Why contractors should consider a Right of Substitution clause

As the debate continues around IR35 and the off-payroll reforms, the key factors used to determine employment status are coming under close scrutiny.  Right of Substitution is one of three primary concepts, along with Control and Mutuality of obligation, which is used to determine employment status. In this article Umbrella Exchange explains the concept of a Right of Substitution and why the inclusion of a substitution clause in a contract for services can provide extra protection for contractors.

What is Right of Substitution and why should I include it in my contract?

Right of substitution refers to the contractor’s right to send a replacement in their place if they are unable to carry out work on a contract. Theoretically, if the contractor can be replaced with someone similarly skilled, then it can be argued that the contractor isn’t providing a ‘personal service’, and is therefore less likely to be an employee. As the recent spate of IR35 tribunals demonstrate, Right of Substitution is a difficult status test to implement, as limited company contractors will usually only have one fee earner. It’s also the case that, as IR35 becomes more rigorously enforced, HMRC will interrogate the validity of such clauses in order to determine if they are genuine, rather than just a paper exercise to divert from IR35. As the recent appeals of BBC presenter Christa Ackroyd and Dragonfly Consultancy against HMRC prove, having a Right of Substitution clause in your contract is not an automatic indication of your employment status. For the clause to carry weight, it should take into account the following points which clearly demonstrate the contactor’s rights of control and their day-to-day working practice.

• The contractor must choose the substitute: The right of substitution clause should be ‘unfettered’, meaning that it does not give the client or the agency the right to vet the replacement. Avoid wording that refers to client ‘approval’ or ‘satisfaction’, as there should be no suggestion that the client has control over the provision of service that the contractor makes.

• The contractor must pay for the substitute: Any costs incurred in providing a substitute will be at the contractor’s expense. This means that if anything goes wrong, the contractor is responsible for putting it right and bears the cost. This effectively cancels out the need for client approval as the contractor accepts liability for the substitute.

• The clause must be genuine: It should be noted that even if the substitution clause isn’t likely to be used, the contractor should make sure that it’s a genuine provision. As a demonstration of this, consider putting the clause into effect and using a substitute for an arranged period of time while working on a contract. The fact that the right of substitution clause has been exercised offers further proof that it’s genuine and not just a paper clause.

• The clause should be consistent: If you’re working through a recruitment agency, make sure that any clauses are included in both the upper level contract, between the agency and the client, and the lower level contract, between the agency and the contractor. Recent changes that transfer responsibility for deciding IR35 status from the contractor to the fee payer mean that it’s in the interests of the agency, the client and the contractor to work together to reduce the risk of IR35 liability. These changes will also apply to the private sector in 2020.

Umbrella Exchange can provide a range of options for your contracting needs. To talk to a member of our team call 0203 393 3881