IR35 substitution is often labelled as a key test for employment status determination, though the IR35 legislation actually tests not whether an individual contractor can send a substitute, but rather, whether there is an obligation on the individual to personally carry out the work for the client.
Having a genuine right of substitution effectively demonstrates such a lack of personal service obligation, writes IR35 status and employment status specialist David Harmer, a director at Markel Tax.
Once believed to be a "silver bullet" defence for contractors seeking outside IR35 status, personal service remains a crucial consideration for employment status and IR35 determinations in 2025-26.
Where does personal service as an IR35 factor come from?
The 'personal service' test for IR35 and employment status originates from the 1967 High Court Ready Mixed Concrete decision.
Mackenna J outlined three key requirements as the bare bones of what is needed for a contract of employment to exist:
- In return for payment, the worker agrees to provide their own work or skill;
- The worker will be subject to control in a sufficient degree, and;
- Other provisions within the contract are consistent with employment.
With IR35 substitution, it's obligation that matters under employment status rules
As we can see from the first point, for employment to exist under IR35 rules, the contractor must be under an obligation to personally carry out the work.
But Ready Mixed Concrete is not the only must-read case for contractors to understand substitution and personal service as an IR35 factor for employment status determination.
What the Court of Appeal says about a right to provide a substitute under IR35
In 1999, the Express and Echo Publications v Tanton case at the Court of Appeal delved further into this key IR35 factor and provided the following guidance for contractor employment status:
"Where a person who works for another is not required to perform his services personally, as a matter of law, the relationship between the worker and the person for whom he works is not that of employer and employee.
"A right to provide a substitute is inherently inconsistent with the existence of a contract of employment. A contract of employment must necessarily contain an obligation on the part of the employee to provide his services personally. Without such an irreducible minimum of obligation, it cannot be said that there is a contract of employment."
The 'Unwilling or Unable' test for contractor substitution
The 'Express and Echo v Tanton' case also showed that it is the right to use a substitute which is important for IR35 purposes, providing the contractor can exercise that right when "unwilling or unable" to provide the services.
This subtle distinction helps to differentiate between being able to send a replacement at will, and whether there are restrictions on when a substitute can be utilised under IR35 rules.
Further IR35 case law that's informative on personal service and contractor substitution
In the Lime IT Ltd v Justin [2003] IR35 case, it was found that a contractor working via an agency was not an employee of the end-client, mainly due to the substitution provision she specifically negotiated into her contract for employment status purposes.
The court was persuaded that she was acting in business on her own account and her right of substitution was "a strong indicator of self-employment" under IR35 rules. In this case, a substitute was never sent in practice; however, the right existed within the contract and was found to be genuine for IR35 purposes.
When a contractor's right of substitution is too limited for IR35
Conversely, in Dragonfly Consultancy Ltd v The Commissioners For Her Majesty's Revenue and Customs [2007], the right of substitution was too limited for IR35 purposes, as there was a requirement for the substitute to be approved by the end-client.
Potentially even more damning for the contractor's employment status was the end-client's testimony confirming they expected the original contractor to carry out the work. A similar issue and conclusion were reached in the IR35 case of Usetech Ltd v Young [2004].
What does HMRC say about contractor substitution under IR35?
HMRC's view is that restrictions or practical limitations on substitution – such as a requirement for security clearances — will mean the right does not exist for IR35 employment status purposes.
In fact, this is how HMRC's IR35 status testing tool, CEST, is designed to approach this issue of personal service for contractor employment status determination.
The substitution clause contractors will want isn't unreasonably fettered under IR35
Case law suggests that the feasibility and practicality of substitution must be considered in each IR35 case, but if the right is not unreasonably fettered, it will stand up to scrutiny for employment status purposes.
Fetters relating to skills, qualifications, experience and security clearance would not be unreasonable requirements for contractor substitution under IR35 rules.
When your contractor substitution clause is probably ineffective for IR35
In the case of McMenamin v Diggles [1991], a right of substitution was found to be effective for employment status purposes even though the substitute was required to have a minimum of 10 years' experience.
Though a caveat must be included here for IR35 purposes – if the engagement is four weeks long and it takes three weeks to receive security clearance, it is safe to say the right to send a substitute is very limited and probably ineffective for contractor employment status!
What does a genuine substitution clause look like for IR35 purposes?
For a right of substitution to be effective under IR35 rules, it must be genuine. This means that it must be actionable in reality, and not just a contractual provision to avoid the IR35 legislation and employment status determination.
This point has been reiterated by courts over the years, most notably in the case of Autoclenz heard at the Supreme Court, which approved the approach in Consistent Group Ltd v Kalwak [2007] where the judge held:
"The concern to which tribunals must be alive is that armies of lawyers will simply place substitution clauses, or clauses denying any obligation to accept or provide work, in employment contracts, as a matter of form, even where such terms do not begin to reflect the real relationship."
A right to send a substitute doesn't automatically equate to outside IR35 status
So, just because a right to send a substitute exists within the contractor's contract, it does not automatically place the contract outside of IR35 and employment status rules.
The practicality of any such substitution must be considered for IR35 employment status determination.
Contractors should note the non-IR35 case of BCA Logistics for employment status
This issue of practicality was recently echoed at the Employment Appeal Tribunal in the case of BCA Logistics Ltd and Brian Parker and Others [2025].
Here, the EAT found that there were no processes or procedures in place by the company to allow their operatives to send a substitute, which entitled the court to conclude that the company did not expect the right of substitution to be utilised for employment status purposes.
In this 2025 case, it was not clear whether the individuals even knew how to enforce their contractual right of substitution! This was enough to deem the right as not genuine (though not quite a sham), which led to the decision that the individuals were 'workers' and therefore entitled to employment protections.
What if a genuine right of substitution is never used under IR35?
Where a genuine right of substitution exists but it is not utilised (sometimes referred to as a 'dormant' substitution clause), this will not necessarily render the right ineffective for IR35 and employment status purposes.
The key is the right – provided it exists contractually and in reality, then it will be a solid marker of self-employment for contractor IR35 status.
As with anything in this area of contractor tax and IR35, however, it is important to consider the engagement as a whole, because a right of substitution shouldn't be solely relied on as a 'get out of jail free' card for employment status determination.
Author: David Harmer, Director at Markel Tax
