IR35 – Strengthening Your Right of Substitution

Substitution is considered a key HMRC test in determining IR35 status and is probably one of the most discussed and misunderstood issues in the contracting community.

Whilst some are happy simply with a written clause in their agency contract, most contractors feel something a little more ‘solid’ is required in order to prove their right of substitution is genuine. In this article, IR35 expert Becci Hicklin provides a simple solution; three steps a contractor can take to improve their right of substitution.

Having a compliant right of Substitution (ROS) clause within the agency contract is worthless if this is not recognised in reality. Therefore, the first step to take in improving your ROS would be to have a Confirmation of Arrangements (COA) document in place. This is a letter from your limited company to your end client, clearly outlining your actual working arrangements.

In our experience, some agency contracts do not reflect the reality of the relationship a contractor may have with their end client; therefore having this documented and signed separately from your agency terms and conditions is most definitely a benefit. In the event of an investigation, HMRC will almost certainly go directly to your end client for confirmation of your IR35 status. It is at this stage that the COA would be used to demonstrate to HMRC your working relationship was outside of IR35 and your end client fully recognised you as contractor with a right to provide a substitute. Two points can be gained in HMRC’s Business Entity Test for having such a right.

The COA can be downloaded from Qdos Contractor’s website here. Please ensure the document is checked by an IR35 expert before it is signed by your client.

Once you and your client have documented your right of substitution, along with other key areas of IR35, the next step in improving your ROS would be to actually find a substitute.

Some contractors may have a colleague or friend of equivalent skill and expertise that they could utilise. However, for a lot of one-man-band limited companies, actually finding alternative personnel can be difficult. This doesn’t have to be too much of a cause for concern, as due to an increase in contractor websites and forums, finding a qualified contractor in your area is simply a click away.

Contacting other contractors and gathering your own network of individuals whom you can build a trustworthy relationship with will undoubtedly make exercising your right of substitution easier. However, do not fall under the false pretence that simply having a name is fool proof, as this will not guarantee you the 20 Business Entity Test points for ‘actual substitution’ – please read this article for more about this. Also see the ‘Substitution Buddy’ section of IR35Buddy, which gives access to a network of potential replacements.

The final and most water tight demonstration that your right of substitution is genuine, is to actually do it. Although HMRC’s own manual states “It is the right to provide a substitute that is important, not whether that right is exercised” (ESM0530) – actually exercising your right is a solid indication that personal service is not a requirement. In HMRC’s Business Entity Test, 20 points can be gained for exercising your right of substitution; putting you at ‘low risk’. There is no minimum period of time you are to use a substitute for, only the stipulation that it is to be within 24 months. Therefore, exercising your right of substitution for one day in a 2 year period is enough to pass this key test.

Overall, substitution does not need to cause a contractor a headache. Just spending a little extra time to research your options, prepare in advance and document as you go is enough to strengthen your ROS position.


  • Steve says:

    Hello, thanks for the informative article. One thing I have always wondered…Within the banking industry, even though a contract may have a RoS clause, in reality no-one (contractor, Professional services consultant, or employee) can gain access to any systems without Background and Credit checks, signing security agreements, as well as all the lead time required for IT to add them as a user, meaning the RoS is not a short-term thing, nor can it be on a moment’s notice. As far as I know, this is an industry wide requirement, and the checks are even stricter when working for a Clearing House, for example. How does / has the HMRC view(ed) such security requirements? Is the bank I work at different to most?

  • Kate says:

    Hi Steve,

    I would say this is pretty much the same for most banks. The fact that any substitute would have to be security cleared is likely to diminish your right to provide a substitute. However this doesn’t mean that a genuine right doesn’t exist and you may still be able to to exercise such a right. For example if you had a holiday planned and were able to get the substitute security cleared before you went away.

  • Steve G says:

    Absolutely spot on steve – my thoughts exactly. There isnt a contractor I know that could simply whistle in a complete stranger to a company on a whim and there is no client that would sign any separate piece of paper. Its the same with providing your own computer equipment – what, like a window cleaner provides his own bucket!! The IT industry simply doesnt work that way – the whole thing is a joke.

  • Chris says:

    The whole article misses the point ENTIRELY (as usual with these so-called experts).

    This isn’t about doing a paper round, it’s a long-term ongoing project so there is no suggestion that anyone will substitute for a day, or even while you’re on holiday.

    The time that substitution becomes a reality is when a contractor decides to put someone else in for a fairly long time, possibly the remainder of the project/programme.

    It also needs to be noted that most one man band companies would only do this in a combination of unusual circumstances:

    1. If another role came up that was more lucrative

    2. The location was better
    3. They can find a substitute that will do the work for much less than they were being paid

    The last is important – if you can’t do that then you just get out of the contract and let the client find someone else (because it’s the commercially sensible option – no profit, no point).

    So RoS is a neutral thing, it doesn’t point either way.

    And as others have pointed out, it’s also about as relevant to IT work (or most other one man band operations) as ashtrays are to motorbikes.

    But when they’re trying to prove that firms are something that doesn’t really exist… they need to clutch at straws. The best that contractors do is to keep the straws out of reach by knocking down their stupid illogical non-arguments one at a time, and time after time.

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