination, such as there is in Articles 39 or 43. As it happens, with one exception, all the cases to which I have been referred either involved discrimination against nationals of other Member States, or, in one case, that of Säger, dislocation (the requirement for a foreign patent monitor to qualify as a local patent agent). The closeness of dislocation to discrimination is illustrated by paragraphs 12-14 of the judgment of the Court in Säger:

"12. ... Article [49] ... requires not only the elimination of all discrimination against a person providing services on the ground of his nationality, but also the abolition of any restriction, even if it applies without distinction to national providers of services of other Member States, when it is liable to prohibit or otherwise impede the activities of a provider of services established in another Member State where he lawfully provides similar services.

13. In particular, a Member State may not make the provision of services in its territories subject to compliance with all the conditions required for establishment, and thereby deprive of all practical effectiveness the provisions of the Treaty whose object is, precisely, to guarantee the freedom to provide services."

81. The one exception to which I refer is Syndesmos, which is neither a discrimination nor a dislocation case, and to which I shall return.

The Defendants' Case

82. The Defendants deny that there is a relevant obstacle. They submit that there is no restriction on movement, whether of workers or services, or of establishment, simply by virtue of the fact that IR35 imposes an obligation on those in fact providing services as an employee to pay NIC on the remuneration paid by the client; or at least that the only incentive would be to avoid paying tax which would be payable both by all in the United Kingdom and, on the evidence, in many, if not most, other Member States. They further submit that no issue of discrimination applies by virtue of the imposition of IR35 on all those subject to UK tax laws, and that there is no question of dislocation either, in the sense of the legislation having any greater or more difficult effect on those who come from, or are based, abroad, and that:

i) As to Articles 39 (as to which Kenny is specifically relied upon) and 43, discrimination or at least dislocation is necessary: and there is no decided case to the contrary.

ii) As to Article 49, there is once again the provision of Article 50, to which I have referred, which limits complaints about restrictions for those who are temporarily establishing or established to those that are based on discrimination: but there is also the Opinion of Advocate General Jacobs in further paragraphs of his Opinion in Säger, to paragraph 23 of which I referred in paragraph 77 above, in which he indicates or advises a sensible degree of flexibility:

"25. The truth is that the provision of services covers a vast spectrum of different types of activity. On one extreme, it may be necessary for the provider of the service to expend a substantial period of time in the Member State where the service is provided: for example, an architect supervising the execution of a large building project. In that type of case, the borderline between services and establishment may be a narrow one and it is arguable that the Treaty merely requires the abolition of discrimination in such a case. Indeed the chapter on services does make an express reference to non-discrimination in that context ... [Article 50]

26. At the other extreme, the person providing the service might transmit it in the form of a product: for example he might provide an educational service by posting a series of books and video cassettes: here there is an obvious analogy with the free movement of goods, and the case might even be considered to fall under Article [28], rather than under Article [49]."

83. It is worth recalling that if in fact it is only the occasional provision of services, rather than anything approaching establishment, which is to be considered in respect of service contractors established abroad, then, as set out in paragraph 80 above, they are most unlikely to come into conflict with IR35 in any event. In those circumstances the Defendants further assert that in relation to Article 49 also, discrimination or at any rate dislocation is required before there can be complaint of a relevant obstacle. In any event the obstacle has to be a real impediment to free movement, and the provision of services in another Member State, and not just a disadvantage such as, for example, poor infrastructure by way of transport or communications.

Justification

84. The Defendants further submit that, if there be found to be an obstacle or restriction on movement relevant for the purposes of Articles 39, 43 or 49, then justification arises. Three forms of justification have been raised in the fiscal sphere, which I shall describe briefly in turn.

i) Fiscal Supervision. This is obviously a reference to the need to ensure compliance with taxes. To an extent this means what it says, and, for example, was relevant in Futura, the dislocation case where the complaint was that a foreign company was required, just like every other company in Luxembourg, to keep and hold within Luxembourg a set of accounts complying with national rules, but because they were non-resident that was going to require them to compile two sets of accounts, and that was regarded by the Court as disproportionate; so that the justification of fiscal supervision or ensuring fiscal compliance, though otherwise available, failed on grounds of proportionality. But plainly there are other aspects to fiscal supervision, and the primary one is the prevention of tax evasion. That justification does not apply here, as it is not suggested, at least against the vast majority of service contractors, that tax evasion is involved.

