As we hurtle towards 2021, the IR35 reforms suddenly seem an awful lot closer. If you’re in the midst of your preparations for the new legislation, chances are you have some burning questions around the subject that you could really do with putting to an expert.
Luckily, we have just such an expert to hand, in the form of Kingsbridge’s Head of Tax, Andy Vessey. Andy has more than twenty years of experience working with IR35 and has successfully defended hundreds of cases. This week we have a Right of Substitution Ask Andy Special, with all of your questions focusing around that particular status test.
In terms of right of substitution, is it sufficient for an agency to provide a substitute where the contract is between client and agency?
No. A substitute needs to be sourced, paid for, and provided by the contractor, and the substitute’s payment should come through the original contractor’s company.
It is however reasonable for a contractor to engage an agency to source them someone to provide the services, but the fees for that should be covered by the contractor, and the agency will only be placing a substitute into the contractor, not the client.
Simply put, there should be no disruption to the contractual chain for it to be genuine substitution.
Is right of substitution critical to being outside IR35? What if you are a single contractor, but you have multiple clients?
It’s not critical, but depending on who you ask, a lack of personal services (most often demonstrated by substitution) is considered the ‘silver bullet’ or ‘first amongst equals’ of the key status tests.
You need to consider control and mutuality of obligations too, otherwise you won’t have a clear picture – and that doesn’t even factor in the minor status tests. Being a one-man-band style contractor with multiple clients will be positive, but ultimately not a major indicator, as IR35 status is determined on a contract-by-contract basis.
You could for example have five clients, whereby one of your engagements is inside due to the way you operate, but the rest are outside.
And now to another of our resident IR35 experts, Matt Tyler, who’s been covering for Andy while he enjoys some well-earned annual leave.
I have a limited company, and contract through an agency. I am a director of my limited company and have no other employees. Am I likely to fall within IR35? Would it be better for me to employ someone to do my admin work – would this make me fall outside it? The last time I was assessed, I fell outside IR35.
Being the sole employee in your own limited company does not (or should not) automatically classify you as being inside of IR35. There are a multitude of tests to consider to determine if you are operating in a manner befitting a genuine contractor, and whether or not you provide personal service is but one of these – albeit a quite important indicator at that.
That having been said, If you are operating as the only individual in your limited company, it does not mean you are required to give your personal service. Ultimately, the client (or agency) has, in theory, engaged the services of your limited company and not you personally.
It should not matter who individually is doing the work, and it should be well within your rights as a contractor to send a suitably skilled, qualified, and experienced substitute in place of yourself should you need to.
You may not have another employee in your company to pick from in order to send a substitute, but there’s nothing preventing you from sourcing another individual externally (a friend, a colleague, another ltd company, etc.) should the need arise.
Engaging someone else in your limited company to do ancillary admin work won’t really have much of an impact on your IR35 status as they won’t (or are unlikely to) be undertaking any of the services directly related to a contract that you have picked up, so it is important that, if you are trying to demonstrate a specific engagement is outside of IR35, any individuals you engage are contributing directly to the services.
How to Ask Andy…
If you’d like to ask your own question to Andy (or Matt) about right of substitution or anything else to do with IR35, you can send it in using our straightforward form. Andy will do his best to reply on this blog.
In the meantime, you need to continue preparing for the IR35 reforms. One of the ways you can do this is by looking into IR35 insurance such as IR35 Protect. This unique policy flexes to cover whoever in your supply chain holds the tax liability, which could be you or your fee payer. The Premium cover also gives you unlimited access to the Kingsbridge IR35 Status Tool, giving you and your end clients confidence in your status.
