IR35: Substitution
It’s high time to explore Substitution given that the ESS – the IR35 digital tool – seems to rank it as more determinative than Control (by asking about it first). Substitution is also a factor in private sector IR35 determinations that has been significant since the legislation’s introduction in 2000.
But what does substitution mean and how much of an influencing factor is it when determining employment status?
Substitution: a definition
Substitution is the ability of a contractor providing a contracted service to supply a replacement contractor to carry out the service under the contract.
The nature and extent of the power of substitution within an agreement (irrespective of whether this power was used), has long been one of the key factors to take into account when considering the employment status of an individual and establishing whether there is a contract of service (employed) or a contract for services (self- employed independent contractor).
Substitution: what the courts have said
Considerations had traditionally centred around the threefold test in Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 1 All ER 433):
- There has to be sufficient Control between both parties,
- Mutuality of Obligation; and
- A degree of service from the employee to the employer.
Case law has also steadily maintained that no emphasis should be placed on any one factor in all cases but that all factors must be applied to the particular factual circumstances in each case, and an evaluation made as to the weight or relevance of each. In other words, it is always necessary to look at the picture as a whole. An example of this approach being endorsed can be seen in cases such as RS Dhillon and GP Dhillon Partnership v HMRC [2017] UKFTT 17 and MJ Quinn Integrated Services Ltd v Mr G Jones UKEAT/0301/16/JOJ[2017]).
But ever since the issue of substitution was raised in detail in the decision in Express & Echo Publications Ltd v Tanton [1999] EWCA Civ 949), it has emerged and evolved by a flow of caselaw into one of the main factors to consider.
The case of MJ Quinn Integrated Services Ltd (UKEAT/0301/16/JOJ[2017]) endorses the comments of Lord Clarke in Autoclenz v Belcher [2011] UKSC 41, in that the fact that the substitution term is not enforced does not mean that the term can be disregarded or is not part of the agreement. But the significance of a substitution clause is very likely to be effected by an analysis of the evidence in the case as to whether or not there has been ‘true’ substitution in fact (and not just a stand-in), and how realistic the provision of a substitute might be.
Substitution: in practice or impractical?
Both the nature and scope of the substitution are also relevant. There should be consideration as to whether the role being delegated is the dominant purpose of the agreement, as seen in Green v St Nicholas Parochial Church Council [2005] UKEAT/0904/04. The right to substitution has to be unfettered so any conditions placed upon the contractor to limit the scope or circumstances when substitution can take place will be looked upon unfavourably when considering whether a true self-employment status exists.
The case of RS Dhillon and GP Dhillon Partnership v HMRC [2017] UKFTT 17 related to the employment status of haulage drivers who were given a limited power of substitution. The driver was allowed under the agreement to procure a substitute where the driver was unable to make the delivery due to legal restrictions on hours of continuous driving of a heavy goods vehicle. It was considered that this power was “limited” and “occasional” as opposed to “far-reaching,” and therefore distinguishable from the case of Express & Echo Publications Ltd v Tanton [1999] EWCA Civ 949 , which required the driver in that case to appoint a substitute if he was either ‘unable or unwilling’.
Substitution: where we are today
Which brings us back to the ESS, because one of the criteria which initially needed to be satisfied to pass the substitution test was that the substitution needed to be if the worker was ‘unwilling but not unable’ to carry out the work. These words may sound familiar and yet they are noticeably inconsistent with the case law. It’s therefore correct of HMRC to update the wording of the test, so that it now reads as ‘unwilling or unable.’
And the ESS may indeed address Substitution before Control. But again, this is not consistent with case law which tells us (again and again) to look at all factors particular to each case.
So the position is not as clear as contractors might hope. It should not be forgotten that the ESS is a product designed by HMRC and is described by HMRC as a service which will give ‘a view’ of HMRC as to employment status. This view may not always be consistent with the case law. Interesting times ahead.
Written by Jonathan Wright, tax investigation solicitor and partner at Richard Nelson LLP.
Editor's Note: Read the other article in this ongoing series --
