Why a genuine right of substitution clause will help in an IR35 investigation

3rd October, 2018
Why a genuine right of substitution clause will help in an IR35 investigation

A right of substitution clause states the contractor’s right to send a replacement in their place if they are unable to work on the contract. While having a right of substitution clause in your contract won’t guarantee that you’re outside IR35, it’s part of an important set of factors that can help to prove your self-employed status. If incorporated correctly, the clause can be particularly effective as it demonstrates that the contractor is replaceable, and therefore isn’t providing a personal service, a key factor in identifying disguised employees. The wording of the substitution clause is important as it indicates the contractor’s rights of control, another key factor in demonstrating self-employment. In order for the substitution clause to be valid, the following points should be observed

  • The client needs to agree to it
  • The contractor must pay for it
  • The contractor must choose the substitute

When it comes to negotiating the clause with the agency or client, the contractor might experience some reluctance. Clients might worry that a substitute won’t have the same skills, which could put the project at risk, and the agency won’t want to risk upsetting their client by asking for the clause to be included. However, recent changes in public sector contracting make the organisation paying the contractor (the agency or client) responsible for deciding whether the contract is ‘inside’ or ‘outside’ IR35. With the same changes predicated for the private sector, it’s in the interests of the agency and the client to work with the contractor to reduce the risk of IR35 liability. If the contractor is unsuccessful in negotiating the clause into the contract, they could seek assurance from the client through a confirmation of arrangements letter, which is less formal.

It can also be argued that the right of substitution clause works in the interests of all parties should a situation occur where the contractor is unable to work. Without such a clause, the contract would simply be terminated, leaving the client or the agency with the inconvenience and cost of finding a replacement. The contractor is often in the best position to evaluate the skills of a substitute and to brief them on the project. If the substitute is only to be used as an interim replacement or subcontractor for part of the project, the contractor retains control of the project at his or her own cost.

In the majority of cases, contractors might never choose to exercise the right of substitution clause. However, its inclusion represents an important principle when demonstrating the contractor’s independence. It should be noted that even if the substitution clause isn’t likely to be used, the contractor should make sure that it’s a genuine provision that can be put into practice. HMRC will be on the lookout for ‘sham’ clauses that are merely included to give the right impression; such clauses will have the opposite effect, alerting them to possible breaches of IR35. In order to ensure your right of substitution clause carries maximum weight, you should take note of the following:

  1. The right of substitution clause should be ‘unfettered’, meaning that it does not give the client or the agency the right to vet the replacement. Avoid wording that refers to client ‘approval’ or ‘satisfaction’, as there should be no suggestion that the client has control over the provision of service that the contractor makes.
  2. Any costs incurred in providing a substitute will be at the contractor’s expense. This means that if anything goes wrong, such as the substitute missing deadlines, making mistakes or lacking general competency, the contractor is responsible for putting it right and bears the cost. This effectively cancels out the need for client approval as the contractor accepts liability for the substitute.
  3. Consider putting the clause into effect and using a substitute for an arranged period of time while working on a contract. The fact that the right of substitution clause has been exercised offers further proof that it’s genuine and not just a paper clause.

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