Reply to: Documenting outside IR35 status in a watertight way

[JohntheBike]

Precedent is not static.

Cases which claim to set precedent are often distinguished from later instances on facts or because the law has changed or because the later Judges want to move in a different direction because of developing case law elsewhere.

The world in which the Ready Mix case was heard is an age away from where we are now.

Yes, many elements of the Ready Mix case remain good law, but many do not. Many have been overtaken by later, more relevant, cases.

Precedent is always dependent upon circumstances and facts.

A driver of a truck delivering concrete can easily be substituted because the person taking delivery cares only for the product and the timing.

A project manager for a complex piece of IT cannot be so easily substituted partly because of knowledge but also perhaps because of a need for some form of vetting.

So yes, substitution remains important but it also relative.

Remaining hide bound to elements of cases setting "precedent" whilst ignoring the facts in the instant case is not sensible.

This is my final contribution here. I do not expect you to change your view despite the weight of evidence and therefore further discussion is pointless.

I don't disagree with anything you've said in this specific post. However, I contend that nothing is set in stone, because as I understand the issues, we don't have a written constitution. Existing precedent can be overturned. That's all I'm saying.

[webberg]

Precedent is not static.

Cases which claim to set precedent are often distinguished from later instances on facts or because the law has changed or because the later Judges want to move in a different direction because of developing case law elsewhere.

The world in which the Ready Mix case was heard is an age away from where we are now.

Yes, many elements of the Ready Mix case remain good law, but many do not. Many have been overtaken by later, more relevant, cases.

Precedent is always dependent upon circumstances and facts.

A driver of a truck delivering concrete can easily be substituted because the person taking delivery cares only for the product and the timing.

A project manager for a complex piece of IT cannot be so easily substituted partly because of knowledge but also perhaps because of a need for some form of vetting.

So yes, substitution remains important but it also relative.

Remaining hide bound to elements of cases setting "precedent" whilst ignoring the facts in the instant case is not sensible.

This is my final contribution here. I do not expect you to change your view despite the weight of evidence and therefore further discussion is pointless.

[JohntheBike]

I think you'll find that it's not just my opinion.

The opinion expressed, i.e. a right to substitution is not a magic bullet if it exists only in words and cannot be exercised, is one that appears in the cases mentioned, HMRC Manuals, many opinions from IR35 specialists and in at least one "insurance" contract we have read.

I'm going to be bold and say that this is not an "opinion" but rather a statement of fact.

Judicial principle is that substance outranks form. Courts will look at what the real life situation is and apply the law to that situation, taking into account legal rights and obligations.

They do not start from a make believe world of documented actions which can override what happens in reality. To do so would very soon lead to anarchy.

I repeat that to rely upon words in a document that may bear little or no resemblance to the facts on the ground is naive and is a flimsy defence.

As for the need I may have to read more, I agree. To take from a case etc only those elements that support a position I arrived at previously and to ignore the flow and direction of decisions, will lead me astray. Staying with a view that has been eclipsed and which belongs to the past is also unlikely to help me or my clients. I therefore read almost every relevant case and article etc to try to arrive at an objective view (accepting that nothing will ever be absolute in that regard).

I know however that you will not believe the above. I know that you will continue to advance your view as the first and only truth. If you genuinely believe that form can overcome substance, good luck to you.

As I understand the issues, because the UK has no written constitution, we are ruled by case law. Legal briefs are entitled to use case law, irrespective of how old that case law is, in presenting their arguments. You will be aware that the RMC case was judged in the 1960's and the High Court ruled recently on the proroguing of Parliament, based on very old precedent.

Whether or not those judging any particular case, whether in the FTT or the ET/EAT, take notice of any arguments presented, remains to be seen. I do understand that they have to abide by precedent such as the RWC case, until there is further precedent. However, there is at least one case where the judge asserted that, despite the client stating that a substitute would not be accepted, the presence of a contractual right of substitution meant that the engagement could not be one of service, i.e. employment and form outranked substance, as you like to put it. So, to support your argument, you will need to point to precedent set at the same level of the RMC case or higher, related to substitution, which judges are obliged to follow and are not at liberty to come to any other conclusion. We may all then be more enlightened.

