Right of Substitution

IR35 Guidance

What is the Right of Substitution?

The right of substitution is one of the key status tests that HMRC would look for during an IR35 investigation. It is therefore important that for all contractors who wish to operate outside of IR35, a genuine right of substitution exists throughout the duration of their engagement. Contractors must be able to demonstrate that their end client does not need them to personally deliver the services, and that any individual with the relevant level of skills, qualifications, and experience would be able to deliver the services successfully.

What must be remembered is that these are business-to-business agreements. Therefore, a contractor’s limited company should have the right to provide any suitably skilled and qualified individual(s) to deliver the service in their place. If the client asks for a certain contractor to personally provide the services and will not accept for the services to be delivered by another qualified individual, this would diminish the purpose of the client engaging the limited company from the start, but rather the individual; HMRC could argue at this point that the individual is better off being employed directly by the client and should be taxed in the same way as an employee.

What is a genuine substitution?

Many contractors get confused over how it would be possible to send a substitute in their place if there are no other employees within their company besides themselves. However, it is worth noting that a substitute does not necessarily have to be an employee of the limited company. A substitute can be anyone who the contractor may know of that works within the same field, or alternatively, it could be somebody that is sourced via a networking website or agency. For substitution to be considered genuine, the limited company must remain liable for all costs associated with the substitute. When substitution occurs, the limited company must be paid as per usual by the client and the company will pay the substitute directly.

If a contract has been issued from the agency/client, it is important that contractors look out for the substitution clause. An absence of this clause could imply that the client is either not aware of substitution at all, or they quite simply will not allow for substitution to occur/specifically want an individual from the limited company to deliver the services. Once a strong substitution clause has been inserted into the contract, it is important to obtain confirmation from the client to confirm that this right also exists in reality.

Exercising your right of Substitution

Within HMRC’s own manuals, they have stated the following;

“Many contracts contain clauses that appear to give a right of substitution. It seems likely that many of these clauses have only been inserted to try and break the requirement for personal service and change the contract from one of service to one for services. Normally a client requires the services of a particular worker and a substitute would not be acceptable so there must be doubts about the validity of such clauses.”

Therefore, it is suggested that a contractor exercises their right to provide a substitute should the situation arise, as this would significantly increase the prospects of successfully defending their company if HMRC conduct an IR35 enquiry. In any event, evidence supporting the right to supply a substitute, for example agreement in the written contract issued by the agency/client, could prove extremely useful in supporting their status and should be gathered where possible.