Right of Substitution Declaration FAQs
What is the purpose of the Right of Substitution Declaration?
- This Declaration provides evidence to HMRC that a) the client accepts that the contractor’s limited company has a legal right to substitute the main resource(s), and b) the contractor’s limited company would / will carry out any substitution robustly and in line with HMRC stipulations, such as the contractor’s limited company paying the substitute. The result is the firm establishment of the agreement as one for services delivered by the limited company, and not one of personal service delivered by the contractor. This can be a sole or vast majority contributor to a safe, indisputably compliant outside IR35 status. It can also be a strong component of a client’s reasonable care obligations in its IR35 status determination process.
How does a Right of Substitution Declaration benefit the client?
- It's probably the best assurance of no client resources having to expend valuable time and effort as witnesses in an HMRC tribunal.
- It explicitly clarifies the extent and scope of the right, striking the perfect balance of allowing the contractor to implement a substitution that would / will be beneficial to the client by ensuring the contractor's limited company obligations to the client remain deliverable if a main worker is not present.
- Fundamentally, it's a benefit available to the client, that if not deemed beneficial by the client on reasonable grounds, can be rejected in favour of an alternative resource or solution that maintains the integrity of the overall contractual relationship. In other words, for the client it is all upside and no downside.
What does the Right of Substitution Declaration Look Like?
The essence of the Right of Substitution Declaration content is as follows:
- The service delivery and liability obligations attributed to the contractor and their limited company in the Main Contract would transfer in full to the Substitute and the Substitute’s company in the event that a Substitution is executed.
- This would always be supported by a legally binding contract between the contractor and the Substitute’s company.
- The Substitute would be paid by the contractor's limited company at rates agreed between the Service Provider and the Substitute.
- The contractor remains ultimately responsible to the Client for the Service Delivery, during any period in which Service Delivery is performed by a Substitute.
- The contractor will continue to be paid according to the terms specified in the Main Contract, for the Service Delivery provided by the Substitute.
- The Client would have the opportunity to validate the credentials of the Substitute in terms of their suitability to perform the Service Delivery.
- Where a prerequisite is in place or inferred in the Main Contract that in the provision of the Service Delivery the Personnel must, by law or otherwise, possess specific qualifications, certifications, licenses or other formally accredited attributes, the Service Provider warrants that any Substitute will possess the same such attributes and credentials as the Personnel.
- The Client would have the option to insist upon an alternative Substitute in any case where the Client reasonably demonstrates that the proposed Substitute poses a material risk that the Service Delivery will fall short of contractual obligations.
- In the event that the Client insisted upon an alternative Substitute under the reasonable grounds described in 7) above, the contractor would be responsible for securing an alternative, more suitable Substitute.
- The contractor would ensure that any knowledge transfer or other preparation effort required to enable the Substitute to perform the Service Delivery, were executed at no additional cost to the Client.
- In the event that difficulties encountered in securing a suitable Substitute, posed a material risk to the Client that Service Delivery would fall short of contractual obligations, the contractor would reasonably endeavour to provide an alternative solution, not excluding making their Personnel available for some part of the proposed Substitution.
- In the event of any perceived or actual conflict or perceived or actual contradiction between any clause or combination of clauses in this agreement and the Main Contract or any other contractual agreement that governs the Service Delivery and/or governs the Right of Substitution, the clause or combination of clauses in this declaration shall take precedence.
- For the avoidance of doubt, in any challenge to the presence of a genuine Right of Substitution between Service Provider and Client, this agreement is deemed to take precedence over any other contract or agreement between the Service Provider and the Client or between the Service Provider and the Agent or between the Agent and the Client or between any parties, that impacts or seems to impact any aspect of the presence of the Right of Substitution between the Service Provider and the Client.
Does the Declaration obligate the client to accept any substitute at any time?
- Categorically no. Firstly, HMRC cannot force a contractor to take time off. Secondly, HMRC cannot force a client or a contractor to provide cover when a contractor does take time off. All the Declaration does is confirm that, in the event the contractor needs to be absent at a time when they and the client agree that a resource is in fact needed in order to deliver the contractual obligations, then the contractor will provide and pay the resource. The client also has the right to vet the candidate for suitability.
Must the substitute be a member of 34square?
- The substitute needs to be a member of 34square in order for the Right of Substitution Declaration to be effective, because 34square provides the robust legal mechanism for carrying out the substitution. However, they do not already have to be a member when selected. They can always join in order to execute a substitution.
Does the contractor have to source the substitute?
- The contractor must be seen to have sourced the substitute. However, they can seek whatever assistance they wish in doing so, from the client, their agent or any other agent. What’s important is that the contractor’s limited company then engages, contracts with and pays that substitute’s company. Nevertheless the candidate can come from anywhere
As a client, am I opening the floodgates to a bunch of strangers turning up to my offices?
- Categorically no. You CAN sleep easy. If your contractor(s) send / attempt to send substitutes without prior discussion and agreement with the client, and the client is unhappy, they of course have the legal right to serve notice on the contract. An expectation of reasonable courtesy and prior dialogue and agreement before a substitution, in no way weakens outside IR35 status. Further, contractors virtually never actually carry out substitutions. They tend to be the workers most likely to want to turn up for work, because they otherwise don’t get paid. In addition, if a client feels a contractor is abusing this right in any way, they are likely to conclude their contractor is not suitable, and are free to terminate the contract.
So why does a contractor need to join 34square if they don’t ever intend to substitute?
- Substitutions are incredibly rare. What’s important for compliant outside IR35 status, though, is possessing the demonstrable legal right and capability to do so, combined with the intent to carry it out in a compliant manner if the situation arises. It’s ongoing membership of 34square, optionally strengthened by a signed Right of Substitution Declaration, that achieves this. You need to be about to tee off!
What if a contractor decides to substitute a cheaper resource to make a margin themselves?
- As a client, you have chosen to contract with a limited company, based upon an expectation that they will deliver the contractual obligations. If that limited company fails to provide that service to your satisfaction in any way, you have the legal right to terminate the contract. Essentially, if a contractor does choose to abuse their position, a client will likely and reasonably conclude they have chosen the wrong limited company, and will cease to do business with them.
Won’t the recruiter want to place the substitute in order to maintain their margin?
- A substitution executed in 34square has a neutral impact on an agent. For the duration of a substitution, the client is still paying the agent and the agent is still paying the main contractor’s limited company. Therefore margin is maintained.