Running a limited company may feel very similar to operating in any other manner when you do not have any employees or your only employee does the books as opposed to actually getting involved with the contracts. With all of the marketing efforts you put in with your business profile and the meetings with potential clients or recruitment agencies, which feel very much like interviews as opposed to selling your business, it can certainly seem like you are your company and are all that it has and can give.
Well the Revenue sees it very differently. You are not a contractor with a company name, but an employee and director of a real business. This means that your company makes the deals and fulfils the contracts, and you are the puppet master running the show. This may sound a little demeaning and it is not meant to be so, but in order to really get to grips with the argument of your right to substitute or personal service, this is how you should distinguish yourself from your company.
Right of substitution has been argued to the world’s end by contractors and status experts alike but it still remains one of the top deciding factors when determining your IR35 status so it is certainly one to get your head around.
The test argues that, as a business, you should be able to send another person in your place in the event that you cannot complete a contract that you have signed into. Many contractors argue against this as they are the only employees of their business and are experts in their field, however the Revenue argue that the contract should be between your company and the end client, not yourself, and therefore your company should be able to fulfil the contract regardless of your personal attendance. Your client should not reject any substitute to completing the contract without ‘reasonable grounds’ such as an inadequate level of skill, experience or qualification. Rejection of a reasonably suitable replacement suggests that this right does not exist, and thus your personal service is required, meaning that your business is not a genuine one and you are a disguised employee of your end client.
So assuming that you have a good clause in your written contract stating your right to provide a substitute and your end client has agreed that this right is a genuine one (a clause which holds no merit may as well not be there), how do you prove it?
The golden ticket to proving your right is to actually exercise it and use a substitute. If you do this then it is important to remember that your company must maintain the contract with the end client, have responsibility for the substitute and be responsible for their payment. Without doing this, you will not be truly substituting but passing the baton to someone else. Most contractors, however, will never need to exercise their right or not know any suitable replacements even if they did. This is why most contractors struggle with this test.
If you have not used your right to substitute and are unlikely to, then we are looking at the hypothetical situation, which is of course much harder to prove. It is recommended that you seek written confirmation (aside from your written contract), which confirms your ability to provide a substitute if needed. This should be from an authoritative member of your end client’s firm who you deal with regularly. Connecting with other contractors who could be potential substitutes would only help your case if questioned by HMRC but it has yet to be taken as hard proof.