Sub-contracting vs substitution

[Wanderer]

Sub-contracting is not substitution. There's nothing to stop you sub-contracting part (or even all) of your work. It won't make any difference to an IR35 case...

That is completely wrong. Read HMRC's IR35 guidance and tell us what part of it you don't understand..

In particular, pay attention to the "Actual Substitution" test which states "You could do this by sending someone to do the work in your place. You could also do this by sub-contracting." If the contractor passes this test and presuming the contractor doesn't fail the "Previous PAYE test" then they automatically score at least 20 points and will be put into the 'low risk' category meaning that HMRC will close the review and move on to the next case.

[malvolio]

That is completely wrong. Read HMRC's IR35 guidance and tell us what part of it you don't understand..

In particular, pay attention to the "Actual Substitution" test which states "You could do this by sending someone to do the work in your place. You could also do this by sub-contracting." If the contractor passes this test and presuming the contractor doesn't fail the "Previous PAYE test" then they automatically score at least 20 points and will be put into the 'low risk' category meaning that HMRC will close the review and move on to the next case.

Ermm... none of it?

"Won't make a difference" as in "exactly the same result"....?

[Wanderer]

To quote the full text:

There's nothing to stop you sub-contracting part (or even all) of your work. It won't make any difference to an IR35 case though since employees can do the same: after all, your line manager does it all the time...

Your suggestion was that sub-contracting is NOT a pointer to being outside IR35 as "employees can do the same". You even followed up, trying to make that point. There are two possibilities here, you were completely wrong or you were trolling. If you make a mistake, then just admit it, correct it and move on. Don't go digging yourself deeper into the hole. If you were trolling, then just go away because this is a serious discussion.

"Won't make a difference" as in "exactly the same result"....?

Nice try but you have failed "basics of fereelancing #101", sir. I hereby sentence you to re-read the 47 page Business entity tests from HMRC and we will have a test on this later.

[Murder1]

This is indeed very interesting, as Wanderer points out with it being detailed on the HMRC's IR35 test guidelines it's either a valid point (sub-contracting) or they've made a major b@lls up.

Hmm, so who wants to write me an SSIS package for £100?

[speling bee]

To quote the full text:



Your suggestion was that sub-contracting is NOT a pointer to being outside IR35 as "employees can do the same". You even followed up, trying to make that point. There are two possibilities here, you were completely wrong or you were trolling. If you make a mistake, then just admit it, correct it and move on. Don't go digging yourself deeper into the hole. If you were trolling, then just go away because this is a serious discussion.



Nice try but you have failed "basics of fereelancing #101", sir. I hereby sentence you to re-read the 47 page Business entity tests from HMRC and we will have a test on this later.

I think you're being a bit unfair. Mal has his own style and talks a lot of sense, and gives his expertise for free - most of it I agree with and some of it I don't, but it's usually worth listneing to. I don't think he trolls and I',m not sure it's worth getting into 'Admit you're wrong', as that's not how an Internet forum works in my experience.

The point of asking this question is that I doubt that there is a right or wrong, but a range of opinions. I have reached the view that sub-contracting work (as long as it is not a sham to put yourself outside IR35) would be a very useful indicator for a contract being outside IR35, particularly if the client knows about it. If the client doesn't know, I can see it being of use as I suspect the tribunal would look at it and decide that this is not an action that an employee would take. Not sure how much weight they would put on this compared to other factors. Others may take a different view and we will not know until this gets tested either at an investigation or at a tribunal.

Now the business entity test states:

The Actual Substitution test
Test
Have you hired anyone in the last 24 months to do the work you have taken
on?

You could do this by sending someone to do the work in your place. You
could also do this by sub-contracting.

But your business has to remain responsible for the work and for paying the
person who does the work you have taken on.

You can still pass this test if you had to tell your end client the name of the
person who would be doing the work you took on.
Evidence
 Details of end client
 Details of who was hired
 Details of why the substitute was hired
 Details of who was responsible for finding the substitute
 Details of who was responsible for paying the substitute
 Payment terms
 Audit trail of payment from end client to intermediary and from intermediary
to substitute
Score
Score 20 points if your answer is Yes.

So 20 points for sub-contracting every 24 months makes it a slam dunk for low risk (as long as you don't pick up the minus points). Am I missing soemthing? I genuinely have more work than I can take on (3 day per week contract) and offers of smaller consultancy work. If I sub some of this work out whether or not the client knows, am I low risk? And am I therefore OK for whatever public sector horror awaits (OK, we don't have the details yet)?

[andrewb]

So 20 points for sub-contracting every 24 months makes it a slam dunk for low risk (as long as you don't pick up the minus points). Am I missing soemthing? I genuinely have more work than I can take on (3 day per week contract) and offers of smaller consultancy work. If I sub some of this work out whether or not the client knows, am I low risk? And am I therefore OK for whatever public sector horror awaits (OK, we don't have the details yet)?

Hmm. My end-of-project handover document needs proof reading. Clearly it makes business sense to deliver a quality product free from silly grammar and spelling errors (because I'd like future business) and it's notoriously hard to proof-read your own work because you end up reading what you thought you had written, or you don't know how to correctly spell the word you've spelled incorrectly, so it would make sense to get someone else to do it. I can't even decide whether proofreading is one word, or two, or takes a hyphen. Afterall, I do technical stuff so I cant be expected to spel rite. I think MyCo could pay for such a professional service in order that it can deliver the best result to its client.

Now, it'll cost some money... but it was going to take me some time to do it if I did it myself anyway, so this way I gain back some time... perhaps I can even deliver the project sooner... does this get me closer to passing the Efficiency test for an extra 10 points?


