Substitution

[greenbear]

My company has been offered the chance to work for a small company. We'd like to structure the way this is done in the most tax-efficient manner, and both sides are prepared to do anything reasonable and legal to achieve this. There are no agencies involved. My company has previously worked for them for small ad-hoc tasks but they now need a more regular committment.

The work will be of a type that's essentially similar to permanent work in nature (an agreed number hours per week, an indefinite contract with a period of notice, if there are tasks that are different from the core tasks that are in my area of expertise then I'd be expected to do what I can to help). I think makes it not possible to set up a limited company and operate the right side of IR35 (and the amount they can pay if I have to operate the wrong side would not make it worthwhile to take the work). I would however be working from home or an office near my home. I can control where I work, the hours I work and the detailed order of how I do tasks.

It would be possible however, to get a subcontractor to do some small non-critical parts of my work that don't involve customer data (the subcontractor would be someone working remotely from probably India, via upwork or similar), and invoice this time to the client (or less if the subcontractor takes longer than I would have done to do a job of the same quality). I would review this before submitting to the client to make sure it's of the required standard. The client have said they would agree to this if the work gets done and there aren't any security or quality issues.

If I have a contract that's written that allows a substitute and actually use one in this way, would this make things safe from an IR35 perspective?

[Old Greg]

My company has been offered the chance to work for a small company. We'd like to structure the way this is done in the most tax-efficient manner, and both sides are prepared to do anything reasonable and legal to achieve this. There are no agencies involved. My company has previously worked for them for small ad-hoc tasks but they now need a more regular committment.

The work will be of a type that's essentially similar to permanent work in nature (an agreed number hours per week, an indefinite contract with a period of notice, if there are tasks that are different from the core tasks that are in my area of expertise then I'd be expected to do what I can to help). I think makes it not possible to set up a limited company and operate the right side of IR35 (and the amount they can pay if I have to operate the wrong side would not make it worthwhile to take the work). I would however be working from home or an office near my home. I can control where I work, the hours I work and the detailed order of how I do tasks.

It would be possible however, to get a subcontractor to do some small non-critical parts of my work that don't involve customer data (the subcontractor would be someone working remotely from probably India, via upwork or similar), and invoice this time to the client (or less if the subcontractor takes longer than I would have done to do a job of the same quality). I would review this before submitting to the client to make sure it's of the required standard. The client have said they would agree to this if the work gets done and there aren't any security or quality issues.

If I have a contract that's written that allows a substitute and actually use one in this way, would this make things safe from an IR35 perspective?

My immediate non-expert thought is that in addition to the substitution, you should look to structuring this as a call off contract where the client can purchase up to (e.g.). 200 hours of work per year and you invoice on work called off from contract and completed. That leaves flexibility for weeks when you may do no work (e.g. holiday or no client requirement), for when additional work is required, and also you can fit your subbie into this if you write the sub part of the contract correctly. If the client needs < 200 hours in a year then you don;t have the work - perhaps a business risk for you, but really how much of one - and if they need > 200 hours they can raise a purchase order or whatever, if the contract is worded correctly to allow it.

Good luck with it!

[missinggreenfields]

If I have a contract that's written that allows a substitute and actually use one in this way, would this make things safe from an IR35 perspective?

Subcontracting != substitution

[TheCyclingProgrammer]

Subcontracting != substitution

Why not? They might not be exactly the same thing but they amount to the same thing for IR35 purposes.

Can an employee sub-contract their work? No.

The ability to sub-contract parts of the work at any time at your own discretion (subject to any reasonable requirements from the client) not only shows a lack of personal service, it also shows a lack of direction and control from the client (because you're effectively in control of when, where and by whom the work is done) which should be more than enough to satisfy one, if not two of the main pillars of being outside of IR35 (and you only need to show one).

Bauer and Cottrell seem to agree:
http://www.contractoruk.com/ir35/con..._ir3_4668.html

Subcontracting is as good as substitution for IR35 purposes because both effectively show a lack of the requirement for personal service.

[jamesbrown]

Why not? They might not be exactly the same thing but they amount to the same thing for IR35 purposes.

Can an employee sub-contract their work? No.

The ability to sub-contract parts of the work at any time at your own discretion (subject to any reasonable requirements from the client) not only shows a lack of personal service, it also shows a lack of direction and control from the client (because you're effectively in control of when, where and by whom the work is done) which should be more than enough to satisfy one, if not two of the main pillars of being outside of IR35 (and you only need to show one).

Bauer and Cottrell seem to agree:
Contractors' Question: Is my substitution clause IR35-friendly? :: Contractor UK

Subcontracting and substitution are not the same thing, either conceptually or for the purposes of IR35. Substitution involves sending someone on behalf of YourCo to perform services that would otherwise have been performed by you personally. Beyond employment case law, it has little practical application. Thus, for example, subcontracting a component of a project that you are personally unable to deliver, because you don't have the skills, would be materially less relevant in establishing employment status than a valid substitution. In short, subcontracting is good, substitution is better.