There was a story put about many years ago, which although probably not true, might demonstrate where we are with case law.

It was related that as part of a rag week stunt, undergraduates of Nottingham Uni staged an archery practise in the centre of Nottingham. Plod duly attended and tried to move them on. A law student pointed out that under medieval law, archery practise was encouraged and was allowed. Plod left but returned later, claiming that indeed archery practise was allowed, but it must be performed whilst wearing Lincoln green, which the protagonists were not. They were moved on.

[webberg]

you are entitled to your opinion. .

I think you'll find that it's not just my opinion.

The opinion expressed, i.e. a right to substitution is not a magic bullet if it exists only in words and cannot be exercised, is one that appears in the cases mentioned, HMRC Manuals, many opinions from IR35 specialists and in at least one "insurance" contract we have read.

I'm going to be bold and say that this is not an "opinion" but rather a statement of fact.

Judicial principle is that substance outranks form. Courts will look at what the real life situation is and apply the law to that situation, taking into account legal rights and obligations.

They do not start from a make believe world of documented actions which can override what happens in reality. To do so would very soon lead to anarchy.

I repeat that to rely upon words in a document that may bear little or no resemblance to the facts on the ground is naive and is a flimsy defence.

As for the need I may have to read more, I agree. To take from a case etc only those elements that support a position I arrived at previously and to ignore the flow and direction of decisions, will lead me astray. Staying with a view that has been eclipsed and which belongs to the past is also unlikely to help me or my clients. I therefore read almost every relevant case and article etc to try to arrive at an objective view (accepting that nothing will ever be absolute in that regard).

I know however that you will not believe the above. I know that you will continue to advance your view as the first and only truth. If you genuinely believe that form can overcome substance, good luck to you.

[JohntheBike]

Have you not read the above few posts?

Where a "contractual right of substitution" is a sham, a fake, held by a Tribunal to be impossible to apply in real life, it will be ignored and its weight in decision between employed and contractor, to be diminished.

You have read above references to a number of cases and statements and decisions, yet you revert to what is clearly a reliance upon the words in a contract rather than the facts of a real life situation.

The judicial principle is now one of substance over form (and has been arguably for a decade or more) so reliance upon a group of words that have no real effect is dangerously naive.

you are entitled to your opinion. I was essentially agreeing with the opinion of the original poster. If the client agrees that a substitute can be sent, even if the contractor would find it difficult to do so, then that would not necessarily invalidate the contractual right of substitution. I remind you that the opposite can be true. If there is a contractual right of substitution, and the client states that a substitute would not be accepted, then that could amount to breach of contract if the contractor attempts to substitute. You need to read more case law to expand your opinion.

[webberg]

and a contract of service, i.e. employed, is incompatible with a contractual right of substitution.

Have you not read the above few posts?

Where a "contractual right of substitution" is a sham, a fake, held by a Tribunal to be impossible to apply in real life, it will be ignored and its weight in decision between employed and contractor, to be diminished.

You have read above references to a number of cases and statements and decisions, yet you revert to what is clearly a reliance upon the words in a contract rather than the facts of a real life situation.

The judicial principle is now one of substance over form (and has been arguably for a decade or more) so reliance upon a group of words that have no real effect is dangerously naive.

[JohntheBike]

Yes, in CEST it is overcome if you are an officer (director/secretary) as part of the engagement. That's the only thing that overcomes it. I expect in a tribunal that's also the only thing.

That's nothing new, sham contract provisions are already disregarded. But case law also says that difficulty in finding a suitable sub does not invalidate the right of substitution. So I suspect it will again take actual legislation to strike at this, as long as both contractor and client are affirming the right of substitution.

HMRC will certainly ask, 'Would you really let him sub? Wouldn't you insist on interviewing the sub? Wouldn't there be ANY restrictions you'd place on it?' And if the client says anything but, 'As long as the sub is qualified to do the work,' they'll try to use it. There have been cases where HRMC sits down with a HR person who, years later, throws the contractor under the bus by saying, 'Oh, we would have to approve a substitute.' The difference going forward, is that it isn't the contractor on the hook if that happens and likely the client will have lawyers answering that question who know the traps.

