Contractors warned against using client PSCs as substitutes, in wake of LPPL

Contractors whose substitute is already known to the client -- because the client already hires and pays them on its own terms -- will likely fail in using substitution as an IR35 defence.

Issuing this alert, a former tax inspector said that in a Little Piece of Paradise Ltd (LPPL), the taxpayer who lost to HMRC had a replacement who was, in the judge’s words, just “another member of the [client’s existing] team, rather than a substitute.”

'You may have a problem'

Reflecting further on the case of former Sky Sports presenter Dave Clark -- who tried to claim fellow Sky presenter Rod Studd was his substitute, the ex-tax official, Carolyn Walsh, warned contractors directly:

“If you have the right to substitute but your replacement is known to the hirer and may even be engaged by the hirer, as opposed to being someone you have introduced and engaged to meet your responsibilities under the contract, you may have a problem.”

For Clark, another problem was that even if he did substitute, his right was not “unfettered,” as it “was Sky’s decision that the substitute was suitable”, the ruling against LPPL adds.

'False substitution clauses'

“HMRC always looks through false substitution clauses to the true nature of the contract”, advises Ms Walsh, who is now the managing director of CWC Solutions.

Mr Clark’s case was heard against the old IR35 rules, but the new IR35 rules effective since April 2021 add a new dimension to the consequences for those relying on ‘sham’ sub clauses.

“Where a contractor hasn’t disputed an [outside IR35] SDS [which contains a fake substitution clause] with the end-hirer, he/she will more than likely be jointly-liable for the tax debt with the feepayer,” cautions Ms Walsh. “Or solely liable where the feepayer, generally an agency, has since folded.”

'Little context'

Chartergates is also mulling what the defining aspects of Mr Clark’s case would mean under the current off-payroll framework, which covers medium-sized and large engagers like Sky.

“Perhaps Sky’s responses would have been different if the case was being heard against the new rules -- where Sky would be responsible for any IR35 liabilities,” the law firm began in in update on Friday.

“Sky’s written responses [which provided very little context surrounding the day-to-day arrangements], when coupled with the terms and conditions, was Mr Clark’s ultimate downfall.”

'Very different picture'

The firm added that the broadcaster’s responses “painted a very different picture” to the evidence provided by Mr Clark, and not just on the issue of substitution.

But it is the responses at the hearing of the two legal teams that puzzles tax lawyer Rebecca Seeley Harris.

“What I have found interesting in this case, and PGMOL, is the arguments that are proposed by either the counsel for the respondent or for the appellant.

“In PGMOL for example, they argued that there was no contract between them and the football referees. This seems to be a very naive argument, bearing in mind that there was both an overarching contract in writing and terms for an individual contract which would, more than likely constitute a contract.”


Boss at ReLegal Consulting, Ms Seeley Harris continued: “But in LPPL, the tribunal looked at other factors such as the fact that Sky had a framework of control, Mr Clark was restricted from presenting for other companies, and that there would not have been any substitution provisions in the hypothetical contract.”

The restrictions are an example of where Mr Clark’s working practices appear “noticeably different from the vast majority of contractors’” working practices, believes Qdos operations director Nicole Slowey.

“[Also, at the hearing,] Clark was represented by his accountant,” she added in a post, alluding to the fact that contractors typically enlist status experts. “While that’s not to say they weren’t capable, specialist IR35 advice and representation in court certainly helps.” 

'Could have been done differently'

In its Friday update, Chartergates made a similar point, saying things “could have been done differently” for Mr Clark, in terms of Sky’s evidence and HMRC’s interpretation of the evidence being “accepted with little challenge.”

As to the wider lessons for other limited company contractors, the law firm echoed guidance put to ContractorUK readers when the judgment was first published on November 5 – and since then.

“It is clear from [Little Piece of Paradise Ltd]….that using template written contracts with boiler plate clauses will not be sufficient when scrutinised, particularly if those terms do not reflect the reality of the arrangement between the parties.”

The update continued: “[And potentially] importantly, agreements reached outside of the written terms still form part of the overall arrangement and will be included as part of the hypothetical contract.”

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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