The IR35 legislation is riddled with grey areas, which naturally leads to misinformation and misunderstandings. Perhaps one of the biggest areas of confusion is surrounding personal service and substitution.
Most contractors will have heard of the ‘right of substitution’, but many will not truly understand what it means and how it can potentially be used to your advantage.
Firstly the explanation:
If there is an IR35 enquiry HMRC will be trying to ascertain whether the particular engagement is genuinely business to business in nature, or if it is simply disguised employment.
The contractor should have been engaged as a business, not an individual, and the skills required to do the work are the company’s – not the individual’s. Therefore, as long as the services can be carried out satisfactorily, the contractor’s company should be able to send whichever representatives it sees fit.
Of course, the likelihood is that the contractor is the only person in the company who can do the work, but what must exist is a ‘right of substitution’. It is vital that this right is in the written contract and even more important that it exists in reality.
The key question is this:
If you were unable to provide the services for a period of time (a day, a week – not necessarily a long time) and you had a suitable replacement with all the same skills, qualifications and vetting/clearances, would you be able to send them in your place?
The end user could satisfy themselves that the replacement was suitable, but they should not be able to reject a substitute on unreasonable grounds. The contractor’s limited company must be responsible for paying the substitute and remain responsible for the successful completion of the services.
In reality it is unlikely that you would ever genuinely need to exercise this right, BUT if you ever do get the opportunity to send someone else it is well worth considering. In effect it would win your case before it had started; substitution carries so much weight that HMRC wouldn’t have a leg to stand on if you proved that you had actually sent a replacement.
Indeed, ‘actual substitution’ is worth 20 points on their Business Entity Tests, which would immediately put you in the ‘low risk’ category. HMRC have stated that if, in the event of an enquiry, a contractor proves that they are ‘low risk’, HMRC will close the investigation down and won’t touch you again for 3 years.
So if you know any contractors who work in a similar area (they can’t be at the same client unfortunately) and you think your end client would be amenable to accepting a replacement, it’s certainly something to consider.
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