Right To Substitution

[MojoDog]

Just been reading up on HMRC' IR35 rules on Right to Substitution.

HMRC IR35 Legislation, http://www.hmrc.gov.uk/ir35/intermediaries-legislation-ir35.pdf states:
The right to substitution
"A ’right to substitution’ clause in your contract will only be accepted by HMRC if it is genuine.
HMRC doesn’t accept that the right exists if the client's permission must be obtained before sending a substitute.
A right of substitution is only likely to exist when you have the right to hire and pay other people to work for you during an engagement. This is dependent on the client not minding who carries out the work, provided they’re suitably qualified and experienced.
If the client only needs to be notified of the substitute for security reasons, eg to obtain a security pass, this won’t affect the validity of the right of substitution clause.
Where the intermediary’s contract is not with the client but with an agency or employment business and there’s a claimed right of substitution, HMRC will normally require a copy of the written contract between the agency or employment business and the client. If you’re unable to get access to that contract you should ask the agency to send a copy direct to HMRC.
If this isn't possible you may be asked to provide alternative evidence. This can be a letter from the client confirming they have agreed that your company or partnership may provide a substitute worker to carry out the work. They should confirm that it doesn't matter which worker is provided on a day to day basis over the course of the whole contract. "

It got me thinking that whilst you can get all the good words written into a contract that says that you will provide a substitute and that the client will be happy with this; for a lot of independent contractors (myself included) actually finding a substitute - should the need arise - who is a) suitable and b) available might be a problem.

I spoke with a couple of other contractors (with similar skills to mine) and between us we have agreed informally that if one of us ever needs a substitute and one of the others was available, that we would agree to be named as a 'sub' and step in to help out.

Putting aside all the practical implications of this (i.e. the chances of someone being available, having skills acceptable to the client etc) Can anyone see any ethical, legal or moral issues with this agreement?

[TheFaQQer]

Putting aside all the practical implications of this (i.e. the chances of someone being available, having skills acceptable to the client etc) Can anyone see any ethical, legal or moral issues with this agreement?

No. A few people I know have all said the same.

[northernladuk]

Because it's pretty unrealistic and HMRC will know it. I am sure we have discussed named subs in contracts before and I seem to think this has been tested and didn't stand up. I could be wrong on that last point but we have had a chat about it some thread or other.

The biggest problem is the reality that very very few clients will even accept a sub even though it's in the contract which is why they have been labelled sham clauses before. And that was in a court.

HMRC even have a page on it...

Considering the evidence: ineffective or sham substitution clauses

If it works then the Contractor Club should be a good place for finding someone but good luck finding someone who isn't in gig to do it for you.

[SpontaneousOrder]

Just been reading up on HMRC' IR35 rules on Right to Substitution.

HMRC IR35 Legislation, http://www.hmrc.gov.uk/ir35/intermediaries-legislation-ir35.pdf states:
The right to substitution
"A ’right to substitution’ clause in your contract will only be accepted by HMRC if it is genuine.
HMRC doesn’t accept that the right exists if the client's permission must be obtained before sending a substitute.
A right of substitution is only likely to exist when you have the right to hire and pay other people to work for you during an engagement. This is dependent on the client not minding who carries out the work, provided they’re suitably qualified and experienced.
If the client only needs to be notified of the substitute for security reasons, eg to obtain a security pass, this won’t affect the validity of the right of substitution clause.
Where the intermediary’s contract is not with the client but with an agency or employment business and there’s a claimed right of substitution, HMRC will normally require a copy of the written contract between the agency or employment business and the client. If you’re unable to get access to that contract you should ask the agency to send a copy direct to HMRC.
If this isn't possible you may be asked to provide alternative evidence. This can be a letter from the client confirming they have agreed that your company or partnership may provide a substitute worker to carry out the work. They should confirm that it doesn't matter which worker is provided on a day to day basis over the course of the whole contract. "

It got me thinking that whilst you can get all the good words written into a contract that says that you will provide a substitute and that the client will be happy with this; for a lot of independent contractors (myself included) actually finding a substitute - should the need arise - who is a) suitable and b) available might be a problem.

I spoke with a couple of other contractors (with similar skills to mine) and between us we have agreed informally that if one of us ever needs a substitute and one of the others was available, that we would agree to be named as a 'sub' and step in to help out.

Putting aside all the practical implications of this (i.e. the chances of someone being available, having skills acceptable to the client etc) Can anyone see any ethical, legal or moral issues with this agreement?

Only difficulty might be, assuming you and he are on flat rate VAT, in negotiating a rate - if the subbie gets your full rate you'll lose out significantly on the VAT he charges you.

[Contreras]

Only difficulty might be, assuming you and he are on flat rate VAT, in negotiating a rate - if the subbie gets your full rate you'll lose out significantly on the VAT he charges you.

