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.
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.
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
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.
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, along with an ever-present signed Right of Substitution Declaration, that achieves this. You need to be about to tee off!
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.
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.
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.