The Professional Contactors Group today lost its battle against the controversial IR35 tax law after the Court of Appeal this morning dismissed its claims that the tax clause is illegal.

This represents another blow for the group which has been battling against the tax law since its announcement in a press notice after 1999's budget, but they are not willing to give up until the clause is removed.

The PCG claimed that, because big businesses were being taxed differently to very small businesses, this constituted illegal state aid.

"The judicial review represented one possible knock-out blow for this unfair legislation. The court found the IR35 is not illegal, but that is not to say it is right or fair," said PCG's chairman Jane Akshar after today's hearing.

"Tens of thousands of businesses have to try to operate with the uncertainty of it and [we] will continue to do all we can to remove this unfair burden on small businesses."

IR35 treats small business contractors as 'disguised employees' for tax and National Insurance purposes, which prevents them from operating on similar terms with larger competitors.

As its next move the PCG will be launching a series of test cases where the IR35 tax law has failed contractors.

"For the past few months we have been preparing to launch a series of legal test cases, which will establish case law where there is currently a vacuum," said Akshar.

But the PCG does not see this ruling as a defeat. It's still convinced that the law may be legal but that it is unfair.

"I predict that within the next two years the IR35 will be a voluntary tax," said an optimistic Akshar.