To the OP, you cannot introduce sham arrangements and expect these to hold under investigation. The whole point of IR35 is to look through any contractual arrangements and working practices that are designed to obfuscate and to establish the reality of the relationship between the contractor and the client. At the very least, you'd be on shaky ground (depending on what the client says about the reality of the relationship under investigation).

[Lance]

My immediate non-expert thought is that in addition to the substitution, you should look to structuring this as a call off contract where the client can purchase up to (e.g.). 200 hours of work per year and you invoice on work called off from contract and completed. That leaves flexibility for weeks when you may do no work (e.g. holiday or no client requirement), for when additional work is required, and also you can fit your subbie into this if you write the sub part of the contract correctly. If the client needs < 200 hours in a year then you don;t have the work - perhaps a business risk for you, but really how much of one - and if they need > 200 hours they can raise a purchase order or whatever, if the contract is worded correctly to allow it.

Good luck with it!

I think this is a sensible approach.
Get a contract template from IPSE and adjust the deliverables to match. The IPSE contract should be fine from an IR35 perspective. And don't mention your name (just the company name) anywhere except as the director who signs it.

[WordIsBond]

Subcontracting and substitution are not the same thing, either conceptually or for the purposes of IR35. Substitution involves sending someone on behalf of YourCo to perform services that would otherwise have been performed by you personally. Beyond employment case law, it has little practical application. Thus, for example, subcontracting a component of a project that you are personally unable to deliver, because you don't have the skills, would be materially less relevant in establishing employment status than a valid substitution. In short, subcontracting is good, substitution is better.

To the OP, you cannot introduce sham arrangements and expect these to hold under investigation. The whole point of IR35 is to look through any contractual arrangements and working practices that are designed to obfuscate and to establish the reality of the relationship between the contractor and the client. At the very least, you'd be on shaky ground (depending on what the client says about the reality of the relationship under investigation).

All very true.

However, in this case, where the OP is doing all of his work off-site, and the subcontracting work is off-site, and the sub-contracted work is something which OP could do and chooses to have someone else do, and the decision is made by OP (not client) as to whether or not to sub-contract it or do it himself, the distinction between subcontracting and substitution becomes virtually negligible.

If you want to go for it, yes, I think the sub-contracting/substitution would be a strong factor for you. It might not be iron-clad, but it is close enough they'd probably look for a softer target as soon as you say, "Yeah, I thought about IR35, but since I use a substitute a lot it doesn't come under that."

I would definitely NOT say "an agreed number of hours per week." That's too much control over when you work, etc. Rather, I'd say an agreed number of hours for the term of the contract, and make it a six month contract. If your client will go for it, set a minimum and maximum hours you'll work with your company (not them) having the discretion as to whether you work min, max, or somewhere in between over the six month period. That digs away a little bit at the foundation of the Mutuality of Obligation pillar of IR35, too. It doesn't quite knock it down, but it says you don't have to work at any particular time and you have a lot of freedom to refuse work if you want.

Another completely outside the box approach. I'm assuming this is direct (no agent involved). Given the dividend tax, the tax distinction between self-employed and limited company is a lot less than it used to be. You might consider just doing this contract as a sole trader. There may be VAT issues if you have other contracts through your Ltd Co. There may be liability issues, but that can usually be handled through insurance. And sole trader would be more tax efficient than IR35, I believe.

And one other thought. If this is just one contract running concurrently with others, you could just operate this one under IR35. Presumably you are paying a minimal salary. You could pay that out of this contract, and also pay any pension contributions out of this one, and reduce your IR35 liability to close to nil. Doesn't work if this is full-time or close to full-time, obviously.

[Lance]

Another completely outside the box approach. I'm assuming this is direct (no agent involved). Given the dividend tax, the tax distinction between self-employed and limited company is a lot less than it used to be. You might consider just doing this contract as......

cash only ?

IANAL but I don't condone this approach.

[WordIsBond]

Yeah, I wasn't suggesting cash only. Sole trader != cash only.

[Old Greg]

To the OP, you cannot introduce sham arrangements and expect these to hold under investigation. The whole point of IR35 is to look through any contractual arrangements and working practices that are designed to obfuscate and to establish the reality of the relationship between the contractor and the client. At the very least, you'd be on shaky ground (depending on what the client says about the reality of the relationship under investigation).

Is this true in practice, if a contractor uses an IPSE or equivalent contract template and has IR35 insurance? I would reckon that most contractors in this position who are somewhere on the sham arrangements continuum win out. Any views?