Right of Substitution
One of three major factors that decide whether you are inside IR35 or outside IR35 is the Right of Substitution.
This is where you can have in your contract that you can supply a substitute to do your job, or fulfill your contract, instead of you if you are not able to do it yourself.
Your Unique Skills and Knowledge Put You Inside IR35
To me, this is completely crazy.
Surely, the less easily that you are able to supply someone who could easily take over from you, the more your skills and knowledge are unique to you. That should differentiate you from the common or garden permie and put you outside IR35.
However, the anomaly is that, the more easily replaceable you are, the more you are likely to be outside IR35.
Bums on Seats Contractors
It means that what IPSE (ex-PCG) once called disparagingly, the ‘bums on seats’ contractors, who have the same skills and knowledge as permies and other contractors not at the company, are more likely to be outside IR35 than those who have unique, irreplaceable skills and business and systems knowledge.
This is the crazy game we are in – but it is the crazy game that we must play.
We know the rules – so let’s play this crazy game according to their rules.
Subsitution Clause in Your Contract
What you must do is to have a clause in your contract that says that you can supply a substitute who can, potentially, take over your job if you are unable to do it.
You can find a friend, or ex-colleague at another site where you worled as a contractor, that you can make as a substitute in your contract.
You can reciprocate by allowing him, or her, to name you in the right of substitution clause in their contract with a different client.
Right of Substitution Unlikely to be Triggered
You don’t have to worry about ever getting them to do it.
Firstly, the client is unlikely to allow this.
It is not easy for someone to come into a company, without knowing their systems and their business, and just pick up where a Contractor left off. That’s especially for the short time off work that illnesses or holidays usually are for contractors.
So, client’s are extremely unlikely to allow it – whatever it says in your contract with them.
Right of Substitution Clause legal and not a Sham
Secondly, HMRC can’t prove that the right of substitution isn’t valid in your contract just because you’ve never triggered it.
This must be very frustrating for them. However, a court upheld the principle.
The judge ruled against them. The ruling was that just because the the client never triggered the right of substitution, which was in an IT Contractor’s contract, didn’t mean that it was a sham.
For it to be proved to be a sham there would have had to have been an opportunity to trigger it. This wasn’t used.
Even in a case like that you could argue that you were happy to provide a substitute. However, it ws the client who vetoed it.
Three Major IR35 Factors for Cntractors
So, there we are – that’s the Right of Substitution catered for. And that’s one of the three major IR35 Factors along with Control and Mutuality of Obligation.
IT Contractors shouldn’t concern themselves with the rights or wrongs of it and how ridiculous the rules of IR35 are.
They should simply play the system, as HMRC do, and make it play in their favour.
So, if you have the right of substitution in your contract, you have fulfilled one of the three major IR35 factors. So, HMRC can’t legally prove, to the satisfaction of a judge, that your contract clause is s sham.
IR35 Insurance for Contractors
To find out more about how to insure yourself against an IR35 investigation, which could take years, and potentially cost you tens of thousands in back taxes, you should click on IR35 Insurance for Contractors
It doesn’t cost too much and you can sleep more easily in your bed at night.
Chalk one up to you!