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

[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.

[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]

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]

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]

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]

Another interesting article. https://www.thesubbench.com/insights...s-substitution

Again this article mentions arguing about the terms is semantics and again mentions the importance of the client/contractor relationship in reality.

hile the argument between substitution and sub-contracting is one of semantics, it’s an important and relevant one, as it directly links to how you and your client perceive yourself. The traditional and archaic view of substitution is that is has to be like for like; someone with the exact same skills and experience completing the same job – essentially someone exactly like an individual in the hiring manager’s team. Again, as mentioned in my previous Insight post, if you view yourself as an individual on a client site, then it is likely you would have a contract of service. Therefore, any substitute would have to be like for like, as your client will not perceive you in any other way. Emphasis needs to be placed on convincing your client that you are a business, as this will lead to different treatment. Substituting elements of your contract to be delivered in an improved manner is the ideal way of proving this.

So while the OP is a bod on site he's in the old archaic substitute, until he can get a contract that he can take extra work on he can't subcontract (I know I know but lets look at it from a high level and talk about extra work). If he's in a halfway house where he can grab the odd bit of extra work then substitute and subcontract are available and when he manages to get a full managed service then he will be subcontracting and not need substitute.

[northernladuk]

There's a lot wrong with this post. Subcontracting, substitution and assignment are all different things. Subcontracting and substitution leave the responsibility with YourCo, whereas assignment shifts the responsibility to another party. Substitution does not require that a contract is substituted in its entirety and it cannot be assigned, by definition. It is perfectly valid for the substitute to perform only a fraction of the work that would otherwise have been performed by you personally (e.g., a period of illness), which demonstrates lack of personal service, which is the whole point of substitution, as distinct from subcontracting.

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.

[ryan11]

Thanks so much everyone. Very helpful information

[jamesbrown]

Also bear in mind that, while a substitution clause may be perfectly valid (real, not unreasonably fettered) and very useful for IR35 (lack of personal service), it is completely alien to proper B2B contracts outside of the narrow scope of the UK contracting scene.

[jamesbrown]

Be aware that a sub-contractor is not a substitute. A substitution, to be meaningful, is someone taking over the contract in its entirety other than the money they are paid from the company. Handing bits of work off to others while retaining overall control of the contract is not substitution in the sense that it applies to IR35.

There's a lot wrong with this post. Subcontracting, substitution and assignment are all different things. Subcontracting and substitution leave the responsibility with YourCo, whereas assignment shifts the responsibility to another party. Substitution does not require that a contract is substituted in its entirety and it cannot be assigned, by definition. It is perfectly valid for the substitute to perform only a fraction of the work that would otherwise have been performed by you personally (e.g., a period of illness), which demonstrates lack of personal service, which is the whole point of substitution, as distinct from subcontracting.

[jamesbrown]

Hey all
- Can a substitute be any type of resource? eg an employee on the books of the company, another shareholder who has the required skills, freelancer or sub-contractor?

Yes, but with a caveat. The contractual relationship between YourCo and the substitute is not important, but sub-contracting is weaker than substitution w/r to IR35 (it is still a good pointer against IR35, but substitution is a much stronger pointer against personal service). What matter is that the worker is sent on behalf of YourCo (not themselves) and YourCo incurs all of the costs of the substitution and YourCo is paid as usual (not that the substitute is paid by the client) and YourCo then pays the substitute directly, but the contractual relationship between YourCo and the substitute is otherwise unimportant.

- My work is always done remotely and very rarely do I visit or work in the client's office. Does working from home affect the clause of "sending" a substitute?

No.

Hey all
- How can I affectively prove to HMRC that a sub has done some work? Would keeping a log of work done/date/resource/client/cost etc suffice ?

Yes, the work done, the invoices from the substitute that identify the work done (where applicable) and the payments made to the substitute.

[northernladuk]

It's absolutely fundamental that you understand your clients needs and your business model. You can't be getting these mixed up if you are going in to business with them. The whole engagement needs to be different, the contract needs to be completely different, the framework you'll engage with the client will be different. You really need to understand basics like these if you are going to move forward as it's going to get a lot more complex.

To do it properly you need to start a new offering, not try grow out of what you are doing else you aren't going to get an effective consultancy model. There is a massive difference between a contractor hoovering up a bit of extra work to a full blown managed service model. Understanding that model is key. Difficult to provide a proper consultancy when you don't really know what one is.

Try to take a step back and look holistically at the situation and build the offering from the ground up. Forget what you are doing now and approach the situation with new eyes I'd say if you get me.

[Lance]

effectively


Short answer - you're describing sub-contracting not substitution. If you use subs to do the work you'll never fall under IR35 yourself. So it works. Problem is your subbies might fall under IR35.
Will the client issue an outside SDS for you? If so what's the issue? Or are they a small company?

Your specific questions...

- yes. Any type of resource.
- location is irrelevant
- the invoices/payslips you pay the 'subs' with should do. And some email acknowledgement from the client that the subs work was done.


But you do have this the wrong way round. A sub is a direct swap out for you. Not people you put on the client's site to do the work. If you want to be a consultancy then be a consultancy.

[malvolio]

Be aware that a sub-contractor is not a substitute. A substitution, to be meaningful, is someone taking over the contract in its entirety other than the money they are paid from the company. Handing bits of work off to others while retaining overall control of the contract is not substitution in the sense that it applies to IR35.

[ryan11]

Hey all

At the moment I'm just a one-man-band who works via a ltd co. however I'm looking to grow my contracting company into more of a consultancy that would provide the service of multiple contractors/consultants.

My plan is to work with clients who are happy to provide my company "an unfettered right to provide a substitute" and break any chain of personal service so to speak.

I have already spoken to one of my clients and their view is that as long as the agreed work is delivered by the agreed time, at the same level of quality, and that there's no additional cost from their side, they don't mind how my company delivers the work.

With that in mind, I would think it's a strong positive on the IR35 front re substitution?


A few questions,

- Can a substitute be any type of resource? eg an employee on the books of the company, another shareholder who has the required skills, freelancer or sub-contractor?
- My work is always done remotely and very rarely do I visit or work in the client's office. Does working from home affect the clause of "sending" a substitute?
- How can I affectively prove to HMRC that a sub has done some work? Would keeping a log of work done/date/resource/client/cost etc suffice ?


Thanks
Ryan