Substitution is arguably one of the more key factors which HMRC look out for when conducting an IR35 investigation, to see if an employee should be self-employed or an employee of the employer.
Before we go delve into the world of substitution, it’s important to firstly define what it is. Simply put, the right of substitution looks into how easily a worker can be substituted for another individual who can provide the same level of services, or how easily they can complete the assignment.
The worker must be able to demonstrate that the employer doesn’t require them personally to deliver a service, and that any other worker could replace them. If the worker cannot be substituted, they could be argued to be providing a ‘personal service’ to the client and therefore a direct employee.
Kate is a developer. She is hired to create an app for a pharmaceutical company. Kate works from home and builds the app when she can but has a deadline to meet. Kate can easily be switched out for any other developer.
Hanna is a developer. She is hired to create an app for a pharmaceutical company over a 12-month period. Hanna works from home and builds the app when she can and is also required to pick up extra work from the company as required. Hanna cannot easily be switched out for any other developer.
What counts as a genuine substitute?
A substitute does not necessarily have to be an employee of the limited company, or the employer – it could be anyone the contractor may know with the same skills, or someone sourced via an external agency. However, for the substitution to be genuine, the contractor must remain liable for all costs associated with the substitute. The employer will pay the limited company as normal and the limited company will then pay the substitute.
As a result of this, it’s crucial those wishing to remain outside of IR35 include this in their contracts. For this to be valid, the following aspects must be agreed:
- The client must agree
- The worker must pay for the substitute
- The client cannot vet any replacement