Independent Contractor Services Blog

Contractor UK this week warned contractors who work via an agency that HMRC were beginning to rely on right of substitution clauses to launch IR35 investigations.

Right of substitution is the ability of a contractor to send someone else in their place to complete a role, and is one of the official tests used to establish employment status. Twenty contractors were recently deemed employees after the Appeal Court said that their substitution clause was a sham, partly due to them not knowing it was in the contract.

Following this, HMRC are launching a growing number of probes into the employment status of contract workers where the substitution clause may be too flimsy.

Former Inland Revenue tax inspector Kate Cottrell, who started IR35 firm Bauer & Cottrell, told Contractor UK that the clause was “too flimsy” to meet HMRC requirements. Since the Appeal Court’s ruling, the firm says that all the signs indicate that more contractors will be deemed employees due to their substitution clause not standing up.

“We are seeing more and more IR35 investigation cases where a claimed substitution clause has simply been treated as one clause amongst many carrying little weight in the status argument,” Ms Cottrell told the news provider.

Addressing all contractors, she added: “It all comes down to educating all the parties in the contractual chain and ideally at the outset” and advises that a contractor should seek the views of the client if they are planning to rely upon a right of substitution to take them outside IR35.

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