Because there has been no real solution to the problem since IR35 was enforced 20 years ago, a contractor’s view of the right of substitution is likely to be set in stone.
It’s well known that substitution – which can have a huge, if not conclusive impact on a contractor’s IR35 status – is impractical and implausible, so why would your thoughts on substitution have changed over the years?
However, I am going to make a bold statement here – your view on substitution is wrong. It’s traditional, quite archaic and makes it difficult or, in some cases impossible for you, along with the vast majority of contractors, to legitimately exercise this right.
In my opinion, there needs to be a significant shift in your current mindset to understand how the challenges around substitution can be overcome so you can cement your outside IR35 status.
From where I stand, when it comes to substitution, contractors are suffering from a case of ‘anchoring’. This is a cognitive bias where an individual depends too heavily on an initial piece of information offered to make subsequent judgments during decision making.
But it’s clear to see why anchoring is causing such a problem for contractors, most of whom want to exercise their right to provide a substitute and increase their chances of operating outside IR35. The most obvious example of this would be during a football game, where if a substitution is made – it’s usually a striker for a striker. Instantly there is this assumption that substitution has to be like for like. We need to think differently. We need to start taking a Pep Guardiola approach and investigate switching tactics behind this inferral – as the system for substitution changes, so should your view of it.
There is nothing within HMRC’s guidelines that states that substitution has to be like-for-like – just that the substitute is suitably qualified to complete the task they are being asked to. I have spoken with numerous legal experts on this issue. Lucy Tarrant, CEO of Cognitive Law states:
“Like for like substitution is not, and should not be, needed for a contractor to establish their status outside of IR35.”
There are a lot of negative factors to consider that make substitution in its current form an absolute nightmare to implement – too many to list. However, the fact of the matter remains – the substitute does not need to be like-for-like at all, contrary to common belief.
By massively overly simplifying the problem, HMRC have anchored the view of what substitution means for the world of self-employment and contracting. This is that a substitute has to be someone who has the same skills as you, capable of doing the same job to the same level and capabilities as yourself.
Essentially to make this possible, you would be required to build yourself a bench of substitutes. But it’s totally unrealistic to expect someone to wait at the end of the phone ready to take your spot and help a friend out. This isn’t Who Wants to Be a Millionaire! If you’re an expert in your field, then people with the exact same skill set and quality as you are also likely to be engaged.
This would all vary depending on your client or the project you undertake too. The range of skills you acquire or use on a project for a client in banking isn’t likely to be the same as those needed for an insurance company. This is why building a hypothetical bench of substitutes becomes virtually impossible. Even if it was nothing more than a pipe dream, how many able contractors do you think you would need available at short notice? You’ll likely need around 15 substitutes to make this work. We haven’t even considered the cultural differences of each client yet either – another ball game altogether.
I know this because it is the exact issue I have faced with The Sub Bench’s sister company, Konvergent.
The concept is a simple one, architecture managers are always fighting demand. Projects are handed to them at a moment’s notice and they need access to talent on-demand. Basically, what they’re looking for is a substitute bench of contractors they can call upon as and when they need to. It sounds simple in theory doesn’t it – a bit like HMRC’s view of the substitution clause!
However, the reality of the situation is a lot more complex, and provides huge challenges:
If you’re in the middle of a large transformation project and want to substitute yourself out for two weeks, as you are unable to personally provide the service, ask yourself and your client this question: is this going to provide value?
Firstly, you must overcome the challenges that onboarding, introductory meetings, logistics, handovers and security clearance will all provide, not only for your client but for the substitute you plan on using too.
The substitute will be dropped in at the deep end, plunged into the middle of a significant inflight project where the core team have been working together for some time.
The substitute has no idea of the internal politics of the company, nor the decisions that have already been made or rejected, not the culture of the client either. They won’t know what the best way to approach a decision is or how to best present a message. If the substitute is lucky, there will be a plethora of documentation to read, likely taking up their first week.
If they are unlucky they will stumble from meeting to meeting trying to make sense of what’s going on and attempt to not make a mistake. All of this for the same rate that you charge your client. It’s little wonder that this rarely takes place in reality. It’s simply not sustainable, realistic or valuable to any of the parties involved.
Like for like substitution can work, but only in certain circumstances where the expertise to complete the tasks required and the background knowledge of the client required is minimal.
The perfect example of this would be a minicab driver. As long as you have a driving licence and the ability to use a sat nav there’s no reason why you can’t be an adequate like for like substitution. However, this is no comparison to the example above. The difference in the complexity of the problem is enormous.
I’m sure you’ve started to get the picture. Having a substitute on standby to take over from you is like becoming England football manager – a near-impossible dream.
It was this realisation and understanding of how difficult – if not impossible – it is to make a like for like substitution a reality, where The Sub Bench was born. But if the substitution clause is so important, how does substitution become a reality? In other words, how do contractors include and exercise this right to demonstrate their outside IR35 status?
I’ll explain. Think about the work that you do for a minute or two and you’ll realise that it most likely falls under the 80/20 rule. 80% (perhaps even 90%) of what you do is unique and can’t be easily substituted to someone else.
However, there are elements of the work that you complete that can be substituted out. For example, internal corporate communications you produce for a client – whether documents, presentations or packs. While these are likely to include information that only you can pull together, that’s not to say the design element cannot be substituted – something that The Sub Bench facilitates.
As HMRC guidelines state, substitution does not have to be like for like – nor does it need to be a full substitution, as Simon Gilmour of Harper James Solicitors explains:
“Most people assume substitution is one person taking on the role of another, there is in fact no reason why in the consultancy context there can’t be partial substitution, akin to sub-contracting or outsourcing of some of the tasks required. The solution now being offered by The Sub Bench fits with this and clearly does give a genuine solution to the issue of personal service within the consultancy arrangement with its partial substitution model. This in turn definitely will help the case against IR35.”
By using The Sub Bench, you can remove the notion of personal service to stay outside of IR35, while effectively landing your message with the business through impactful design and visual communications. It’s a no brainer and could hold the key to proving your right of substitution and therefore your outside IR35 status.
This article was written by Ben Clark, CEO of The Sub Bench, which is a new concept that helps contractors legitimately promote their outside IR35 status. To learn more about how this service helps remove the notion of personal service, please click here.