Contractors' Questions: Does hiring preclude me from IR35?

Contractor's Question: I am an IT contractor, contracting through my own limited company direct to the client. I am thinking of expanding by taking on one member of permanent staff. Given that my contract with my clients state that I personally do not have to be the one carrying out the work (i.e. it is my company they are contracting with), substitution is a given right. I would regularly get my employee to work on aspects of the projects my company does for its clients. Would that, once and for all, definitely prove that my company's contracts with its clients are unquestionably outside IR35? In other words, if I take on a member of staff to work on my company's client's projects with me, would that mean IR35 no longer applies to my company?

Expert's Answer: This questions concerns the condition of substitution under the IR35 regime. Before we answer this we need to consider the rules relating to the criteria used to establish whether a contract amounts to a contract of service (typical employment contract) or a contract for services (self-employment). There are three essential questions to consider:

(1) is there a requirement for the worker's personal service?
(2) is there a sufficient degree of control over the worker?
(3) are the mutual obligations of the contract consistent with employment?

If the answer to any of these three questions is 'no', the contract cannot be a contract of service (employment). Now let us consider the substitution element of it (which falls under (1) above). In order to remove any requirement for personal service there should be a complete (or not unreasonably restricted) right to substitute personnel, or even to assign or subcontract the services to another party altogether. For example, if the agreement allowed the company to use whoever it wanted to perform the services, then this could not be contract of service (employment) but would be a contract for service.

In practice, though, it is unlikely that anyone would give an unlimited right to substitution so we need to consider what affect limited substitution has on this. Case law has held that a restriction that the substitute is to be suitably qualified does not displace the right of substitution. One thing that is not acceptable, however, is if the client has the right to reject a substitute; as the client simply could reject any substitute put before them and effectively demand personal service.

The expert was Izaz Ali, senior partner at Lawdit Solicitors.