Why an outside IR35 SDS isn’t enough if substitution is part of your in-business matrix

Supply chains in scope of the IR35 Off-Payroll rules and that utilise limited company contractors, in scenarios where roles are being deemed as outside IR35 due (at least in part) to a Right of Substitution, are recommended by us to have at their disposal several different types of supporting evidence, writes Stuart Marquis, business manager at Workwell.

The two key elements that put paid to personal service

Unsurprisingly, they’ll need to be able to present a Status Determination Statement that clearly confirms the presence of a Right of Substitution.

This needs to be backed up by a set of contractual terms and conditions that also lay out a Right of Substitution.

But what many supply chains don’t seem to realise is that having these two elements in place is potentially still not enough.

When the taxman looks beyond the written contract and your outside IR35 SDS

And moreover, at the point of an audit or investigation, HMRC is likely to want to look beyond these documents, in an attempt to establish whether they are an accurate reflection of the reality of the situation.

Or -- HMRC might say -- whether these two elements are merely an ‘artificial construct,’ designed to achieve a desired determination outcome.

What, then, might HMRC do to look beyond these documents, to establish whether the picture they paint is an accurate one?

And as we know it is the ‘whole picture’ which the courts say ultimately matters most when it comes to accurately determining IR35 status.

What’s the reality of your engagement? It’s a question HMRC is bound to ask

Well, the main thing HMRC will want to do is to try and discover the actual working practices; what’s the reality of the engagement, rather that the written description of it?

Believe it or not, that can actually be very challenging for HMRC to achieve!

The Revenue isn’t generally here to observe the day-to-day happenings, and with something like substitution, it isn’t exactly a regular occurrence anyway. In fact, the frequency with which substitution happens might be zero in some organisations, even contractor-friendly organisation.

If you haven’t substituted, fear not, it’s the right to substitute that matters most

But we believe that this is OK; the issue is whether or not there is a right to substitute, not whether HMRC can see it happening with their own eyes or be given examples of its prior occurrence.

Given these factors, then, what could HMRC realistically look for to add weight to the claims of the contract terms and the status determination statement around substitution?

One key thing that they could look to is whether there is a substitution policy document in operation.

A substitution policy document: explainer

We believe such a document adds substance to claims made at the contractual-level, and the Status Determination Statement-level.

And in some respects, we determine it will be seen as a step closer to the actual reality of the engagement.

This is because a good quality substitution policy document doesn’t merely contain the generic ‘off the shelf’ statements about substitution that you’d expect to find in contract terms, or the simple ‘yes/no’ response fed into a status determination tool in response to a question on substitution. But rather it's a detailed overview of how that specific supply chain would deal with a worker enacting their right to substitute.

What (else) should a substitution policy document contain?

The document should ideally contain information unique to that hiring organisation and supplier, often aligning to and referencing other existing policies and systems being utilised for the onboarding and offboarding of workers.

The best substitution policy documents will even go so far as to reference relevant individuals by name; for example, by naming the hiring manager or HR manager that will act as the initial point of contact in instances where the worker in question enacts their right to substitute.

The key ingredient here is the level of detail and the extent to which the document is built around people and infrastructure being utilised in that supply chain.

Right of Substitution (RoS): No silver bullet

While such a substitution policy document can never prove with certainty that a claimed Right of Substitution is genuine, such a document does provide a much more detailed piece of evidence than just contract terms and an adjoining status determination statement.

It should also go without saying that a scenario in which a supply chain claims there exists a Right of Substitution on the basis of contract terms and a Status Determination Statement, but cannot then show in any detail how they’d actually deal with a substitution in practice (due to lacking the framework offered by a substitution policy), is a scenario best avoided.

Finally, PGMOL’s loss just made ‘personal service’ more deserving of your attention

With personal service being hailed just last week as one of the key IR35 battlegrounds (given that Mutuality is now one of the past in wake of HMRC v PGMOL), a substitution policy document that clearly outlines how substitution is to be handled in real life -- should the worker enact their RoS, is surely a thing of the future.