The Inland Revenue is to meet the PCG in court for three days from tomorrow to discuss the tax change that contractors say is forcing many of them to emigrate.
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At the High Court, lawyers for the PCG will argue that IR35 contravenes European law because by its restrictions on a contractor's eligibility for taxation as a small business effectively constitutes illegal state aid to larger firms. IR35 treats up to 95% of self-employed contractors' gross income as profit, the PCG claims.
"IR35 confuses a small business with an individual. A consultant's turnover is treated as salary, so they have no money for reinvestment, equipment or diversifying," a spokeswoman for the PCG said.
After the budget speech, PCG chairman Gareth Williams lambasted Gordon Brown for failing to repeal IR35. "There is little point in the chancellor making token gestures towards small businesses when many of those small businesses will have either closed down or moved overseas," he said.
This week's hearing follows a ruling by Mr Justice Gibbs last October that there should be a judicial review of IR35.
The all-party Treasury Select Committee of MPs has strongly criticised the Government for pushing through IR35 without fair consultation while the Conservative Party has pledged to repeal IR35. Shadow trade secretary David Heathcoat-Amory described it as a stealth tax that was wrong for small business.
The Inland Revenue hopes to raise £400m a year from IR35, which takes its name from the press release in which the tax was announced after the March 1999 Budget.