However, because the High Court judge criticised the "inflexible stance" taken by the Inland Revenue in assessing whether contractors should be treated as individuals or companies for tax purposes, a pressure group set up to fight the tax law believes headway has been made. "The battle has been lost, but the war has been won," said Jane Akshara, director of Professional Contractors Group, the pressure group set up to fight the IR35 tax law 18 months ago.
Ann Redston, a partner at Ernst & Young and member of the Chartered Institute of Taxation, said that the PCG effectively lost on all three accounts and would not be advised to appeal.
She said: "It could not be deemed as illegal state aid because no one group could be identified as benefiting from the tax law. The closest the group came to winning on one count was that the judge said it was 'just about arguable' that the law may prevent freedom of movement to those seeking work in the UK, but he ruled that there was good reason for the rule in protecting the government from tax avoidance."
The High Court judge also recommended that the tax assessment guidelines used by the Inland Revenue be reviewed. "This may help some escape the taxation, but not all," added Redston, who believes the rules should be reviewed to include more points.
The tax on contractors was introduced in the 1999 budget to prevent employees leaving a company on a Friday and returning as a contractor on the following Monday.
To stop this Gordon Brown, the UK Chancellor of the Exchequer, said that these contractors would not be recognised as small companies by the Inland Revenue and would be treated as individuals or employees for tax and national insurance purposes.
Akshara said: "The Inland Revenue did not stop this happening, what it did do was take the proverbial sledgehammer to crack a nut and failed to stop this happening but hurt legitimate businesses."
The High Court judgement backed the lobby group's argument that the tests Inland Revenue carried out to assess whether a contractor was a company or a "disguised employee" were outdated and did not reflect modern consulting practices.
While the pressure group has failed to have the tax law overturned, Akshara said that the fact that it would be able to offer some input to Inland Revenue in the interpretation of the law was a victory in itself. The court was critical of the blanket advice that standard agency contracts come under the IR35 rule and ruled that some of the uncertainty could be removed by a series of acceptable standard forms.
In treating IT contractors as disguised employees, PCG argued that the Inland Revenue did not take into account that contractors did not have the same role as employees. Contractors do not receive holiday and sick pay and unlike employees can substitute themselves. This means the contract is with the contractors' company and not the individual. The court ruled that these differences are relevant and should be considered by Inland Revenue when assessing these cases.
The lobby group has renewed its offer to meet with government ministers and Inland Revenue officials to assist on drawing up new guidelines.