Contractors' Question: Is my substitution clause IR35-friendly?

Contractor's Question: I'm contracting direct with the client company and have been pushing to get my contract finalised. I've used an IR35-friendly template but the client company has changed the following substitution clause:

'The whole or part of this Contract for Services may be assigned or subcontracted to any third party at the sole discretion of the Company and the Client may not object.'

Instead, they propose:

'The Company may not assign or subcontract the whole or part of this Contract for Services to any third party without the prior written consent of the client such consent not to be unreasonable delayed or withheld.'

Is the revised clause still 'IR35 friendly' in terms of a substitution clause? And if I'm direct to the client does, or how would, IR35 apply?

Expert's Answer: Assignment, subcontracting and substitution are slightly different issues. Assignment is actually concerned with assigning the whole contract to another entity e.g. where an agent or client assigns the contract to say another company within its group. Consequently if a contract has been assigned by a contractor then the original would only be a relevant engagement for IR35 purposes up to the day it was assigned. Then IR35 may become an issue for the assignee (assuming it was assigned to another contractor) from that point.

Subcontracting is as good as substitution for IR35 purposes because both effectively show a lack of the requirement for personal service. However any right to sub-contract or indeed to substitute which is subject to needing prior consent does not work, as any kind of prior consent means the clause is unreasonably fettered as they could simply say 'no.' Unless and until they say 'yes' it cannot take place. The fact that they say "such consent will not be unreasonably withheld" does not really help as reasonable and unreasonable are subjective terms. All in all, you would prefer to see a separate substitution clause.

The expert was Kate Cottrell, founder of Bauer & Cottrell , which provides IR35 advice to contractors and IR35 training to accountants.

Wednesday 2nd Dec 2009
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