Why Contractors Right Of Substitution Crazy as a Major IR35 Factor

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Right of Substitution for IR35 Tax
Right of Substitution for Contractors for IR35 Tax

Contractors Right of Substitution Crazy

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Contractors right of substitution is absolutely crazy as an IR35 factor and we will explain why.

We’ve already shown why Control is Crazy as an IR35 Factor.

Now we turn to why contractors Right of Substitution is a crazy idea as an IR35 factor.

HMRC are fond of taking examples of people who are inside or outside IR35 to illustrate who is inside IR35 and who is outside IR35.

We did the same with the Control article and will do so again here.

Experienced Systems Architect

Take the fictional company (we think) SwishBox again.

They have been lucky enough to find Tom. He is a highly knowledgeable Systems Architect, with business knowledge of many simliar companies to SwishBox.

He knows not only how to design computer systems but knows their business inside out. This is from previous experience with other, rival companies to their’s.

Bum-On-Seat Contractor

Then there’s Harry.

This is only Harry’s second ever contract.

He knows the programming language that they use but not much else.

He has never worked at a similar company to SwishBox and doesn’t know their business at all.

Irreplaceable Systems Architect

With his business and systems knowledge, they brought Tom in to design both the system and the architecture surrounding it.

They brought Harry in to knock out a few programmes using the skill, or programming language, that they use at SwishBox, which he knows.

Both would like to use Limited Companies rather than pay the IR35 tax or use umbrella companies.

Adding Right of Substitution to Contract

Harry goes in to see the boss, Dick, so that he can negotiate the Right of Substitution to be in his contract. This will help him to stay outside IR35.

Harry has a number of contractors that he knows with the same programming language that he has. Some of them out of work.

He explains to Dick that he would trigger the Right of Substitution only in an emergency. Say, if Harry got an injury or illness and couldn’t work for a few weeks or months.

Harry explained to Dick that these guys knew the same programming language as he did. They would quickly be up to speed if they had to take over from him.

This right of substitution would mean that they would not compromise Dick’s project schedules if Harry was off for any length of time.

Agreement on Right of Substitution Clause

They agreed on this. Dick was happy to sign off on the new contract containing the right of substitution clause for Harry.

Harry was delighted.

As he passed many of the other IR35 factors he could now use a limited company rather than pay the IR35 tax.

That would save him a lot of money over a year.

He told Tom about this.

Contractor wants Right of Substitution Clause

Tom was worried about his IR35 status so decided that the would like to add a contractors Right of Substitution to his contract.

However, there are not many people on the marketplace with Tom’s skills and business knowledge of the area of business that SwishBox are in.

Indeed, Tom knew none at all who were able to operate at his level of skills and systems and business knowledge.

He knew one or two contractors who could ‘do a job’. However, it would not be with the same high degree of skills and insight that he could.

However, Tom, a relatively junior devekoper on just his second contract after just 18 months as a permanent IT employee He was able to get the right of substitution in his contract.

Right of Substitution Clause Turned Down

So,  Tom went in to see Dick.

Dick wasn’t having it al all.

Tom was irreplacable.

Tom had said, himself, that he could not substitute himself with anyone near his level of skills and systems and business knowledge that he had.

If Tom did have to be off for a few weeks, SwishBox would have to  work round that till he came back. That’s even if it meant delaying the project.

If he was off for longer than that they would have to go back into the market to find someone as close as they could get to Tom’s skills, although they knew that they could get no one with Tom’s skills and knowledge as they had already tried when they hired Tom.

Irreplaceable Contractor a Disguised Employee

Tom was as irreplaceable as you could get.

So, Dick refused to give Tom the right of substitution clause in his contract.

So, who would you say was more of a genuine career contractor – Tom or Harry?

Yet Tom could not get the Right of Substitution into his contract and Harry could.

Under this measure, amyway, Tom would be more likely to get a classification as a ‘disguised employee’ than bum-on-seat contractor Harry.

Topsy Turvy IR35 World

It seems that the more replaceable you are, under the Right of Substitution test, the less they think of you as a disguised employee.

Also, the more irreplaceable you are the more you would be seen by HMRC as a disguised employee.

Was Tom really a disguised employee because there was no one in the marketplace with his level of skills and business knowledge?

Was Harry really counted out as a disguised employee because his skills were ten-a-penny and he was very easily replaceable?

Under the Right of Substitution, which is one of the three major IR35 factors, along with Control and Mutuality of Obligation, this is correct.

Unique Skills and Business Knowledge

Surely it should be the other way around.

The more that a contractor is irreplaceble because of his, or her, unique combination of skills and business knowledge, the more they should see him as a genuine career contractor.

The more easily that you can replace a contractor with another contractor, surely, should make that contractor more likely to be seen as a disguised employee.

Yet it is the other way around.

That’s just crazy isn’t it?

It’s a contractors Right of Substitution which is a crazy idea. It penalises irreplaceable long term career contractors.

It’s just another example of the mad, mad IR35 world in which contractors have to operate.

See also Outside IR35 – Eighteen ways Contractors Can Stay Outside IR35.

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