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.