Exercising your right of Substitution

17th November 2017
Written by Nigel Nordone

HMRC's criteria for proving a lack of personal service for IR35

The right of substitution often tends to be the most difficult of the status tests to put into practice because, for a PSC, there is likely to be only one fee-earner in the business. However, as difficult as it may be, this is one of the most important tests in determining employment status, so even if the right is never exercised, it is crucial to be able to demonstrate that a genuine right of substitution exists.

This was highlighted in Ready Mixed Concrete Limited Vs Minster of Pensions and National Insurance (1968) which stated that “personal service is an essential element of an employment.” If therefore you are able to exercise a lack of requirement for personal service, i.e. you can send someone on behalf of your business to undertake the work, this will be a strong indication that you are genuinely self-employed.

HMRC's Criteria for Providing a Substitute

HMRC have included additional criteria to the question surrounding the right of substitution on the CEST (Check Employment Status for Tax) tool which was developed for the off-payroll working rules in the public sector. The tool, which all contractors could end up being directed to if further IR35 reform within the private sector is announced next Wednesday, states that a genuine substitute is someone who;

  • was equally skilled, qualified, security cleared and able to perform the worker's duties
  • wasn't interviewed by the end client before they started (except for any verification checks)
  • wasn't from a pool or bank of workers regularly engaged by the end client
  • did all of the worker's tasks for that period of time
  • was substituted because the worker was unwilling but not unable to do the work


Problems with HMRC's Criteria

There is a discrepancy in the CEST tool relating to the final bullet point. When asking about the actual provision of a substitute, the criteria includes that “the worker was unwilling but not unable to do the work”, but the following question regarding the hypothetical right changes the criteria for “being substituted because the worker is unwilling or unable to do the work”. It is likely caused by some confusion with the case of Express and Echo Publications Ltd v Tanton and the Employment Tribunal case of MacFarlane v Glasgow City Council.

In the Tanton case, the contract included a positive substitution clause which was exercised regularly and "exceptionally"; "In the event that the Contractor is unable or unwilling to perform the Services personally he shall arrange at his own expense entirely for another suitable person to perform the Services." The Lord Justice concluded that where there is no requirement for personal service, it cannot be a contract of employment.

The MacFarlane case distinguished the right of substitution from the Tanton case in that the workers could only provide a substitute when they were unable to work (and not when unwilling) and only from the Council's register. These restrictions limited their right of substitution which may therefore lead to a view that the contract is one of employment when taking the full circumstances into consideration. HMRC have misinterpreted this in the tool to mean that providing a substitute because you were unable to work is not acceptable evidence.

Use of the CEST tool is not mandatory. The tool has also been heavily criticised by a number of professionals for failing to take into account another key status test, also laid out in the Ready Mixed Concrete case; Mutuality of Obligation. 

In our opinion, we would be confident of successfully defending an enquiry at a tax Tribunal where a contractor has sent a substitute, who perhaps did not meet all of the criteria referred to above.

The Hypothetical Right to Substitute

The right to provide a substitute does not necessarily need to be exercised. In HMRC's Employment Status Manuals, it clearly states that "you cannot assert that a right of substitution does not exist just because a substitute has never been provided" (ESM0538), i.e. it is up to the status inspector to prove your hypothetical right is a sham. So whilst it is hugely beneficial to actually exercise your right to provide a substitute, it is not wholly necessary. To help prove your right to provide a substitute, you should:

  • Ensure you have a strong substitution clause in your contract, without limiting restrictions
  • Ensure your end client would genuinely accept a substitute who was suitably skilled and qualified and that substitute would be paid by your company
  • Obtain written confirmation from the end client with a confirmation of arrangements
  • If you are aware of another contractor of a similar role engaged with the same end client who has exercised their right - keep a record of their details as this may help to prove that your right is also a genuine one

If you have any queries about your ability to provide a substitute, please contact us on 0116 2690992.

Nigel Nordone
Written by
Nigel Nordone
Nigel Nordone is the Head of Tax at Qdos, after working for HMRC for over 20 years as a tax inspector. We’ve decided to forgive him for this little transgression as his knowledge of how HMRC handle enquiries and compliance checks is really beneficial for both Qdos and our clients. Nigel specialises in employment status and has personally represented hundreds of clients who have been subject to a HMRC IR35/employment status enquiry.

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