The right of substitution, not the IR35 silver bullet contractors might think

One of the most common off-payroll hopes we hear is, “They can send a substitute so they are definitely outside IR35.”

Indeed, substitution is often seen as the ‘silver bullet’ for defeating an IR35 or status challenge by HMRC, writes David Harmer, associate director of Markel. But is substitution all it’s cracked up to be?

What is substitution?

Technically, a right of substitution is not the test to apply. The courts say one of the fundamentals of employment is that the individual is obliged to provide their services personally. It therefore follows that if no such obligation exits, an individual cannot be an employee. 

Trying to demonstrate a lack of personal service can be difficult, which is where a right of substitution comes in. Having an express written right to not do the work yourself, and send someone else in your place, is a clear statement you have no personal obligation.

The ‘right of’ is the key

First and foremost it is the ‘right’ to not do the work yourself which is important. You do not need to physically send someone in your place to demonstrate this right exists -- it is enough that you have a genuine entitlement to send someone if you choose.

On the face of it, it all seems fairly straightforward. However, as is often the case where the Intermediaries legislation (IR35) is involved, there are additional factors which must be carefully considered.

A right of substitution will not provide any ‘silver bullet’ defence if it is not a genuine right in the eyes of the law. At the time of writing, and for a long time now, we see a number of pitfalls in the drafting of substitution clauses which can prove fatal to any attempt to rely on an absence of personal service.

Is the ‘right’ right?

Some quick questions to ask yourself if your clause is one of those which won’t stand up.

Does the substitution clause clearly state you can send someone in your place?

Does it contain an active right to send, or utilise, a replacement individual to perform services on your behalf? 

Or is the clause a passive right to propose or suggest a replacement?

The importance with this right is that it must create a positive, actionable, ability for you to replace yourself with another person to provide the services on your behalf. 

The courts have previously held that a right to simply propose a replacement is not sufficient to break the personal service requirement.

Is the right available at any time?

Similarly, is the right of substitution capable of being actioned at any time for any reason you choose? 

Can you, for example, decide that you don’t want to work next week and then arrange a substitute to work in your stead? Or is the right only actionable if, for example, you are ill or have a holiday booked?

Again, the courts draw a difference between the two scenarios. In order to be fully effective, a substitution clause must be capable of being used not only when you are unable to perform the services, but when you are ‘unwilling’ to provide the services. It’s the ability to action this right at any time for any reason of your choosing, not when the client says you can.

Is the right reasonably unrestricted?

While the ability to send someone in your place is a fundamental factor, it would not be reasonable that you could send just anyone in your place as substitute. The client should reasonably have the right also to ensure that your substitute can do the work -- otherwise service provisions would come to a grinding halt!

The courts agree that reasonable restrictions can be placed on a substitute. For example, the need for qualifications or experience or expertise. However, the courts have also identified that there may be cases where so many restrictions or caveats are placed on a substitute, that it makes it ‘too fettered’.

Clauses which simply state “permission will not be unreasonably withheld” without clarifying what that “reasonable” criteria is, or conditions requiring a substitute to be from a pre-approved list, or simply stating permission may be refused “for any other reason,” are all examples of where the courts have found substitution clauses to be too restrictive.

Is the right genuine?

Once you have navigated the above practical necessities for a right of substitution, it must be remembered that it will prove no use if the right is not genuine i.e. neither party believes it can be used.

As famously stated by Elias J in the Kalwak case (quoted by Autoclenz): “The concern to which tribunals must be alive is that armies of lawyers will simply place substitution clauses, or clauses denying any obligation to accept or provide work in employment contracts, as a matter of form, even where such terms do not begin to reflect the real relationship.”

Lastly when in doubt leave it out -- or just get it right from the off

If substitution cannot happen in practice, then including a clause in your contract will do more harm than good as it will suggest the rest of the contractual provisions may also be a sham.

Getting this right from the start can prove invaluable in an IR35 enquiry -- a correctly drafted and robust substitution clause will leave little room for interpretation and HMRC speculation.