Contractors force taxman to rewrite the rulebook

While the Professional Contractors Group (PCG) has forced the Inland Revenue to alter the guidelines which accompany the legislation, the victory was not complete: it failed in its ultimate aim to prove that IR35 contravenes EC and human rights laws and is therefore illegal.

The revisions will also take time to draw up, meaning that contractors who have been affected by the legislation this financial year must complete tax returns as if nothing had changed.

The UK government introduced the legislation last April to fill a loophole which it claimed allowed contractors to enjoy limited company National Insurance Contributions and tax status while effectively working as full-time employees.

The PCG has persistently fought against its introduction, saying it casts the net much further than the government had intended. In its legal challenge, the group claimed IR35 was illegal because it restricts free movement and unfairly helps large companies.

Mr Justice Burton this morning denied this claim, but he did suggest that the Inland Revenue redraft the guidance manual which is used by tax office officials to assess who falls under IR35.

PCG director Jane Akshar was confident that today's ruling amounts to a victory for IT contractors because when the amendments are made they'll have far-reaching implications.

"The Revenue's guidelines have been thrown out as biased and unworkable and can't possibly work in the 21st century. The judge has seen it and given a binding judgement. The Revenue has got to rewrite their manual," she said.

However, legal expert Kevin Barrow, partner at Tarlow Lyons' IT personal division, claimed the ruling was a "small moral victory" but little else. He said: "The Revenue probably will make changes but it won't provide conclusive determination of when IR35 applies."

He added that contractors will continue to face uncertainty.

The Inland Revenue said it is happy with the High Court decision, adding that it is likely to hold a consultation before making any changes to the guidelines.

A spokeswoman said: "We will look at the judge's remarks and see where amendments need to be made."

She admitted it's unlikely any changes will be agreed before the end of the tax year.