The IR35 tax has come under fire from tax experts and employers groups, who fear it could lead to higher freelance rates and staff shortages when the IT jobs market recovers.
Gordon Stuchbury, a 45-year-old IT contractor from Sunderland, has taken the Inland Revenue to court to appeal against the tax, which he claims has forced him to close a small technology business, with the loss of four jobs.
Although the case, which went before the court on Tuesday, is unlikely to set any significant legal precedent, lawyers believe a victory by Stuchbury would be a major setback for the Inland Revenue.
"I think the major importance is that it represents more of a moral victory. Anecdotal evidence suggests the Revenue is losing a lot of cases on IR35. If it loses this one, inspectors might start to think it is not worth pursuing IR35 claims," said Kevin Barrow, partner at London law firm Tarlo Lyons.
According to the Professional Contractors Group, which is backing Stuchbury's case, the majority of IR35 investigations launched by the Revenue against its members are finding in favour of contractors.
Out of 103 investigations launched by tax inspectors, only one has resulted in the contractor being found liable for the tax.
However, a defeat in the appeal court could leave contractors worse off. It would encourage tax inspectors to examine each contract on a case-by-case basis, rather than take an overall view of whether a contractor is self-employed, said Barrow.
Stuchbury brought the case after the Inland Revenue ruled that he was a "disguised employee" under a contract with EDS to provide services to the Benefits Agency, although it accepted that two other contracts fell outside IR35.
He appealed to the General Commissioners of Income Tax tribunal, which, although it accepted that Stuchbury was "in business on his own account" ruled that he was still subject to IR35.