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By Joey Gardiner, 3 October 2001 17:15

NEWS The result of a recent employment tribunal has thrown into doubt the legal basis behind the government's controversial IR35 legislation. UK law firm Tarlo Lyons claims an appeal won last week by HP could make it extremely difficult for the government to treat independent contractors as employees of the firms they work for. The news follows in the wake of continued confusion over IR35, which seeks to stop IT contractors avoiding tax by setting up independent one-man firms when they are in reality directly employed by one company. Last week's ruling was in the case of Mr O'Murphy, who had been working for HP via his personal service company for six years from 1994. When his work was terminated he claimed unfair dismissal, the assumption being that he was an employee of HP's all along. HP appealed this point, arguing that because he had worked as a contractor via a personal services company, he was never an employee, and couldn't be unfairly dismissed. Last week, an employment appeal tribunal ruled in favour of HP. Now contractors are arguing that if they don't get the benefits and protection of being an employee, then it is wrong for the Inland Revenue to try to tax them as such. Frances Lewis, solicitor for Tarlo Lyons, said the implications could be wide-ranging. "This outcome could throw the whole of IR35 into question wholesale. Here is someone who seems to fit all the criteria for falling into the scope of IR35, yet they have ruled he isn't an employee of HP," she told silicon.com. However, she added that the reasoning behind the tribunal's decision had not been made public, meaning it was still unclear exactly how far-reaching the ruling's influence would be. The Inland Revenue said that decisions by employment tribunals weren't binding for tax purposes. However a spokesman admitted: "This isn't to say the ruling can be completely ignored - cases will be taken on merit." HP, currently the only party privy to the tribunal's decision-making process, issued a statement today that said: "The tribunal found no direct contract existed between Hewlett-Packard and Mr O'Murphy, and that he could not therefore be their employee." It added: "Hewlett-Packard pursued this action as it involved an important principle of employment law relating to contractors which would have a significant impact on employers in the IT and other industries. The ruling serves to bring a level of certainty for both employers and contractors." Contractors having been calling for certainty ever since the legislation was first mooted back in the summer of 1999. A spokeswoman for the Professional Contractors Group (PCG) said: "This proves what we've been saying for some time. There is a grey area where people are being treated as one thing for tax and one thing for employment benefits." The PCG is due to restart its court case to get the legislation overturned in November, having lost the first round.