Can simply naming a substitute gain maximum points under the business entity tests?
Where a contractor is able to score more than 20 points under HMRC’s business entity tests (BETs) and are able to provide satisfactory evidence to support their score then they will be considered low risk and provided a freelancer’s working arrangements do not change, then the Revenue guarantee to leave a contractor alone for the next three years in respect of IR35 matters.
The ‘Actual Substitution’ test is worth a whopping 20 points but can this be passed without having to physically send along a replacement in the contractor’s place?
This test asks whether the contractor has hired anyone in the last 24 months to do the work in their place either by sending a replacement worker or by sub-contracting the work. The responsibility for both the work and for paying the hired hand must remain that of the contractor.
A single paragraph contained within the test however might seem to suggest there is an alternative to physically appointing a substitute, i.e., ‘You can still pass this test if you had to tell your end client the name of the person who would be doing the work you took on’. This has to be put into context and not read in isolation because the evidence that is required by HMRC to satisfy the test makes it clear that actual substitution must take place to secure the 20 points, namely:
- Details of end client;
- Details of who was hired;
- Details of why the substitute was hired;
- Details of who was responsible for finding the substitute;
- Details of who was responsible for paying the substitute;
- Payment terms; and
- Audit trail of payment from end client to intermediary and from intermediary to substitute.
Furthermore there is a separate test surrounding the ‘Right of Substitution‘ which only scores 2 points and which would be more suited to the simple provision of named substitute(s) who could be called upon in a contractor’s hour of need.
Where it is possible for a freelancer to engage a substitute they only need to do it once in the last 24 months to score the 20 points as the test does not stipulate a minimum number of times a replacement worker has to be used.