However, the judge was critical of the Inland Revenue's tests for the tax and laid down new guidance to make them more relevant to the knowledge-based sector.
The decision followed a judicial review brought by the PCG on behalf of its 13,000 members who operate their own small businesses, mainly in the IT and engineering sector.
IR35 treats small businesses in the knowledge-based sector as “disguised employees” for tax and NI purposes, thereby preventing them, argues the PCG, from operating on similar terms to their larger competitors.
Claiming success, PCG Chairman Gareth Williams said:
"IR35 has been a catalogue of disasters from the very beginning. The most unfair aspect of it was that we had to pass a set of tests which had no relevance to our working practices. The High Court has been the first authoritative body to listen to our concerns and has confirmed that we were right. The Revenue got it wrong and as a result has damaged many small businesses, some of which have closed down and some have moved abroad.
"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. For example, the judgement was highly critical of the Revenue's 'inflexible stance' regarding blanket advice that standard agency contracts would be caught and he ruled that some of the uncertainty could be removed by the drafting, agreement and approval of a series of acceptable standard forms. He also found that the Revenue has been incorrect in assuming that mutuality of obligation was not a relevant issue, and he was critical of the Revenue's 'too inflexible approach' to the right of substitution."
However, the judge stopped short of overturning the legislation.
On every finding of fact the judge concurred with the PCG, including the key issue that contractors are in competition with larger consultancies and that IR35 would distort the marketplace. He was also critical of the Revenue's selective use of the employment tests to assess whether a small business fell inside or outside of IR35.
In his judgement, he described the Revenue's guidance as inappropriate, unclear, inflexible, inaccurate and unhelpful. He also made reference to the unnecessary, emotive and ”colourful” language in the original press notice which set the tone for a hostile debate.
The PCG points out that this judgment comes only days before the end of the tax year when these small businesses will have to make decisions based on Revenue guidance which has now been shown to be inaccurate and misleading.
The PCG has renewed its offer to meet with Ministers or officials at any time to assist with this transition to the new guidelines with the minimum of disruption to all parties.