There seems to me much misunderstanding about the importance
and relevance of ‘rights of substitution’; in this article I’d like to try and
clarify the position.
"A contract of
service exists if these three conditions are fulfilled.
(i) The servant agrees that, in
consideration of a wage or other remuneration, he will provide his own work and
skill in the performance of some service for his master.
(ii)
He agrees, expressly
or impliedly, that in the performance of that service he will be subject to the
other's control in a sufficient degree to make that other master.
(iii)
The other provisions
of the contract are consistent with its being a contract of service.' (Ready Mixed Concrete South East Limited v
Minister of Pensions and National Insurance 1968)
- and that if even one of those preconditions is not
satisfied, then the relationship cannot as a matter of law be employment - however the other
factors may point. The 'irreducible minimum'.
It is only after it becomes clear that that irreducible minimum is
satisfied that one can move on to 'paint the picture', and consider all the
other factors listed as 'pointers' by the Revenue in their guidance notes.
1 not only will the claimed right of
substitution not have the desired effect of taking the contractor outside
IR35, but
2 the very existence of a 'sham' term in
the contract will cast doubt on the validity of the other potentially IR35
helpful terms in the contract.
Thus it can
be dangerous to include a right of substitution in a contract where that right
is not in fact realistic or valid, since the presence of a 'sham' term can
itself have IR35 negative effects.
It seems to me that in this industry
there are generally four possibilities:
1 the situation is one where there can
indeed be a genuine right of
substitution - in which case such a right should where practicable be
negotiated into the contract, with the result of taking the hypothetical
contract outside IR35, because it will then fail to meet the ‘irreducible
minimum'
2 the contract has been entered with a
view to securing the specific expert
services of one individual - in which case, an apparent right of
substitution would clearly be a ' sham' and therefore potentially damaging from
an IR35 point of view. Here, the better
approach is probably to expressly state that the contract is entered to secure
the named individual's expert services, which of itself, whilst not
automatically lifting the contract outside IR35, can nevertheless be a strong
non-employment pointer, and wholly consistent with the contract having been
entered in the course of the contractor’s own independent business
3 once
the individual has commenced working under the contract, the knowledge that he or she will gain of the
project will then make the individual indispensable for the remainder of
the project duration. This possibility
was expressly recognized in the judgment in the PCG judicial review case, in
which the judge said
'Again so far as computer services are
concerned, the Claimants are concerned that, in practice, at any rate once a
service contractor has commenced work at the client's premises on his
equipment, his expertise will become such that no one else in fact would be
able to replace him. Given that the issue is not determinative, but only one of
the factors, that may indeed be right and may in a
particular engagement be a strong counter-indicator against employment.
4 the
contract requires the personal services of the individual for some other reason - not likely to be
particularly helpful from an IR35 point of view
Thus when
choosing the desired approach to the issue of substitution in a contract –
whether direct, or through an agency, to achieve the most helpful IR35 results,
it is important to consider the extent to which the presence of such a right is
in fact realistic, and to frame the contract accordingly.
The
following additional points should be borne in mind:
1
the
fact that a client may have a right to refuse a proposed substitute is not
necessarily fatal to a right of substitution, provided that refusal is
on grounds which are objectively reasonable - but if the client doesn’t have to
justify such a refusal in this way, then in reality the right is likely not to
be a ‘right’ of substitution at all, and no more than a right to propose
a substitute.
2
It
is important that the responsibility for sourcing and paying the substitute,
and for the actual work done by the substitute, remain with the original
contractor.
3
A
contractual obligation to provide a substitute (eg to provide continuity of
service when the original individual is unavailable) may be just as effective
as a right
of substitution
4
A
right to assign the contract to another contractor (ie to make a permanent
change) is not the same thing as a right to substitute – and may not necessarily
have the same effects.
5
The
lack of a right to substitute – whatever the reason - does not automatically
make the contract ‘employment-type’ – it simply means that one of the three
elements of the ‘irreducible minimum’ is satisfied; when painting the picture, the lack of the
right may be an employment pointer; a non-employment pointer; or simply neutral. It all depends.
I'd really appreciate your feedback on this FAQ - so mail me and tell me what you think of it, if it's been useful to you, or let me know of any specific problem you have where I may be able to help.
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