IR35 Factor Right of Substitution Now Being Turned Against Contractors

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IR35 Factor Right of Substitution
IR35 Factor Right of Substitution

IR35 Factor Right of Substitution

It looks as if major IR35 Factor right of substitution is now being used against contractors.

That’s currently in the public sector but the Government may roll out their IR35 changes to the private sector too.

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Contractors Future may be different.

This is all down to two things.

Firstly there is HMRC’s new online IR35 Employment Status test.

Secondly, there is the involvement of the HR department in the answers to this test.

Putting Right of Substitution in Contracts

The right of substitution is one of the three major factors which determine a contractor’s IR35 status.

The others are Supervision, Direction and Control and Mutuality of Onbligation.

Contractors often put IR35 factor right of substitution in their contracts.

This means that if ever the contractor can’t come in to work he, or she, can send a deputy to substitute for them.

The client would have to agree to this deputy coming in.

Right of Substitution a Complete Sham

Of couse, it is a complete sham.

How this ever became a major IR35 factor is astonishing.

How this is a test for a contractor being in business on their own account is completely ridiculous.

Surely the more irreplaceable you are the more you are likely to be in business on your own account.

If your skills are ten a penny surely that would be more likely to make you a disguised employee.

It should be the other way around.

However, one must play by the rules set.

Sending a Substitute for Contractor

So, contractors put it in their contracts that they will send a substitute if they can’t come in themselves.

Clients go along with this knowing that they can veto any substitute.

Of course, this is never invoked.

HMRC Test Case

In one test case HMRC argued that this was a sham in one contractor’s contract.

They said the substitute would never be used.

However, the judge ruled that they didn’t know that.

They would only know that if the contractor couldn’t come in, the client wanted a substitute and the contractor couldn’t provide one.

Otherwise HMRC would have to accept the contract in good faith.

They would have to have some good reason for believing that this clause is a sham.

Victory for Contractors Over HMRC

So, any contractor could put the right of substitution in his or her contract and HMRC would have to accept it in good faith.

Strike one up to contractors.

That’s one of the three major IR35 factors in the bag.

HMRC must have been frothing at the mouth over that one.

Government’s New IR35 Rules

However, the Government’s new IR35 changes now mean that this will count against contractors.

Why?

Let’s give a recent example.

Five contractors in one of the NHS trusts were told to take HMRC’s new online IR35 Self Employment test together.

The argument was that they were all doing the same job.

Manager and Woman from HR

By their sides as they did the test were their manager and the woman from HR.

For any question where there was disagreement a majority vote was taken.

The contractors said that they had the right of substitution in their contracts.

Their manager was happy enough to go along with this.

However, the woman from HR said No.

She said that the company would never accept any substitutes.

So, they had to enter that they had no right of substitution.

Monitoring Contractors Doing IR35 Test

As clients now have to decide the IR35 status of contractors they will want to monitor what answers contractors enter in the test.

So, hardly any clients will agree that there is an IR35 factor right of substitution in their agreements with contractors.

So, what was previously a plus for contractors is now a negative.

Of course, this is only in the public sector so far.

Government IR35 Changes in Private Sector

However, there are indications that the Government want to roll this out in the private sector too in 12 months time.

One feels that the end game for the Government is that virtually all contractors will eventually have to pay the IR35 tax.

Chancellor Hammond said in his budget that it is not fair that a self employed person on £100,000 a year should pay less tax and national insurance than a permanent employee on £100,000 a year.

He said that this is an anomaly that he intends to fix.

So far, he has only fixed it in the public sector.

Unless one believes that he and Prime Minister May believe that this is only unfair in the public sector then I would suggest this means he intends to roll it out in the private sector too.

Watch Matthew Taylor’s report on Self Employment in June.

Watch also the Autumn statement where the Chancellor has to cure a £2bn hole in his budget because he aborted the national insurance rise for contractors.

Whom do you think he will try to claw it back from?

Contractor Services

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If you do need an umbrella company you could try one of the following:-

Simply Umbrella

Public Sector Umbrella Company

For Mortgages specially designed for contractors try Specialist Contractor Mortgages.

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