> I'm an IT contractor working
through my Limited Company, through an
> agency, providing services to
an end-client.
>
> My contract with the agency has
a clause allowing substitution with the
> client's approval. In other words the right of substitution is
> fettered, and as I understand
it the Revenue will see this (rightly or wrongly)
> as not a right to substitute
at all.
As usual, what we need to do is to
start from first principles.
1 The
IR35 question is whether where
‘(a) an
individual ("the worker") personally performs, or is under an
obligation personally to perform, services for the purposes of a business
carried on by another person ("the client"),’.
(c) the
circumstances are such that, if the services were provided under a contract
directly between the client and the worker, the worker would be regarded for
income tax purposes as an employee of the client.’
(From
Finance Act 2000, Schedule 12, para 1)
The obligation to provide personal service is an element of the
'irreducible minima' required to constitute a contract of service (ie an
employment relationship) –
'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. [1]
And if that obligation is not
present, then the relationship cannot
be of the employment type.
An obligation
to provide services personally is one of the essential requirements for an
employment relationship. There are also
other essential requirements, but for the moment we will stick with this one. If you can show that this essential
requirement is missing, then the relationship could not be employment – and so
other considerations may adopt far less relevance from an IR35 viewpoint.
Thus the
objective is to demonstrate that there is no obligation to provide the
services personally.
The reason
why substitution is seen by many as of such fundamental importance is that
right on the part of the contractor to substitute is incompatible with a
requirement to provide services personally.
It therefore follows that if there is a right to substitute, there
cannot be a requirement for the Contractor to provide the services
personally; and as a consequence of
that, the relationship could not be employment.
So Hey Presto!, we need look no further, are outside IR35.
2
The question then becomes one of whether or not the
contract terms permit the individual to decide whether to perform the
services (or any significant part of them) himself, or to have another do
so. If they do so permit him, then that
undermines any suggestion that there is an obligation to perform them
personally.
Where that
right to decide is absolute, then we are probably home and dry. It must still be implicit that the substitute
has the necessary skills etc to perform the services however, even if not
expressly stated.
It
therefore follows (and this is supported by case law) that a right reserved to
the client to first approve a substitute may not necessarily undermine the
principle that the individual has the right to decide.
In Express and Echo
Publications Ltd v Tanton [19991 ICR 693, although there was a right for the
delivery driver to arrange
"at his own expense
entirely for another suitable person to perform the services",
(which was held to be a
crucial factor in deciding that the contract was not a contract of service),
nevertheless a proviso that in such event
"the contractor
must satisfy the company that such a relief driver is trained and is suitable
to undertake the services",
was not considered to
neutralise the point.
The
question of whether the right to substitute is in fact ‘fettered’ is relevant
to the more primary question of whether the Individual has the right to decide
– that being the real question which needs to be addressed.
If the Client
can refuse approval to a substitute only on reasonable grounds, relating to eg
skills and suitability, then the right remains (to my mind) substantially
unfettered. I’d need to see your
contract and to consider the apparent rights to substitution against the
background (1) of the contract as a whole, and (2) the real world situation,
before passing an opinion on your own position.
But I would not necessarily take for granted that a right is ‘fettered’
simply because the client’s approval is required.
3 The key point in all of
this remains whether or not there is an obligation to provide the services
personally – because if you can show that there is not such an obligation, then
there are features in the relationship for IR35 purposes which mean that,
whatever that relationship might be (were it direct), it could not be a
contract for services.
The
existence of a substantially unfettered right of substitution will generally
demonstrate the absence of an obligation to provide the services personally –
and thus achieve this end objective.
> I have gained approval from
the client to use a substitute and the
> agency are happy with this to
take place. For the days when
substitution takes
> place, I will get my
timesheet signed as if it were me in the office.
> The substitute will not get
anything signed by my client. The
substitute's
> Limited Company will invoice
my Limited Company and payment will be made
> according to the agreement
between the two companies - we are using the
> PCG Direct Client - Supplier
contract (the substitute will not be an
> employee of my company).
>
> My question is this:
>
> Does the fact that actual
substitution has taken place, regardless of
> the form of the substitution
clause in my contract, take the contract out of
> IR35? I believe the answer is yes, as the fact that
the client is
> allowing a person to perform
my duties in my place, under existing contractual
> arrangements, must mean that
I am not "obliged to personally perform the
> services".
Actual exercise of a right of
substitution (where the substitute is paid by you, and you remain responsible
for the substitute’s work) is the best proof that the apparent right in the
agency-contractor contract is in fact genuine – something about which the IR
are often suspicious.
And (as I think you will see from
the above) the wording of the substitution clause is a means to an end, rather
than an end on itself. Indeed, if you
actually substitute, that should be sufficient – regardless of what the contract
says on the subject.
> Also, if an extension to the
contract is negotiated, under exactly the
> same contractual terms, will
this be outside IR35 as well, i.e. does the
> client consent for the
substitute carry forward into the extension?
The real question is whether or
not the right for you to decide continues – and thus continues to negative the
question of any obligation to perform the services personally.
If it is in effect a variation to
the existing contract, then that should follow.
If on the other hand it is a fresh contract (as is generally the case),
then the question needs to be asked afresh – and although (in the absence of
anything to the contrary) there may be strong grounds for suggesting that this
consent carries forward, it would be wise to get express written agreement to
that fact.
30th
November 2001
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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