IR35 & Right of Substitution in 2026/27: Explainer for Contractors

The right of substitution remains one of the strongest indicators of self-employment under IR35, but only where it is genuine, writes off-payroll rules expert Charlie Hemsworth, director of specialist status advisory Bauer & Cottrell.

HMRC and the courts will always look at how substitution operates in practice — distinguishing between theoretical contractual clauses and rights that are practical or capable of being exercised.

What is the right of substitution in IR35?

For a limited company contractor, a right of substitution in an engagement means you are not required to provide your services personally.

Instead, your limited company (also known as a Personal Service Company) can send someone else to deliver the services if it chooses to do so, thereby demonstrating that the client has engaged a business to provide independent services and not a specific person.

With IR35, what's key for substitution in 2026/27?

In the IR35 employment status world of 2026/27, it's not enough to simply stick a substitution clause in the contract.

The key question is not whether the clause exists, but whether it operates as a workable right consistent with a contract for services.

What makes a right of substitution genuine?

Before you think about what the contract says (or what to insert in it), you should consider what makes a right of substitution genuine, and whether it can operate in practice in the engagement.

The main hallmarks of a genuine right of substitution are:

What makes a right of substitution impracticable?

The phrase 'realistically exercisable' means that substitution is a realistic and practical feature of the engagement, and could be exercised in practice. Some examples of what could make substitution impracticable:

If any of the above applies to you, substitution may not be exercisable in your engagement despite what your contract might state.

A genuine substitution right must be expressly set out in the written contract

If it is the case that substitution is realistically exercisable, substitution clauses should be drafted with care.

They should not contain fettering or wording that gives the client broad discretion to reject a substitute on grounds beyond the capability to do the work, or only allow substitution in certain circumstances.

How is the IR35 substitution test failed?

Even if you are certain as a contractor that the client would accept a substitute, if the written contract gives them discretion to reject one on any grounds, that is their contractual right, and the test is failed.

Remember, there is no value in inserting a substitution clause 'for the sake of it' if it does not reflect how the engagement operates in practice. HMRC investigations are extensive, and sham clauses will be picked apart quickly.

How to use Teams to run an informal substitution test

It is also important that both parties understand what rights the contract gives, and are aware that a substitution event is a possibility.

Here's a quick, very informal substitution test you can take with IR35.

So the client must be prepared for a substitution event.

What practical tips are there for exercising the right of substitution?

If your company does need to send somebody else, ensure you agree upfront with the client what would need to happen, in practice.

Considerations when exercising the right of substitution may include issues such as handovers, site security requirements, and access to client systems.

Is actioning the right of substitution a very strong outside IR35 signal?

If you genuinely exercise your right of substitution during an engagement, this places you in a very strong position from an Outside IR35 perspective.

However, the substitution must be legitimate and meaningful, with the substitute performing a significant and substantive portion of the work, not just a few hours here or there.

Would the worker have to pay their substitute?

Yes, you, the contractor, pay the substitute from your own company. There should be a clear paper trail, including a contract between your company and the substitute, together with invoices and payment records showing that your company paid them.

Additionally, where you are permitted to engage helpers who undertake material aspects of the work alongside you, this can also show a lack of personal service requirement and be very helpful to an Outside IR35 position.

Does an absence of substitution mean Inside IR35?

You may be thinking, "Well, substitution isn't realistic for me, so I must be Inside IR35." But you would be incorrect! In many engagements, personal service is required, but this requirement does not mean IR35 applies automatically.

If there are other strong factors in play, such as a clear lack of Control over the provision of the services, a lack of mutuality of obligation beyond the agreed engagement, genuine 'in-business' features, or the presence of significant financial risk, an Outside IR35 position remains perfectly possible.

Can a right of substitution be relied on to beat IR35?

A genuine and practically exercisable right of substitution gets things off to a strong start, but as with all other employment status tests, it should not be relied on in isolation to secure an Outside IR35 position.

And if your substitution clause exists only on paper, it will not protect you, or your client.

Substitution in 2026/27: Final takeaways

While it will remain very helpful in 2026/27 to help achieve an Outside IR35 position, substitution is not the be-all and end-all to avoiding IR35.

The whole picture remains important.

In fact, whichever party is responsible for deciding the status of your engagement (whether that is you or, under the Off-Payroll Working rules, your client), you should ensure the overall working arrangements have been considered and properly documented, so you are protected and confident that your IR35 status is correct.