IR35 – Personal Service and Substitutions

When considering IR35 -for there to be a contract of employment in place, there are three main elements that need to be present.  These are:

• Control – There must be control over the manner in which the contract work is completed.
• Mutuality of obligation – there must be a mutual obligation between the parties for one to offer work and an obligation for the other party to accept it and carry it out.
• The third element is personal service.

IR35 Personal Service and Substitutions in more detail:

Is the contractor required to carry out the work by their own hand or can they send a substitute in their place to carry out the work?  A person who is directly employed would be expected to give their personal service in working under of contract of service.  A self-employed contractor, be it a PSC Limited company, sole trader or a partnership works to provide services under a contract for services.  If there is a valid substitution clause in your contract, then you will not be a disguised employee and be caught by the IR35 Legislation.

Many contracts will have a substitution clause in them but in reality the client really wants the named individual to do the work and would not accept another person in their place.  It always has to be remembered that a sham contract clause will not beat an HMRC investigation.

If the contract has an external right of substitution, this would carry slightly more weight than an internal one.  An external right of substitution allows the company, which is a separate legal entity, to send someone in its place to carry out the work.  Internal rights of substitution allow a company to swap one employee for another.  For the majority of PSC contractors an internal substitution clause would be meaningless as there is only one employee in the company.

Where a substitute is sent, the original contract remains in place and the client will continue to make payments to the original contractor.  The contractor will remunerate the substitute.

When looking at the contracts of highly skilled contractors, it is less likely that a substitute would be allowed, regardless of what the contract might state, personal service is more likely to be required.  This does not mean there is a contract or service as all the other factors need to be reviewed.  A highly skilled person is perhaps less likely to be controlled as to the manner of how the work is carried out.

Do you have to have sent a substitute?

The judgement when it comes to personal service is, do you have the unfettered right to send someone in your place to carry out the work.  It does not matter if the right has been exercised, a valid right to substitute will mean you are not a disguised employee.

A substitution clause can be fettered in a contract which the Courts look at as not being a genuine right to substitute.  This might be where written consent is required prior to someone else being sent along.  The contract might require a handover period which would also fetter a genuine substitution right.   If a substitute without the relevant skills and experience can be refused, this would not fetter a substitution clause.  Having the ability to carry out the contract work would surely be a prerequisite for any substitute.

If you are concerned about IR35 and the new private sector rules due to come into place 6 April 2020. Contact me to get your contract reviewed.