IR35: Focus on Substitution

Anyone with an interest in contracting will be aware of the importance of getting IR35 status correct. Regardless of the upcoming changes (background on that here), IR35 status has always been something contractors need to be aware of and ensure their working practices and contracts reflect the correct status.

The changes coming in 2020 (see here for more background) don’t change the way an IR35 status is determined, only who is responsible for making the determination. Having said all that, it’s apparent to contractors that asking clients to make the determination may well mean contractors being told they are responsible for determining if they are inside IR35 or not.

The financials and logistic impact on this decision for contractors could be substantial, so what can contractors do to ensure status decisions are correct? We are working with contractors to help make their IR35 status more explicit – i.e. looking at each test and ensuring that it is clear, whether the engagement meets the employment standard or not.

The first pillar we’re looking at is substitution. Sometimes a thorny issue for contractors and clients alike, it’s often a theoretical right only and, as such, can be challenged by HMRC. So, without actually enacting substitution (which is generally a last resort) how can we more clearly demonstrate that the contractor does have the right of substitution?

  1. Contract clauses and associated schedules – It is important that every engagement contract includes a clause outlining a contractor’s unfettered right to substitution. It’s okay to allow the client opportunity to meet the new contractor, and for them to obtain the security status required or pre-vetting required for them to undertake the engagement. It’s also okay to stipulate the contractor must be equally skilled and competent, and able to deliver the project within the same parameters as originally agreed. Beyond that, the client cannot require the right to ‘interview’ the substitute or otherwise decide whether to accept them. The clause must make this clear, and preferably throughout the associated documents it should be emphasized – anywhere the individual is noted, it should be made clear that this refers to that individual and any other supplied as a substitute.
  1. Insurance – A contractor who is genuinely in business on their own account and has a financial risk with the company will invest in insurance. In order to be able to employ someone outside of your close family, you are legally required to have employers’ liability insurance. It makes sense then if you are making it explicitly clear that you could substitute someone, that you have the mechanisms set up to do so legally in advance. This makes employers’ liability insurance a must-have.
  1. Substitution agreement – In order to really be able to demonstrate that you could substitute yourself as required, you need to have a substitute in mind. We would advise finding a similarly skilled contractor and making a mutual agreement with them, i.e. you will act as their substitute and they yours (as a minimum one, but it would be better to have cover from a couple of contractors). This would constitute a formal contract setting out the mechanism of substitution, a standard NDA, the lack of MOO and the payment method etc. In addition to this, we would suggest you exchange copies of your CVs (anonymised as appropriate but setting out skills), exchange references or vetting details that could be called upon, discuss with the substitute the overview of upcoming projects, and get in touch at least twice a year to ensure you’re both up to date on skills, availability and so on. Whilst not binding, this would represent a much clearer commitment to substitution, and done well, it would be difficult for HMRC to argue that substitution was not possible.

If you would like support in making your substitution position clearer, apply to join Evolution’s substitution scheme by contacting me on jeni.howard@evolutionjobs.co.uk.

Jeni Howard

Compliance Manager

View Profile