ii) Fiscal Cohesion. This was raised first in the Bachmann case, which, as discussed, was not a discrimination case, although it may be described as a dislocation case. As discussed in paragraph 74(ii) above, there was a specific reason why the Belgian measure was important, namely by reference to the deductibility of the contributions. It was in that sense that fiscal cohesion was referred to, i.e. that it was necessary for there to be both a swing and a roundabout. Fiscal cohesion, it is quite plain, is not the same thing as good tax administration, and Bachmann has been distinguished, and the principle of fiscal cohesion has been said, on the facts, not to apply, in a considerable number of subsequent cases on justification. It does not apply in this case.

iii) Tax Avoidance. This is said by the Defendants to apply, and to be their justification. The Defendants accept that the justification of tax avoidance, or the increasing of tax revenues or closing of loopholes, cannot be relied upon in respect of a measure which is discriminatory. But that is not the case here: it is not suggested, as indicated above, that there is any element of discrimination in relation to IR35, or even of dislocation, and, hence, the Defendants assert they are entitled to rely on the elimination or reduction of tax avoidance as their justification. The Claimants however assert that the elimination of tax avoidance can never be relied upon as a justification where restriction on movement is established. It is to this dispute, namely as to whether the countering of tax avoidance can be relevant as a justification in the absence of discrimination, that I now turn.

The Cases on Justification.

85. Bachmann. This was a case on both workers and services. There was no discrimination but dislocation. The justification of fiscal cohesion was accepted.

86. There are two cases relating primarily to freedom of movement of capital (now Article 56). The first is Staatssecretaris van Financien v Verkoojien Case C-35/98 E. Ct. 6/6/2000. The restriction was discriminatory, distinguishing between taxpayers according to their place of residence, and as appears from the judgment of the Court at paragraphs 47-48, the United Kingdom Government submitted that "a legislative provision such as the one at issue in the main proceedings may be objectively justified by the intention to promote the economy of the country by encouraging investment by individuals in companies with their seat in the Netherlands." In paragraph 48, the European court made a broad statement that "in that connection, it need merely be pointed out that, according to settled case law, aims purely of an economic nature cannot constitute an overriding reason in the general interest justifying a restriction of the fundamental freedom guaranteed by the Treaty." Nevertheless it considered Bachmann, but concluded that there was no direct link between grant of the advantage and the offset of that advantage, as there had been in Bachmann, so that fiscal cohesion did not apply, and then the final conclusion in paragraph 59 of the judgment was as follows:

"As regards the arguments concerning the loss of revenue for the Kingdom of the Netherlands that would result from exemption of dividends received by its residents who are shareholders of companies with their seat in other Member States, it need merely be pointed out that reduction in such tax revenue cannot be regarded as an overriding reason in the public interest which may be relied on to justify a measure which is in principle contrary to a fundamental freedom"

[and there is a reference to ICI v Colmer Case C-264/96 [1998] ECR 1-4695, which is an Article 43 case and again based on discrimination, to which I shall refer below].

87. The other case in respect of restrictions on capital is Commission v Belgium Case C-478/98 EC 15.6.2000. This too was a discrimination case, relating to Eurobonds. Advocate General Jacobs points out in his Opinion that Bachmann was not a discrimination case, and that in any event on the facts fiscal cohesion did not apply, with which proposition the Court agreed (at paragraphs 31-36). The Court concluded that, notwithstanding that it was a discrimination case, the need to prevent tax evasion and ensure the effectiveness of fiscal supervision was available as a justification, but rejected the justification on proportionality grounds.

88. As for freedom for workers, I was referred to Finanzamt Köln-Altsadt v Schumacker Case C-279/93 [1998] ECR 1-225, which was again a discrimination case, relating to heavier taxation on a non-resident than on a resident in the same employment. Fiscal supervision was put forward, in the sense of enforceability of collection of direct taxes, and it was not accepted as a justification of the discrimination.

