Written by Leigh Foster
The new IR35 legislation changes are coming in April 2021, and one of the key determination factors is the right to substitution.
The right of substitution is one of the key status tests that HMRC would look at during an IR35 investigation. It is so important that all contractors who wish to operate outside of IR35 have a genuine and capable right of substitution should this be required during their engagement.
Substitution is not simply a device to avoid liability for IR35 as HMRC may complain. If a professional contractor becomes ill, then a contractually enforceable right to substitute will enable the performance of services to continue and avoid the risk of a claim for breach of contract.
In recruitment contracts, it is common for an apparent right to substitute to be no more than an obligation to provide a replacement if the professional contractor’s representative is ‘absent’. In these cases, HMRC may argue that even if substitution occurs there remains an ongoing obligation to supply a specific individual. Therefore, professional contractors must be vigilant as to whether an apparent right to substitute is a sham.
Within HMRC’s own manual they state:
“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.”
Do you have to send a substitute, or do you just need to have the right? HMRC go on to say:
"As explained above it is the right of substitution that is important. The fact that substitution has not actually occurred during a contract is not necessarily relevant. Workers with such a right are of course entirely free to carry out the work themselves if they wish. We may want to consider claims that there is a right of substitution critically if substitution does not occur over a long period of time. However, we should not automatically assume, in such cases, that this means that there is no real right of substitution."
In summary, we will be closely monitoring the situation and will update you on any significant changes that may occur. Also, look out for our upcoming blogs that focus on other key areas of the reform.
Here at Pertemps Managed Solutions we can support you and your business during the upcoming changes. For more information, visit our website and take a look at the services we can offer.