IR35 - Substitution with freelancers/sub-contractors and working from home

[jamesbrown]

I think you are both actually right. There is no single answer as it's highly dependant on the engagement with the client, the work and whether you are looking at it from a tax law perspective or just doing business. It also depends if you are a running a true B2B contract or just a bunch of bodies grabbing work. Arguing over the semantics isn't that helpful. Applying it when the a situation occurs is a better way to define which it is.

This article helps understand the two sides to it but both are complex and apply to a situation rather than making a one paragraph distinction.

Substitution is covered by the case law from the Pimlico case and cleverly mentions the precise details of the contract but does appear to cover taking over work from the contractor. It also covers subcontracting later down the article and mentions some criteria i.e. needing extra skills.

IMO that's as close to a differentiation between substitution and subcontracting at a high level as you need so for the sake of the argument it's easier to consider substitution as taking over given work and subcontracting providing extra help. If we work on those principles it's easier to understand.

Both have strong pointers to outside IR35 but clearly sending a substitute to do the whole thing is much better. The IR35 thing isn't really worth arguing though as IR35 shouldn't apply if the OP is going to do a proper job of it.

I don't think it's worth using the OP's post as a basis to discuss the distinction as they don't know the basics between the two which means they won't be able to provide a proper business model. Swapping resources in a true B2B isn't substitution so if the OP is going down this way his basic managed service model will be so flawed it won't really be a managed service model. It will be a couple of bodies hoovering up some work as I said. If he does it right then he won't need to understand the distinctions as one won't exist and the reason for demonstrating them won't be a factor either.

Substitution is an IR35 concept. Subcontracting and assignment are routine B2B contracting concepts. The only value in substitution is to demonstrate a lack of personal service, literally by substituting you-person for a.n.other-person who performs the work that you would otherwise have performed. In terms of IR35, the case law test is whether there is a genuine right of substitution that is not unreasonably fettered, so it doesn't actually matter whether a substitution has occurred, it is the right.

Mal and I cannot both be correct because we are asserting contradictory things. Mal is asserting that a substitution involves "taking over the contract in its entirety". I am asserting that this is false.

[northernladuk]

Substitution is an IR35 concept. Subcontracting and assignment are routine B2B contracting concepts. The only value in substitution is to demonstrate a lack of personal service, literally by substituting you-person for a.n.other-person who performs the work that you would otherwise have performed. In terms of IR35, the case law test is whether there is a genuine right of substitution that is not unreasonably fettered, so it doesn't actually matter whether a substitution has occurred, it is the right.

Yeah no problems with that but that line needs to be emphasised. Genuine right is key. That isn't the case for a vast majority of our contracts where it's just stuck in there to make it IR35 friendly. There are cases where the clause has been disregarded as a sham, Autoclenz, Redrow and I'm sure there was a contractor related one I think. IMO the right to do so is still not very good defence should the worst happen. You'll have to prove it's genuine which most don't.
It's also called out in the page below
https://www.gov.uk/hmrc-internal-man...manual/esm8565

Mal and I cannot both be correct because we are asserting contradictory things. Mal is asserting that a substitution involves "taking over the contract in its entirety". I am asserting that this is false.

You are both correct depending on the situation I think. Mal is correct for most of our standard one man contracts as a fair basis for most of us. It has also been used as the yardstick in the Pimlico case and others. Granted it does mention in one of the articles it's the simplistic archaic view which fits your average contractor situation so can take this definition and it fits. You are right when the reality of a decent engagement is different but the difference only becomes an issue for more switched on contractors in a situation that they need to differentiate the two i.e. they can substitute and subcontract.

[jamesbrown]

Actually, HMRC won't even take an evidenced substitution at face value, so that isn't a silver bullet (for example, they will quite rightly want to know whether the client even knew about it, especially in this new home working era ). Anyway, providing the right isn't unreasonably fettered (e.g., by requiring that the contractor is incapacitated before they can invoke it), then a short period of substitution (e.g., because the contractor decided that they wanted to work on something else) is perfectly valid and is clearly contrary to the idea that the entire contract needs to be completed by the sub

[northernladuk]

Actually, HMRC won't even take an evidenced substitution at face value, so that isn't a silver bullet (for example, they will quite rightly want to know whether the client even knew about it, especially in this new home working era ). Anyway, providing the right isn't unreasonably fettered (e.g., by requiring that the contractor is incapacitated before they can invoke it), then a short period of substitution (e.g., because the contractor decided that they wanted to work on something else) is perfectly valid and is clearly contrary to the idea that the entire contract needs to be completed by the sub

Yep. That said it would be interesting to see what would happen to these situations where someone sub'd for a day or a week just to get a tick in the box got to court as you say. We've seen all the ideas on here, subbing and existing contractor on site, random sub buddy and all the other suggestions. I'd imagine although the contractor thinks they've done it the courts would look at training up, work done and client attitude and still decide it's not valid. It would be useful to see a case to know what bar is set to show true substitution.

I do believe most people don't understand what substituting really is. We see loads of posts about a contractor wanting to leave a gig early and one response is to send a sub in. Have a week off hols and send someone in etc.. No thought for training up at own time and cost, hand over, introductions and the like so there is true seamless substitution.

Guess we will never know now and have to consign this to the 'I wonder what if' pile.

[jamesbrown]

A judge will always look through a sham, for sure. This is both the strength and weakness of IR35 (for both parties). Assuming it isn't a sham, it doesn't matter whether it's a short or long arrangement.