89. I turn to the cases on freedom of establishment. The first was Commission v France Case 270/83 [1986] ECR 273. This was a discrimination case, as is clear from paragraph 22 of the judgment of the Court:

"The fact that insurance companies whose registered office is situated in another Member State are at liberty to establish themselves by setting up a subsidiary in order to have the benefit of the tax credit, cannot justify different treatment. The second sentence of the first paragraph of Article [43] expressly leaves traders free to choose the appropriate legal form in which to pursue their activities in another Member State and that freedom of choice must not be limited by discriminatory tax provisions."

Consequently the Court concludes in paragraph 25 that "the risk of tax avoidance cannot be relied upon in this context".

90. I have already referred to the next relevant case under Article 49, Futura. As discussed, this was not a discrimination case but a dislocation case. The Court concluded at 1-2501 para 31 that "the effectiveness of fiscal supervision constitutes an overriding requirement of general interest capable of justifying a restriction on the exercise of the fundamental freedom guaranteed by the Treaty", and so the Court accepted that the case put forward by the Luxembourg authorities, that they should not be required to refer to accounts kept by the non-resident taxpayer pursuant to another Member State's rules, could amount to justification: but found that the measure was offensive to the concept of proportionality.

91. The third relevant authority was ICI v Colmer, referred to in paragraph 86 above. This too was a discrimination case, relating to a residence requirement in order to obtain full tax relief. In those circumstances the court queried whether there was any justification for what it called (in paragraph 24) such "inequality of treatment under the Treaty's provision on freedom of establishment", which was a reference to the discriminatory measure. The UK Government put forward two justifications, one relating to the countering of tax avoidance, and the other the prevention of reduction in tax revenue. Bachmann-type fiscal cohesion did not apply (paragraph 29) and justification by way of tax avoidance and reduction in revenue were both held not to be available in the context of the unequal treatment, i.e. the discrimination (paragraph 28).

92. The fourth reference was to Metallgesellschaft Ltd v Commissioners of Inland Revenue Cases C-397/98 and C-410/98 E. Ct. 8/3/2001. This also was a discrimination case, relating to the non-residence of a parent company. Advocate General Fennelly referred to the "now unique judgment in Bachmann" (para 32 of his Opinion) so as to discount fiscal cohesion, and he, and the Court (at para 59) concluded that "diminution of tax revenue cannot be regarded as a matter of overriding general interest which may be relied upon in order to justify a measure which is, in principle, contrary to a fundamental freedom".

93. It can be seen that there is no case under Article 43, as none under Article 39, which has been cited before me, in which the European Court has ruled out the availability, for the purposes of justification, of the countering of tax avoidance or diminution of tax revenue, except where the measure complained of is discriminatory.

94. Finally, as to Article 49. I was referred to four cases in which measures which were discriminatory were found prima facie in contravention of Article 49: ERT Case C-260/89 [1991] ECR 1-2925, Customs and Excise v Schindler Case C-275/92 [1994] ECR 1-1039, Alpine Investments Case C-384/93 [1995] ECR 1-1141 and ARD v PRO Sieben Media Case C-6/98 [1999] ECR 1-7599. In each of these cases the discriminatory obstacle to freedom for services was held by the European Court capable of being justified, though none of them by reference to fiscal principles. The first was sent back for reconsideration by the national court, by reference to a question of broadcasting monopolies; the second, by reference to lotteries legislation, was justified on social grounds; the third, by reference to cold calling for financial products, was justified on regulatory grounds; and the fourth, by reference to advertising, was justified on consumer protection grounds. In two other cases, justification failed. I have already referred particularly in paragraph 80 above to Säger, a dislocation case relating to patent agents: the other case is Skatteministeriet v Bent Vestergaard C-55/98 [1999] ECR 1-7641, which was again a discrimination case (relating to deduction of training costs incurred in another Member State). Both fiscal cohesion and the effectiveness of fiscal supervision were concluded by the court to be "capable of justifying the regulations and thus restricting the fundamental freedoms guaranteed by the Treaty" (para 23), but neither of them were held to justify the discrimination.