Absolutely. But there's no need for paranoia, either. The new rules will throw a lot of contractors inside who shouldn't be, I'm sure of that. But those who are outside are much more protected.

But case law also says that difficulty in finding a suitable sub does not invalidate the right of substitution

and a contract of service, i.e. employed, is incompatible with a contractual right of substitution.

[WordIsBond]

It may in some instances be overcome with other factors but it would take a lot.

Yes, in CEST it is overcome if you are an officer (director/secretary) as part of the engagement. That's the only thing that overcomes it. I expect in a tribunal that's also the only thing.

I predict that we will see cases in Tribunal in which fake substitution clauses or those impossible or impracticable to apply will be exposed and their worth reduced.

That's nothing new, sham contract provisions are already disregarded. But case law also says that difficulty in finding a suitable sub does not invalidate the right of substitution. So I suspect it will again take actual legislation to strike at this, as long as both contractor and client are affirming the right of substitution.

HMRC will certainly ask, 'Would you really let him sub? Wouldn't you insist on interviewing the sub? Wouldn't there be ANY restrictions you'd place on it?' And if the client says anything but, 'As long as the sub is qualified to do the work,' they'll try to use it. There have been cases where HRMC sits down with a HR person who, years later, throws the contractor under the bus by saying, 'Oh, we would have to approve a substitute.' The difference going forward, is that it isn't the contractor on the hook if that happens and likely the client will have lawyers answering that question who know the traps.

Just be careful.

Absolutely. But there's no need for paranoia, either. The new rules will throw a lot of contractors inside who shouldn't be, I'm sure of that. But those who are outside are much more protected.

[northernladuk]

This already well documented and has happened in the past.

This article quoting Kate Cottrell warns against it
IT contractors warned on IR35 substitution clauses

This article from QDOS goes in to some detail about sham arrangements and some other interesting points about being unable or unwilling which further muddies the waters.
Exercising Your Right of Substitution

And specifically the article mentions



So inspectors should already be attempting to uncover sham arrangements so you'd expect to do with more vigor now it's a key part of CEST.

There is even a case where the judge called the clause a sham and ignored the whole RoS from the case.

More reasons where teaming up with a contractor buddy to try look like you are making substitution is more possible won't work.

EDIT :

[northernladuk]

Agreed that substitution weighs heavy in the calculation.

It may in some instances be overcome with other factors but it would take a lot.

I predict that we will see cases in Tribunal in which fake substitution clauses or those impossible or impracticable to apply will be exposed and their worth reduced.

Just be careful.

This already well documented and has happened in the past.

This article quoting Kate Cottrell warns against it
IT contractors warned on IR35 substitution clauses

This article from QDOS goes in to some detail about sham arrangements and some other interesting points about being unable or unwilling which further muddies the waters.
Exercising Your Right of Substitution

And specifically the article mentions

The right to provide a substitute does not necessarily need to be exercised. In HMRC's Employment Status Manuals, it clearly states that "you cannot assert that a right of substitution does not exist just because a substitute has never been provided" (ESM0538), i.e. it is up to the status inspector to prove your hypothetical right is a sham.

So inspectors should already be attempting to uncover sham arrangements so you'd expect to do with more vigor now it's a key part of CEST.

There is even a case where the judge called the clause a sham and ignored the whole RoS from the case.

More reasons where teaming up with a contractor buddy to try look like you are making substitution is more possible won't work.

[webberg]

It (substitution) really is a silver bullet, and CEST treats it as such appropriately.

Agreed that substitution weighs heavy in the calculation.

It may in some instances be overcome with other factors but it would take a lot.

I predict that we will see cases in Tribunal in which fake substitution clauses or those impossible or impracticable to apply will be exposed and their worth reduced.

Just be careful.

[WordIsBond]

I'm not sure I would entirely agree with the above.

HMRC may disagree with the SDS. They may consider that the role is inside IR35.

