IR35 and the Right of Substitution

The right of substitution is an important factor in IR35 / employment status cases, but how can it be used in reality?

In this guide, Kate Cottrell from leading employment status experts, Bauer & Cottrell, explains:

• how the Right of Substitution (RoS) is used in contracts.
• why it is not necessarily the ‘silver bullet’ some commentators have claimed it to be in the past.
• why a RoS clause is useless unless it reflects the reality of the contractor’s working practices.

Right of Substitution – not a ‘silver bullet’

The Right of Substitution is an important status issue as it shows that if you can send someone else your own personal service is not required.

The need for personal service is an essential element of an employment contract so it follows that if this is a stated clause in a contract then IR35 or “disguised employment” cannot apply. Or does it?

This will depend on several factors, such as:

• having the RoS inserted into all contracts in the chain between the contractor and client.
• whether or not the right has actually been exercised in the course of the contract.
• to what extent the right is ‘fettered’.

In a typical case where a contractor provides services to a client via a recruitment agency, the Right of Substitution is far from the ‘silver bullet’ that some claim it to be.

Is it realistic for a client to accept a substitute?

We have two contracts in place – agency/contractor and agency/client.

It is usually the case that the contractor is not allowed to see the agent/client contract so cannot confirm that the RoS is contained within it.

Often, any RoS is unreasonably unfettered. This means that the substitution itself requires obtaining the consent of the agent or client beforehand.

This means that either party could decline the request to provide a substitute.

If we look at HMRC’s views and the IR35 cases that have gone before the commissioners and the courts we find that in most cases the RoS has been treated as just one clause amongst many.

Unless, that is, substitution has actually taken place or the end client has confirmed that they did not care who provided the services.

Is this realistic?

In the real world, the agent has selected the contractor’s CV and the client has interviewed the contractor.

One has to ask why then the client would not mind if someone else turns up!

The Right of Substitution must reflect working practices

A genuine, reasonably fettered RoS that is present in all the contracts in the chain and does reflect the client’s view will definitely work. Especially if it has taken place.

However, I would not recommend anyone rely on an RoS clause in isolation to take the contract outside IR35.

We are looking for a RoS, a lack of Mutuality of Obligation (MOO) and, more importantly, a lack of control together with additional clauses supporting business and financial risk.

That said, by far the most important issue is the actual working practices, as a contract strong on all these key issues is not worth the paper it is written on if it does not reflect the reality!

Just like the reality of the Right of Substitution clause!