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Contractor guide to using substitution to stay outside IR35

If correctly implemented, a substitution is an IR35 ‘silver bullet’ that demonstrates personal service is not required. And if personal service is proved not to be required, then there cannot possibly be a ‘contract of service’, or employment contract, in place, so IR35 cannot apply.

Limited company contractors who want to make a substitution and provide another contractor in their place must have the process and paperwork nailed down so that they don’t fall foul of an HMRC IR35 investigation.

There is a risk that any substitution clause written into the contract could be viewed by HMRC as a ‘sham’ that is not valid when subjected to scrutiny. However, there are strategies contractors can adopt to ensure the processes and procedures underpinning their substitution are genuine and will stand up to investigation.

Is personal service required?

The key to any contractor substitution is understanding the legal principles behind the process. To ensure it keeps the contractor outside IR35, and therefore to prove that the contractor is not a disguised employee, the substitution must be ‘unfettered’.

This is a subtle point, as an unfettered right of substitution is not about who the contractor chooses to substitute, but whether they have the right to substitute in the first place. This unfettered right of substitution means they really can send someone in to do the contracted work in their place. If the client gets involved choosing any substitute, by interviewing/screening them, then it would be fettered, and not count.

If personal service is not required, then there cannot possibly be a ‘contract for services’, or employment contract, and the contractor cannot be inside IR35.

But, broadly speaking, the reverse is also true. If the client requires the personal service of a specific contractor, then HMRC will have a strong case for proving the contractor is a disguised employee and that IR35 applies.

There are other factors that will mitigate this position, but it does not place the contractor in a good position.

Understanding substitution processes

If a client decides they can stop the contractor sending in a replacement, then the right of substitution is not unfettered. The decision about who might be a suitable substitute is an entirely different conversation, and also has implications for IR35 status.


And because demonstrating employment status under IR35 is evaluated on a contract by contract basis, then it can be a major negative factor in keeping a contractor outside IR35 if a specific contract does not allow unfettered substitution.

Allowing the client to have an input into who the substitute is can be a major negative IR35 factor, but it should not be mistaken with the concept of ‘unfettered right to substitution’. There are two discrete issues: is a substitute allowed and can the client have in input into who the substitute is?

The practicalities of substitution

So, what actually happens in practice? Even if there is a clause in the contract, many clients won’t actually realise that contractor ‘X’ could send in a replacement, contractor ‘Y’, if ‘X’ were unwell or unavailable.

But genuine limited company contractors are business-to-business service providers. This means that they can send another contractor in to do their work in their place, assuming the contract allows this.

IR35 best practice says that a contract review by an IR35 expert is always the first step for a contractor embarking on a new contract. This should highlight any contract issues, such as there being no substitution clause. And, most importantly, the contract should allow both substitution and a free rein over who the substitute is.

For clients who are employees, the substitution concept can be difficult to accept. After all, many clients believe they are hiring another employee, despite the actual contractual requirement, so there can be an element of education required by the contractor.

Establishing a paper trail

Assuming the contractor has an unfettered right to send in a substitute, they then need to ensure the paperwork backs this up. This means creating a paper trail, in addition to the original contract.

The contractor doing the substitution should have a contract with the substitute worker’s limited company. And this contract should also be a business to business contract for services between the two respective companies.

For the substitution to be genuine and not a sham, the client also needs to know about the substitution. For many roles where the contractor is providing services on-site, this would become obvious.

But there are some remote assignments where the contractor may not always be spending their time on site, so the client may not realise some of the contracted services are being provided by a substitute.

Although subcontracting is a powerful argument that the contractor is outside IR35, if the client does not know then it is watered down.

Finally, contractors should document all the processes associated with a substitution. This includes retaining all correspondence with the client and with the substitute. This can prove essential in proving to HMRC that any substitution clause in a contract is real, and not a ‘sham’.

Published: 16 April 2014





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