If so, you are correct in that HMRC will go after the fee payer (probably the agency closest to the PSC). In the event that they do not pay, they will move through the supply chain, ultimately to the end client who created the SDS.

If I was advising that end client and there was even the slightest degree of risk of an inside scenario, i.e. a right of substitution that was practically very unlikely or impractical to implement, then I'd be looking to some form of indemnity from the individual.

There is therefore a negotiation here.

Whilst I admire the attempt to put into black and white something that is unfortunately several dozen shades of grey, the hard reality is that this sector is the gift that keeps giving for HMRC and all parties in it should be looking to protect themselves.

I don't disagree at all with the final paragraph. But OP's question was what documentation he needs. If he has a SDS that he's outside, it really doesn't matter to him whether HMRC disagrees or not.

From that point on, his role is to do his best to protect the client by keeping an eye on staying outside so the case is strong if HMRC comes calling. That's all. He needs no other documentation.

And if there is a real right of substitution, agreed to by the client, fettered only in that the substitute must be qualified, that's watertight on IR35 unless/until legislation says otherwise. The case law is clear and until HMG legislates on the matter, the case law remains. Employees don't send substitutes, so someone who has a right to do so, acknowledge by both parties, is providing a service and not an employee. It really is a silver bullet, and CEST treats it as such appropriately.

[DeludedKitten]

As well as the prep work that you're already doing, I would tell the client that if HMRC come calling it's important that they do not answer anything without getting professional advice. The last thing you want is for one throwaway comment from the client where they are trying to help you get picked up and misconstrued and used to undermine your defence.

Document the working arrangements. Get the client to sign them off. Have a contractual right of substitution. Bring someone in (even if it's specialised technology, you could get someone in to test the stuff you've produced?). Keep records of things like if there is a server outage and you can't work that day so don't bill for it.

[Paralytic]

HMRC may disagree with the SDS. They may consider that the role is inside IR35.

If so, you are correct in that HMRC will go after the fee payer (probably the agency closest to the PSC). In the event that they do not pay, they will move through the supply chain, ultimately to the end client who created the SDS

Are you saying that (post April 2020) if a private sector client makes (in the eyes of HMRC) an incorrect outside determination, then the liability first falls on the fee payer?

How does that tie with (my highlighting):

Taking reasonable care when making a determination

You must take reasonable care when you make a determination about the employment status of a worker.

Failure to do so will result in the worker’s tax and National Insurance contributions becoming your responsibility.

From What you need to do as a client on April 2020 changes to off-payroll working for clients - GOV.UK

[JohntheBike]

Seems like there's a lot of paranoia on this thread.

The client says they would accept an equally qualified substitute. The fact that it may be hard to find such a person changes nothing -- that puts you outside. It's simply not employment if you could send a sub. The case law on this is ironclad. That's why CEST makes it an auto-outside if there is unfettered substitution.

All you need is a Status Determination Statement that you are outside. That's it. If you have that, you are in the clear after April. The only risk is with the client, and all THEY need to be risk free is to not stupidly refute the right of substitution. Write it into the contract and into a Confirmation of Working Practices that YourCo can send any person qualified to do the work. Have the client, for their own protection, run it through CEST and keep a record of the result. Tell them that if HMRC comes calling that all they need to tell them is that if you sent someone sufficiently qualified as a sub, they'd accept it. HMRC will ask if you've done so and they say, 'No, but he could, it's in the contract.' They will ask if you have anyone you could send and they say, 'That's the concern of ContractorCo, not ours. They are a supplier, as long as they supply what we need we don't care how it happens.' End of story and end of case.

If they go stupid later, they are the ones at risk, not you.

Avoid becoming part and parcel. Watch out for all the things contractors could watch out for. It's for their protection. But don't sweat this too much, you are outside and the risk will not be yours after April anyway.

The client says they would accept an equally qualified substitute. The fact that it may be hard to find such a person changes nothing -- that puts you outside. It's simply not employment if you could send a sub. The case law on this is ironclad.

agreed, a contractual right of substitution means that the contract is for services and not of service and this even if the client subsequently claims that a substitute would not be accepted.