95. That leaves the one case of Syndesmos, referred to in paragraph 81 above, upon which the Claimants particularly relied. It must immediately be said that it was not a case involving discrimination or dislocation, and yet the obstacle was found to be such as to offend against Article 49, and the justification put forward failed. However that justification was not a fiscal one, was not based upon fiscal supervision, fiscal cohesion or the countering of tax avoidance or diminution in tax revenue. The case involved a Greek measure which prevented tourist guides, whether from Greece or from any other Member State, from operating in Greece as self-employed. The Court ruled as follows:

"6. ... The first question must be construed as seeking in substance to ascertain whether the rules of a Member State which, by prescribing a mandatory legal form of employment relationship between the parties, prevent tourist and travel agencies, wherever they are established, from concluding, in connection with the operation of tourist programmes organised by them in that Member State, a contract for the provision of services with a tourist guide licensed to pursue the profession of guide in that State constitute a barrier for the purposes of Article [49] ...

14. The ... point to consider is whether rules of the kind at issue ... constitute a barrier to the freedom of self-employed tourist guides from other Member States to provide services.

15. It is common ground that such rules apply without distinction to all licensed tourist guides.

16. However, Article [49] ... requires not only the elimination of all discrimination against a person providing services on the ground of his nationality but also the abolition of any restriction, even if it applies without distinction to nationals providing services and to those of other Member States, when it is liable to prohibit or otherwise impede the activities of the provider of services established in another Member State where he lawfully provides similar services ...

17. It should be noted that such rules, in mandatorily characterising as an employment relationship, for the purposes of national law, a relationship involving the provision of services by a tourist guide in connection with the operation of tourist programmes in the State concerned, deprive a tourist guide from another Member State of the possibility of working in the first Member State as a self-employed person.

18. Such rules therefore constitute a barrier to the freedom of tourist guides from other Member States to provide services of that kind as self-employed persons.

19. The answer to the first question must therefore be that the rules of a Member State which, by prescribing a mandatory legal form of employment relationship between the parties, prevent tourist and travel agencies, wherever they are established, from concluding, in connection with the operation of tourist programmes organised by them in that Member State, a contract for the provision of services with a tourist guide from another Member State who is licensed to pursue his profession in the first State constitute a barrier for the purposes of Article [49]."

96. The Court then poses the question as to whether restriction can be justified (para 20) "by reasons relating to the general interest in maintaining industrial peace in the sensitive area of the supply of tourist services, in respect of which the Greek state, as a country for which tourism is important, has a reasonable and justifiable interest in intervening by regulation". The Court concludes that this is an insufficient justification. The Defendants point out that in essence this is preventing the tourist guides from other Member States who are self-employed from operating in Greece at all, or at any rate without changing their employment relationship, whereas in this case, put at its highest, service contractors established in other Member States are not prevented from coming to the United Kingdom and are not forced in the United Kingdom to adopt any legal form, but will simply be taxed in a certain way. It seems to me that that is not a material difference for our purposes, because, albeit not a complete barrier, it is (or may be - see my scepticism expressed in paragraph 80 above) a disincentive or impediment which may be sufficient of a restriction on mobility for the purposes of Article 49. However the greater significance, in my judgment, is that, albeit that the justification put forward by the Greek Government in Syndesmos failed, that does not mean that a justification based upon countering tax avoidance and/or diminution in tax revenue would fail, and in any event does not mean that there is any barrier to such justification being put forward.

97. I conclude therefore, on my review of the cases on justification, that where the obstacle is not discriminatory (as in our case), and at least unless there is an element of what I have called dislocation (which again there is not in any event in our case), there is no European jurisprudence to prevent reliance by the Revenue in this case upon its object and effect of combating tax avoidance and/or reducing diminution in tax revenue.