Ok, so proof-reading might not be a great example, but identifying something I do for MyCo for its clients that could be better done by having MyCo subcontract it out (so that it can be done to a higher quality, or in less time, or for less cost) sounds like good business sense anyway. So long as individual clients aren't going to get upset (eg regarding NDAs).

Or, to look at it a different way, there may be some pieces of work where MyCo shouldn't ask me to deliver them personally because I'm not the best person to do them.

[northernladuk]

So 20 points for sub-contracting every 24 months makes it a slam dunk for low risk (as long as you don't pick up the minus points). Am I missing soemthing? I genuinely have more work than I can take on (3 day per week contract) and offers of smaller consultancy work. If I sub some of this work out whether or not the client knows, am I low risk? And am I therefore OK for whatever public sector horror awaits (OK, we don't have the details yet)?

I just think this is so open to interpretation we will never get an answer. When I read the quote you put in I think the key line is the one before the bolded one. 'You could do this by sending someone to do the work in your place'. Not part of, or some of the work, or help you with the work... Sending someone to do the work in your place. That to me, and I strongly believe is in the spirit of what they are trying to get at, is a full substitution with a subcontractor.

I also think the line 'Have you hired anyone in the last 24 months to do the work you have taken
on?' backs this up. No comment about part/some/extra work.

I think the term subsititution and subcontract are the problem. To me a substitution IS a subcontract but for the full job, whole body. Subcontract is a small part of work. To argue the detail we must understand the difference.

Another thing that kinda buzzes round my head is that one of the main points for outside is a substitution clause, not a subcontract clause, a substitution one, so the business test is relating to this in my opinion.

That said the line about telling your client shoots my argument in the foot as you MUST tell your client about a substitution as per the contract and common sense. They must assume there are cases where you can substitute but not tell your client which doesn't make sense to me.

[Contreras]

I think the term subsititution and subcontract are the problem. To me a substitution IS a subcontract but for the full job, whole body. Subcontract is a small part of work. To argue the detail we must understand the difference.

It doesn't have to be for the full job. It could be a day or even half a day to cover while you visit the dentist.

The key point is that by substituting a different individual with YourCo retaining responsibility for direction of that individual and delivery of the services it clearly demonstrates that your relationship with the client is a contract for services and not a contract of service.

The same applies if there are defined deliverables that YourCo could legitimately sub-contract to a 3rd party. The original question that has not been answered is whether the client needs to know?

It's semantics and the end result is the same. The business tests are not IR35 and the law has not changed.

[Wanderer]

I just think this is so open to interpretation we will never get an answer. When I read the quote you put in I think the key line is the one before the bolded one. 'You could do this by sending someone to do the work in your place'. Not part of, or some of the work, or help you with the work... Sending someone to do the work in your place. That to me, and I strongly believe is in the spirit of what they are trying to get at, is a full substitution with a subcontractor.

An IR35 inspector comes to investigate your company they ask a series of questions detailed in the The business entity tests. One of the questions is:

• "Have you hired anyone in the last 24 months to do the work you have taken on? You could do this by sending someone to do the work in your place. You could also do this by sub-contracting."

If you answer "Yes" then you score 20 points and so long as you aren't a Friday to Monday disguised permie, you have scored yourself as low risk. The inspector thanks you for your time, gives you a letter saying that you have been assessed as low risk and tells you that you won't be investigated again for 3 years (provided your circumstances don't change).

If you get caught lying then you will pay the tax plus interest and penalties for attempting to conceal your tax evasion.

I completely understand your conservative approach to things like this especially when it comes to noobs bumbling their way through things. Hey, it sounds too good to be true doesn't it. Could it be HMRC have shot themselves in the foot by giving away a silver bullet like this? Maybe Mal just wanted everyone to shut up about it and not let the cat out of the bag so HMRC don't cop on and change the rules yet again?

Either way, the tests are pretty clear... If you are running the sort of company that subs out work then you are a genuine business, not a disguised employee and that's what they were trying to tell us all along. Small businesses are good for the economy and the government wants to encourage us business people by allowing tax breaks. It's as simple as that, stop worrying and get on with running and growing your business.

[northernladuk]

It doesn't have to be for the full job. It could be a day or even half a day to cover while you visit the dentist.

The key point is that by substituting a different individual with YourCo retaining responsibility for direction of that individual and delivery of the services it clearly demonstrates that your relationship with the client is a contract for services and not a contract of service.

The same applies if there are defined deliverables that YourCo could legitimately sub-contract to a 3rd party. The original question that has not been answered is whether the client needs to know?

It's semantics and the end result is the same. The business tests are not IR35 and the law has not changed.

I cannot see how a client cannot know if you substitute (or subcontract for that matter). It is in most contracts that you can do it with some form of agreement with the client. If you don't agree it you are in breach for a start and your working conditions will not reflect the contract. It will also put you in a legal situation where your sub will have access to client information to some level that he/she has not signed data polices/NDA/whatever. In most cases letting someone else work on client data without asking them is also pretty unprofessional as well (unless there is an agreement saying you can do this of course without telling them).

Head is spinning this this now but I am sure that you can subcontract which isn't a substitution in some cases, just how to explain it. Just cause you subcontract I don't think means you have substitution covered. The legalities behind a subcontract agreement and a substitution will be different as well I am sure as one can exist without the other but the other needs both (wtf, does that even make sense?!?!) I bet if the clients were aware of this discussion an extra clause about subcontracting would appear.