Put another way, if the subbie bills you at £300 + VAT, you'd need to bill the client at £350 + VAT just to break even.

YourCo would remain responsible for the delivery so ideally you'd also want some profit on top of that to justify the risk.

[TheCyclingProgrammer]

Having a solid RoS clause that your client wouldn't actually mind is great but as NLUK says I imagine a lot of clients wouldn't be happy with it because they've hired YourCo on the basis of the skills that *you* possess, not somebody else. The fact is there is almost always a degree of personal service expected for many of us.

That said, it doesn't mean we're all suddenly IR35 caught because we don't all have realistic RoS clauses, but personally I'd be more reliant on direction and control and MOO to show I'm not caught by IR35 rather than RoS (even though my contract does have an unfettered RoS clause).

Even if a client does say they don't mind, who's to say they won't turn around and change their mind? For my current contract, my client said this on reviewing my MSA (which is pretty much a standard PCG contract):

This agreement gives you the right to put other contractors on the job. I'm sure this is just your standard wording, but we would want to make sure that it is you specifically doing the work.

In other words..."I'm happy to sign this as long as it really is you doing the work". My response was:

Yes, its a standard part of my contract and helps reinforce the fact that the contract is between my clients and my company to reduce the risk of any issues with IR35 legislation. In practice, I’ve never needed to send a substitute in 5 years but its important for my company to retain that right in case I’m personally unavailable to do the work for some unexpected reasons (illness, family emergency etc.), just as any bigger consultancy would. In the unlikely event that needed to happen it would be discussed with you first and any proposed substitute would obviously be fully qualified to do the work (I would still be responsible for any work produced).

They were satisfied with that response, I guess, because the likelihood of me needing to use a substitute on what is only a 4 week contract is slim. But do I think they'd actually let me use a sub? I'm not so sure. It's not that I consider my RoS a sham...if I really needed to use one I would and if my clients complained I would simply point them towards my MSA; but that doesn't mean every client would be happy about it. They could then just terminate of course.

But I'm not bothered because I have MOO, direction & control and general working practices nailed (I work from home 80-90% of the time, nobody tells me how to do my job, I'm left to do the work as I see fit, working my own hours, no obligation to accept new work, etc.).

[Clare@InTouch]

The whole substitution sham thing was a large pointer in the Autoclenz case. These guys were trying to prove they weren't self employed, but the points the case raises are valid in any status dispute.

“In other words, if the reality of the situation is that no one seriously expects that a worker will seek to provide a substitute, or refuse work offered, the fact that the contract expressly provides for these unrealistic possibilities will not alter the true nature of the relationship. But if these clauses genuinely reflect what might realistically be expected to occur, the fact that the rights conferred have not in fact been exercised will not render the right meaningless.”

"Submission from Counsel for Autoclenz was that the EJ had misdirected himself by deciding the substitution and right to refuse work were not genuine because that right had not been exercised in practice.

Smith LJ said she would accept that view if that had been the approach of the EJ. The EJ had not erred in holding the right to refuse work was not genuine because it had not occurred in practice as the valeters had always turned up for work as the evidence from the depot manager was that he expected the valeters to turn up for work each day and unless adequate notice was given they were under an obligation to do so.

Smith LJ concluded the EJ was entitled to infer that the substitution clause did not genuinely reflect the rights and obligations on the basis of the evidence of the depot manager who did not know of a single example of true substitution among the valeters and the fact that evidence from a valeter, who had 17 years experience, was that he did not know he had the right to bring in a substitute. Smith LJ said the fact that a valeter could work for Autoclenz for so long and not know he had a right to send a substitute is evidence that no one intended or realistically expected the right should ever be exercised."

ESM7310 - Case Law: Autoclenz Ltd and Belcher & Ors

The moral of the story being - there's no point in having a substitution clause if it's not genuine, but having a right and not exercising doesn't mean it's not genuine.

[SpontaneousOrder]

As an alternative to RoS...
if the project I'm working on ends - lets say 6 weeks before the contract end - and I then stop turning up (regardless of whether there is alternative work on offer or not) even though I've not submitted any notice to terminate, then is that a bullet-proof lack of MoO?

And if so, is that then a bullet proof IR35 defense?

[darrylmg]

Put another way, if the subbie bills you at £300 + VAT, you'd need to bill the client at £350 + VAT just to break even.

YourCo would remain responsible for the delivery so ideally you'd also want some profit on top of that to justify the risk.

Wouldn't this show financial risk?

[psychocandy]

Agree about the sub thing. Not yet one client who wouldnt look at me funny if I even suggested the idea.

As an example. Your a java developer with 20 yrs experience. Your mate who is your subbie has the same.

You go to client for 3 months and crack on. Then you tell client your mate will be in tomorrow. Do you think they'll he happy. Hell no - why would they? They're paying for someone to come in fresh again without 3 months knowledge of how they do things.