Conclusion on Freedom of Movement

98. There has been a number of statements from witnesses to assert that they are or will be off put by IR35 and/or may change their plans. As I indicated in paragraph 20 above, there has been no provision for cross-examination (which would in any event have been wholly unusual), and, before their evidence could be whole-heartedly accepted, the position would need to be explored with them as to whether in fact any other Member State would have any greater attraction for them, including the state in which they may presently be established. I am however just persuaded that the imposition of the tax regime by IR35, which is now less favourable than the previous welcoming tax regime, could be said to be an impediment to mobility, in the sense that a positive incentive for them to come or stay may now have been removed. Particularly given the different approach to freedom of establishment under Article 43 to which I have referred in paragraph 77 above, and the absence of any cases under Article 39 or Article 43 in which discrimination or at any rate dislocation has not been an element, I would not be persuaded that the existence of such a marginal impediment would be sufficient for the purposes of either of those two Articles, on the basis of existing European jurisprudence; but it is clear that, for the purposes of Article 49, Syndesmos indicates that there can be a relevant barrier where the measure is neither discriminatory nor relevant to dislocation but amounts to a measure which is applicable to all, residents and non-residents alike. I conclude that it is just arguable that there is a relevant restriction within Article 49.

99. However I must deal immediately with the question of justification:

i) I am entirely clear that the justification which the Defendants put forward by reference to tax reform, the combating of tax avoidance and/or the steps taken to increase, or avoid the diminution of, tax revenue, is both available in law and, as I have already found, proved on the facts.

ii) I therefore turn to the principles most recently enunciated in Gebhard, set out in paragraph 71(ii) above. There are, as I have found, no human rights implications: and I have concluded that there is no issue on discrimination, nor indeed any question, insofar as it may be a wider principle, of any lack of equal treatment; rather the reverse given that the aim of the Revenue is, I am satisfied, to treat equally those who are in fact providing their services as employees in terms of PAYE and NICs in respect of the total remuneration being paid by the client, whether they are sole traders or partners or work for small or large companies. The only issue that remains therefore is proportionality, which was, as set out above, successfully argued as an answer to justification in Futura and in Belgium Case C-478/98. As to this there are two arguments that are in essence put forward by the Claimants.

a) The `sledgehammer' argument. The point that is made is that all that needed to be done was to deal with the `Friday to Mondays', those who were not genuinely established with service companies, but who were continuing to work for their old employers under the cloak of an apparent new legal relationship. This could have been dealt with in some other way which did not involve the whole paraphernalia of IR35 and the affecting of some 100,000 service contractors. The answer to that, I am satisfied, is that the Revenue's intention was not so limited. As the legislation has developed, and certainly after the consultation of summer 1999, it has been declared that the Revenue has no objection to the continuation of service companies per se, and it no longer anticipates that they will cease to exist (as set out in the Second RIA above); but the aim is that in respect of all such service companies, insofar as the services of their principal or principals are provided on a particular engagement in circumstances in which, at common law a conclusion of employee rather than independent contractor would be made, IR35 bites. The legislation is not intended to be limited to the sham vehicle, but is intended to spread to the legitimate use of service companies, but with potentially different taxation consequences on an engagement by engagement basis. Thus tax avoidance, as well as what would otherwise be tax evasion, is addressed, and insofar as there will be at least a substantial number of service contractors who will now be paying tax and NICs on the basis of the full remuneration paid in respect of a particular engagement, tax revenue will increase. I am satisfied therefore that, within Gebhard, the IR35 measures are "suitable for securing the attainment of the objective which they pursue" and do not "go beyond what is necessary in order to attain it".

b) The other argument that was put forward is that there might have been another way of attaining the objective, and various suggestions have been made, including changing the method of taxation of dividends, increasing the rate of corporation tax, increasing capital allowances and abolishing national insurance contributions. None of these alternative suggestions is very persuasive, but in any event I am satisfied that for me as a judge to canvass other possible methods of fiscal reform is wholly inappropriate. I refer to R v Chief Constable of Sussex, ex p International Traders Ferry Ltd [1999] 2 AC 418 at 439, per Lord Slynn, in which he emphasised the cautious approach of the European Court with regard to the margin of appreciation which a national authority has with regard to choice of measures to take, and I am satisfied that this applies a fortiori to fiscal measures.

100. It is not for me to enter into the political arena, and I am satisfied that this legislation, whatever others, including the Institute of Chartered Accountants for England and Wales, may think of it, is not capable of challenge upon the European grounds that have been so ably urged by Mr Barling QC.

JUDGMENT

101. With very grateful thanks for the extremely full and lucid arguments and research of Counsel, which have formed the entirety of the bedrock for my conclusions, I dismiss this application.