Contract Review - Deemed Failure

[FiveTimes]

I have the following clause in my contract

As at the date of entry into this agreement, the intention is for the Consultancy Company to provide the Services through its employee, the Consultant. However, the Consultancy Company may if the Consultant is unable to provide the Services for any reason at any time provide the Services through another person engaged by the Consultancy Company ("Substitute") provided that the Substitute is suitably qualified and has the appropriate skills and experience and the Consultancy Company shall inform the Company of the identity and qualification of any Substitute which the Consultancy Company proposes to use to provide the Services. The Company may at its absolute discretion determine whether to accept such Substitute to provide the Services.

I understand the need for the substitute clause, but would you class the contract as a FAIL for IR35 based on the highlighted section ?

I can see both sides of the argument but wondered what others think.

[northernladuk]

I have the following clause in my contract

As at the date of entry into this agreement, the intention is for the Consultancy Company to provide the Services through its employee, the Consultant. However, the Consultancy Company may if the Consultant is unable to provide the Services for any reason at any time provide the Services through another person engaged by the Consultancy Company ("Substitute") provided that the Substitute is suitably qualified and has the appropriate skills and experience and the Consultancy Company shall inform the Company of the identity and qualification of any Substitute which the Consultancy Company proposes to use to provide the Services. The Company may at its absolute discretion determine whether to accept such Substitute to provide the Services.

I understand the need for the substitute clause, but would you class the contract as a FAIL for IR35 based on the highlighted section ?

I can see both sides of the argument but wondered what others think.

It is a fail because it is based on discretion of the client. That means they don't have to give a reason for a sub which in reality means they won't accept one. Faced with them getting a stranger in or you getting a stranger in they will always go with their guy just to avoid the hassle. Even if you get a guy known to them and can do the job inside out they will say no and take him on when you are gone.

If you had the words akin to 'The client has the right to refuse substitution should they feel the candidate wasn't competent or suitable for the role' you would be in a much better position. It isn't unreasonable to allow the client to say no if the bloke can't do the job. If he can the client doesn't have much say in it which is how a sub clause ought to work.

A slight re-hash should get you out of trouble, that is, if the client accepts.

[Clare@InTouch]

It does give ultimate control over the substitute to the Client, which isn't good. It's almost giving with one hand and taking away with the other. Usually you'd see something like "consent will not be unreasonably withheld" or "may be refused on grounds relating to qualifications, experience or security".

It's not a clause I'd solely rely on, I'd be wanting some better backup via a decent control clause.

[FiveTimes]

A slight re-hash should get you out of trouble, that is, if the client accepts.

and if the client doesn't accept ?

[Clare@InTouch]

and if the client doesn't accept ?

Then you have to rely on control or lack of MOO.

Substitution is only one out of three main factors that you can use to 'pass' a contract. Also look at your supporting factors - Can you work from home? Do you have professional insurances? Do you have any financial risk, including the need to correct defective work in your own time and at your own expense? Do you advertise and act like a genuine business? etc etc.

[FiveTimes]

Then you have to rely on control or lack of MOO.

Substitution is only one out of three main factors that you can use to 'pass' a contract. Also look at your supporting factors - Can you work from home? Do you have professional insurances? Do you have any financial risk, including the need to correct defective work in your own time and at your own expense? Do you advertise and act like a genuine business? etc etc.

Can I work from home - yes
"The Services shall be provided at such places as are necessary for the proper performance of the Services."

Do I have insurance (just getting some quotes)
"The Consultancy Company shall, accordingly, take out and maintain, at its own cost, a full and comprehensive policy of insurance with a reputable insurance company to cover the Consultancy Company's
(and the Consultant's and any Substitute's) liability in respect of any act or default for which the Consultancy Company may become liable to indemnify the Company under the terms of this agreement (including, but not limited to third party employer's and professional liability insurance)."

There is no mention of defective repair.

Do I advertise - no, not yet.

[Clare@InTouch]

Can I work from home - yes
"The Services shall be provided at such places as are necessary for the proper performance of the Services."

Do I have insurance (just getting some quotes)
"The Consultancy Company shall, accordingly, take out and maintain, at its own cost, a full and comprehensive policy of insurance with a reputable insurance company to cover the Consultancy Company's
(and the Consultant's and any Substitute's) liability in respect of any act or default for which the Consultancy Company may become liable to indemnify the Company under the terms of this agreement (including, but not limited to third party employer's and professional liability insurance)."

