OUTSIDE IR35: GIVE YOUR RIGHT OF SUBSTITUTION CLAUSE TEETH
Let me start by emphasising that 34square does not offer a guaranteed outside IR35 status. What we do is to remove ambiguity and risk, where outside IR35 IS justifiable. Nor do we believe that all you need to do is sort your right of substitution and nothing else matters. Far from it.
We’re actually very similar to all of those IR35 assessment service providers out there that get you to answer a list of questions and then tell you your IR35 status verdict. Two main differences:
- We’ve gone and given you the answers, not the questions. In other words, we give you a configurable list of between 9 and 16 engagement and working practices criteria that if you tick, result in an outside IR35 status, We don’t support the notion that your answers to assessment questions are somehow fixed. It’s perfectly valid and straightforward to flex your practices to achieve a desired, beneficial AND legitimate outcome.
- We provide contractors and the engagement with right of substitution capabilities that elevate outside IR35 credentials. Something an assessment tool alone cannot do. And as a result, clients get to generate probably the safest and most predictable outside IR35 SDS they can. For free.
Many IR35 experts will tell you that right of substitution cannot be relied upon to fuel an outside IR35 determination. They’d be right. Because in the vast majority of cases, it’s unrealistic to 100% guarantee HMRC won’t find cracks and expose the right of substitution as a sham. Some may also claim that IR35 status determination is a complex web, with multiple interrelating factors that perhaps even require artificial intelligence to decipher. In this case, they wouldn’t always be right. Their observation would be fair in a borderline case. But it is child’s play to derive a set of criteria that are nowhere close to borderline, the result of which is the removal of complexity, doubt, ambiguity and risk.
HMRC are sufficiently convinced that right of substitution CAN be a slam dunk, to make a considerable effort to deter and dissuade clients, perhaps all of us, from utilising it:
- Their CEST assessment tool questions on the topic are worded to blatantly incite the client to deny the right exists, even if it does.
- They have dedicated a whole section of their Employment Status Manual to the task. The inference is that if a clause is present but with no substance behind it in terms of client buy-in AND realistic capability to execute, it could even be a pointer TOWARDS personal service and an inside IR35 status. They’re suggesting that clause doth protest too much. I am inclined to contend that HMRC notion itself in fact doth protest too much.
But HMRC have essentially honourably represented right of substitution in their CEST IR35 assessment tool. If your answers in CEST confirm an unfettered right of substitution, where the contractor would pay any substitute, then no matter how you answer any and all of the remaining questions, the verdict will be outside IR35. HMRC HAD to design it that way. A weight of case law precedent confirms an unfettered right of substitution, even if never used, can be and HAS been a sole determinant of outside IR35. Even so, 34square mandates bolstering with a further 8 drivers, all of which most legitimate outside IR35 cases should be able to sign up to. Plus we provide another 7 a client can elect to unnecessarily strengthen the outside IR35 status further.
In 36 cases that went as far as appeals tribunals, HMRC won 17 from 26 where right of substitution was compromised or absent. They won 0 from 10 where it was sufficiently strong. Now you can make your right of substitution even stronger than those 10 were, and you’ll need to. HMRC are more adept at finding the cracks. Hence we have removed them all.
The response to a contention from HMRC or anyone else that your right of substitution clause may be a sham and may in fact increase your risk of an inside IR35 verdict or a dispute defeat, should not be to abandon the clause. It should not be to protest that such a notion cannot be correct or makes no logical sense. Instead, you should render the notion irrelevant. Talk to 34square. Have your contractors subscribe for their nominal annual fee and give your right of substitution a set of sharp teeth in jaws so scary and snarly that HMRC won’t bother to come near. They'll go after the paper tigers instead. They don't want to be eaten alive in a tribunal.