What constitues ROS?

[b0redom]

So in my current gig I have a lot of stuff to do, including making Cat5 cables. I've never needed to do this before, and it takes me ages. I could subcontract this out to a 3rd party supplier (or even buy some from Amazon etc) and go sit in the pub for the day. Does this constitute substitution?

Are there any hard and fast rules? I imagine it can't be anything as simple as 'must attend site', because in other contracts I've spent months working remotely. What if I subcontract something trivial to a fellow contractor and (s)he does the same to me? Some PERL for example?

Who decides? Is it a murky someone who knows nothing about your business makes an arbitrary decision like the rest of IR35?

[jamesbrown]

My understanding....

Substitution involves sending a representative from your company to do the work that you would otherwise have done (with YourCo invoicing the client as normal). Subcontracting involves transferring the contract (assignment), or part thereof, to another company to complete the work. Substitution is a very narrow type of subcontracting in which the substitute is essentially performing the duties that you would otherwise have performed. Thus, subcontracting is more general than substitution. Substitution is a very important factor for IR35 as it clearly demonstrates lack of personal service. Subcontracting is also good for IR35 but does not necessarily demonstrate lack of personal service if there are other pointers towards personal service (e.g. if you subcontract some small tasks beyond your area of expertise but the client expects you to personally undertake other major activities).

[b0redom]

(e.g. if you subcontract some small tasks beyond your area of expertise but the client expects you to personally undertake other major activities).

Ok, who decides if it's a 'small task'? What if I never attend site? I'd never send anyone in my stead.

[jamesbrown]

Ok, who decides if it's a 'small task'? What if I never attend site? I'd never send anyone in my stead.

First up, unless you actually invoke either one, you'll never have complete certainty from the contract alone, although you would be looking for a not unreasonably fettered right to substitute in the contract. Secondly, I think there probably is some ambiguity over what type of subcontracting would demonstrate a sufficient lack of personal service. For example, I could imagine a "sham" situation of subcontracting or a legitimate situation whereby you subcontract some very small tasks while the client has an expectation of personal service on the bulk of the contract. In that sense, I think substitution is more clear-cut. Whether the substitute attends the client site or not, if they are effectively doing the work that you would otherwise have done for a given period (e.g. two weeks while you're on vacation or time off when you're ill), that would be a valid substitution and is pretty clear-cut. I'm just a contractor though, not an expert on this, so you should wait for other views too...

[northernladuk]

Ok, who decides if it's a 'small task'? What if I never attend site? I'd never send anyone in my stead.

IMO just do what you need to do for the right reasons whichever of the two it is (subcon or substitute) as is required by your business. Either way demonstrates you are a business in your own right as you are carrying out tasks that a permie cannot. You can argue the semantics with HMRC when they turn up but whatever the outcome of what you want to call it you have a great defense in an investigation.

In my mind your company would send another employee in to substitute for you to do the same work you were doing. To pay another company to do it or extra roles that are not part of your work is subcontracting. Just check your contract. Some will say you cannot subcontract work out even if it has a substitution clause in.

[Old Greg]

HMRC sees subcontracting (not just substitution) as a near silver bullet against IR35. My eemboldenning:

The Actual Substitution test
Test
Have you hired anyone in the last 24 months to do the work you have taken
on?
You could do this by sending someone to do the work in your place. You
could also do this by sub-contracting.
But your business has to remain responsible for the work and for paying the
person who does the work you have taken on.
You can still pass this test if you had to tell your end client the name of the
person who would be doing the work you took on.

http://www.hmrc.gov.uk/ir35/guidance.pdf

You clearly don't need to tell the client from an IR35 perspective. Whether you need to tell the client from your own contractual perspective is down of course to your contract.

IMHO for it to be valid from an IR35 perspective it must be done for a legitimate business reason (e.g. to cover for holiday / sickness, to allow you to take on additional business, to deliver more cheaply than the bill to client etc.). If you're paying a mate £100 to proof-read a document, you may find it is challenged?

[BolshieBastard]

Ok, who decides if it's a 'small task'? What if I never attend site? I'd never send anyone in my stead.

HMRC will decide what in their opinion qualifies as a ROS, whether a sufficient degree of substitution has taken place based on what is in the contract and in reality if \ when determining whether you are IR35 caught.

If you appeal their decision, then the tax tribunal due process will determine whether HMRC were right or wrong.

[northernladuk]

HMRC sees subcontracting (not just substitution) as a near silver bullet against IR35. My eemboldenning:



http://www.hmrc.gov.uk/ir35/guidance.pdf

You clearly don't need to tell the client from an IR35 perspective. Whether you need to tell the client from your own contractual perspective is down of course to your contract.

IMHO for it to be valid from an IR35 perspective it must be done for a legitimate business reason (e.g. to cover for holiday / sickness, to allow you to take on additional business, to deliver more cheaply than the bill to client etc.). If you're paying a mate £100 to proof-read a document, you may find it is challenged?

+1 to all that. Nice post.

[LisaContractorUmbrella]

HMRC's guidance for HMR&C's people: ESM3350 - Considering the evidence: substitution clauses

ESM3350 - Considering the evidence: substitution clauses
As stated at ESM3320 above, in an IR35 situation it is necessary to construct a notional contract between the worker and the client. Consequently, the views of the client on the issue of substitution are particularly important. It is not just a matter of importing clauses in written contracts into the notional contract.

A clause may be worded in such a way that it quite clearly indicates that no personal service is required - see the case of Express & Echo Publications Ltd v Tanton (ESM7210). But the imputed clause in that case was extreme and there was an obligation, not a right, to provide a substitute when Mr Tanton was unwilling or unable to provide his services personally.

It is much more likely in an IR35 situation that you will be considering a right of substitution rather than an obligation to provide a substitute and that the right will be fettered to some extent. It should be noted that, where a hypothetical contract is considered to contain a right of substitution, that right is likely to be only an indicator of self-employment to be weighed with all the other factors. Park J undertook a review of the case law relating to substitution provisions in the case of Usetech Ltd v Young - see ESM7270. The approach taken in Usetech was followed by Henderson J in the case of Dragonfly Consultancy Ltd v HMRC - see ESM7290. There is further guidance at ESM0533 onwards.

Where you only have the personal service company/agency contract, which contains a substitution clause, you would certainly want to seek evidence about substitution from the end-user. The courts would consider that evidence to be very important. Would the end-user permit the worker to send a substitute or would they only accept a substitute from the agency? Would the worker pay the substitute? And did it happen in practice? In the personal service company situation, the worker and the service company are effectively one and the same. That is not the case in the composite service company situation where the worker is an employee and only one of several shareholders. In those circumstances, you will have a worker/service company contract and it is even more essential that you seek the views of the end user where it is suggested that the worker has a right of substitution.

[Qdos Contractor]

If you are on holiday or ill and you get someone else to do the work in your place whilst still remaining responsible for completion of the services, that is substitution.

Getting someone else to do a relatively small element of your work would probably classed as 'engaging helpers'.

This is still very positive, but not quite as pivotal as full blown substitution.