There is no mention of defective repair.

Do I advertise - no, not yet.

Regardless of what the contract says, does that reflect reality? Can you really work from home at your discretion? Do you really have any control? Would the client really accept a substitute, even if the contract was worded better?

IR35 is about what happens in practice, the theoretical contract between you and end client, not what the written contract between you and an agency says. HMRC are wise to the fact that we all know what a good contract should say, but if it's not realistic then it's not worth the paper it's printed on.

If the contract is bad but the working practices are good, then state your objections in an email so you have a written record, and get a confirmation of arrangement letter in place direct with the client.

[FiveTimes]

Regardless of what the contract says, does that reflect reality? Can you really work from home at your discretion? Do you really have any control? Would the client really accept a substitute, even if the contract was worded better?

IR35 is about what happens in practice, the theoretical contract between you and end client, not what the written contract between you and an agency says. HMRC are wise to the fact that we all know what a good contract should say, but if it's not realistic then it's not worth the paper it's printed on.

If the contract is bad but the working practices are good, then state your objections in an email so you have a written record, and get a confirmation of arrangement letter in place direct with the client.

There is no agency involved - direct to the client, so the contract is the contract.
The client do not have any issues with me working from home. I just need to get a secure ID and bosh I'm sorted.

[pacontracting]

There is no agency involved - direct to the client, so the contract is the contract.
The client do not have any issues with me working from home. I just need to get a secure ID and bosh I'm sorted.

Of the three points to determine IR35, in my experience, Substitution is the easiest to prove but the hardest to demonstrate unless you actually do it. For example, if you are engaged to write a website - and you subcontract the work to a company in India. Would the client need to know or care? Obviously this all depends if you are charging a day rate or a fixed rate etc. In reality - substitution is the holy grail if you actually do it otherwise don't rely on it. As you are going directly to your client - why not ask them 'Would you accept a substitute for me if I were unable to perform the services personally'.

Control is probably the easiest one for a genuine contractor. You are told what to do and just get on with it, guiding the client as to the best way to approach the task e.g. you control the 'how' and 'when' and so on. This usually helps if you are taken on to do a specific project or even for a specific level of experience / expertise the client just doesn't have. Unfortuantely, most support staff e.g. System Admin's or DBA's fall foul of this as their level of control is usually no more than that of an equivalent employee (they work with same helpdesk / change control systems, to same timescales etc).

MOO can be equally straight forward but a number of court cases show that MOO should happen within a contract e.g. the client decides that during the last two weeks of December, your services are not required - thus although you are able to work in that period and the contract covers this period, the client has demonstrated they have no obligation to give you work or to pay you even if you are available. If you turned up - they wouldn't have to pay you! People caught under 'control' can use 'MOO' - but again, it's usually required to actually have happened.

The rules say that any one of these is enough to put you on the borderline of exclusion from IR35 and by adding the fact of how you run your business - could be enough (or make is sufficiently doubtful for HMRC to risk proceeding further).

As the courts say, the only real way to determine IR35 is to paint a picture of your activities, using the above three criteria as a foundation - and not to rely on any one point of a contract. If HMRC smell a rat with the contract - they can and will discount your contract as a sham and then create their own, unflattering one.

[northernladuk]

and if the client doesn't accept ?

Not sure on this one to be honest. Not been in that position yet. I am certain in many situations the substitution clause won't be honoured anyway so most are just lipservice. The JLJ cause was seen as a sham by the judge even though it was worded correctly. I would be willing to be large amounts of money some of my past gigs would have just terminated me rather than accept a sub but seems the case didn't arise they were happy to have it in there. It existed through apathy of the client more than a realistic clause that had a chance of being enforced.

If the client flately refuses I think you have two choices....

1) Just go with it and keep your fingers crossed

2) Agree with them (somehow) that you would be happy with their version but could you just use this wording. You are on a wish and prayer asking him to sign something he doesn't like on a gentlemans agreement you wouldn't hold them to it. It also doesn't really work if you get investiaged so not sure how much use it would be doing this.

You could point out that 'suitable for the role' could mean anything and the client not liking the colour of his shirt would be an acceptable excuse for him not being 'suitable'. If the client accepts that he may accept the change in contract.

Again most of this is just paying lipservice and won't stand up if looked at in depth but may not come to that.