The Importance of Substitution

We have received an alarmingly high number of concerns from contractors worried about the complexities of IR35, so we thought it was about time that some clarity was brought to the table. We are taking the topic of ‘substitution’ head on as it seems to be one the legislation’s largest (and most important) grey areas.

Did you know - The right of substitution is one of the strongest tests of self-employment?

The Right of Substitution

The working practices of a contractor are vital when it comes to IR35 compliance. Substitution can be incorporated into these working practices. When embarking on a contract, a self-employed contractor enters into an agreement to provide a service rather than personal expertise, and because of this, the contractor should be able to provide a substitute (or engage a helper) to provide the same service in their absence.

HMRC states, “The right, as opposed to the obligation, to provide a substitute is a pointer towards self-employment and if it is unqualified it is probable that the courts would consider it to be a strong pointer to self-employment or determinative of self-employment by itself.”

Despite this, a point frequently made in regards to substitution is; “The need to provide a substitute has never arisen”. This statement is true in most cases, as it is highly unlikely that a contractor will ever be in the position where they need to provide an actual substitute, but regardless, it is vital that they are able to demonstrate that ‘should the need arise’.

Although the majority of contractors may never exercise it, the right to provide a substitute to assume the work previously provided by the contractor must be a genuine one.  The substitute must be answerable to, and paid by, the company who originally undertook to complete the contract (the contractor’s limited company.

The best way for a contractor to ensure their compliance in regards to substitution is to actually exercise their right of substitution, and send a substitute. A contractor would only need to do this once throughout the duration of a contract to assure their IR35 status.