A high court judge last week upheld the IR35 tax proposals as lawful, and rejected the claims of the Professional Contractors Group (PCG) that the law is incompatible with European free trade laws and the Human Rights Act.

The judgment on the judicial review brought by the PCG was announced by Mr Justice Burton two weeks after the end of the five-day hearing. The judge accepted the basis of the regulation, which will in certain circumstances tax independent consultants as permanent employees of the companies to which they contract out their services.

However, the judge also proclaimed that the Inland Revenue’s approach to IR35 had been confusing and, in some respects, ‘inflexible’. He criticised the Inland Revenue for the use of ‘colourful language’ in its first press release, in which widespread abuse of the tax system was alleged. The judge issued enforcement guidelines for IR35, which came into force on 6 April.

The PCG hailed the judge’s criticisms as a victory because, the Group said, they will force the Inland Revenue to change its approach: ‘The high court has been the first authoritative body to listen to our concerns and has confirmed that we were right,’ said PCG chairman Gareth Williams. ‘The court has fortunately intervened to restrict further damage with a much more relevant set of guidelines, which prove that IR35 was unfair, unworkable and created an uncertain climate.’

The Inland Revenue was happy with the judgment. ‘All the ruling does is reaffirm IR35,’ a spokesperson said, adding that the Revenue is likely to hold a consultation before making any changes to the guidelines.

The Conservative party has again castigated IR35 as a ‘stealth tax’ which shows ‘a lack of understanding of the knowledge-based economy’. Shadow chancellor of the exchequer Michael Portillo, writing in the Financial Times last week, said: ‘This tax will clobber bright mobile young people. Britain’s competitive advantage in the IT sector is being put at risk.’ The Conservatives will repeal IR35 if they win the next election, Portillo claimed.

The government introduced IR35 last April to fill a loophole which it claimed allowed contractors to enjoy limited company NI contributions and tax status while effectively working as full-time employees. The Inland Revenue believes the measure will boost tax revenues by £350m a year.