Whilst there are many factors that must be considered when making an IR35 status determination, having a substitution clause in the contract is often seen as the ‘silver bullet’. In fact, HMRC’s own Check Employment Status for Tax (CEST) tool is heavily weighted towards substitution.
Whilst the presence of a substitution clause will lend weight to the contract falling outside IR35, it is the reality of the relationship in practice which holds more weight when IR35 status is under scrutiny.
The right of substitution supports the position that the contract is for the completion of a project, rather than the services of an individual. This means that - should the need arise - another individual could be sent in to complete the project. Should personal service be enforceable, it may be an indication that it is the presence of an individual that is required, as opposed to the completion of a contract or assignment.
Substitution in IR35 – is it essential?
Whilst substitution is undeniably an important factor when considering the IR35 status of an assignment it is important that it is considered in conjunction with the other key employment status tests. To have a wider understanding of the major influencing factors in IR35 determination (in addition to substitution), read our articles on MoO and Control.
“It is much more likely in an IR35 situation that you will be considering a right of substitution rather than an obligation to provide a substitute and that the right will be fettered to some extent. It should be noted that, where a hypothetical contract is considered to contain a right of substitution, that right is likely to be only an indicator of self-employment to be weighed with all the other factors”. - Gov.uk
There have been many IR35 cases in recent years that HMRC have lost in which there was no right of substitution. See the Paul Hawsbee case (Kickabout Productions Ltd and The Commissioners for Her Majesty’s Revenue and Customs, ) amongst others. Whilst the absence of personal service does point to a position outside IR35, it is not essential, and it is certainly not worth forcing a substitution clause into the contract if it is not reflective of reality.
Is the right of substitution genuine and unfettered?
It is important that there are not too many restrictions on the ability to substitute. Whilst it is reasonable that the end hirer will wish to confirm that the substitute is suitably qualified, if the end hirer would need to put the substitute through a screening/interview process this is likely to be viewed dimly by HMRC. It is the obligation of the contractor to ensure the substitute can carry out the work to a satisfactory level and is trained and suitable to complete the work.
Whilst many contractual clauses may seem to indicate the right to substitute, they may not be robust enough to demonstrate this right sufficiently in the eyes of HMRC.
For more information about IR35, please visit our IR35 resource hub.