A lobby group representing IT contractors has lost its High Court appeal against the government’s controversial IR35 tax.

The tax applies to self-employed contractors, who set up their own small companies and often find work through employment agencies.

The Professional Contractors' Group (PCG) has been fighting a long-running court campaign to get the government to repeal the tax, which it feels is unfair and has unclear rules.

But the High Court ruling did claim that the assessment system the tax relies upon was rooted in the 19th century.

The test derives from the traditional master-servant relationship and is difficult to apply to individuals who may not have their own tools and are useful solely because of their knowledge.

PCG spokesperson Susie Hughes said: ‘I am sure the government will be interested to know that it has a law on the statute books which is unclear. We will work with all parties to drive this legislation into the 21st century.’

During a three-day appeal hearing in December 2001 the PCG argued that IR35 contravened European legislation on two counts - illegal state aid and restriction of freedom of movement.

The PCG won a contested permission hearing on all counts in October 2000 then lost the High Court case in April 2001.

PCG's members decided to appeal this decision after the High Court had found in the Group's favour on the findings of fact, but ruled against it on a point of law.