The UK's leading contractor site. 200,000 monthly unique visitors.

SG Accounting

Contractor Doctor: No substitution but can hire subcontractor: what’s my IR35 status?

Dear Contractor Doctor

I’m an IT contractor working on an enterprise-wide software upgrade for a medium-sized manufacturing client, initially for six months but likely to last as long as 12 months. Although I have a right of substitution in my contract, my feeling is that the client would baulk at allowing me to send someone in my place. This makes me slightly nervous about my IR35 status

However, a contractor colleague has suggested that I hire subcontractors to work on specific elements of the project, possibly completing small tasks at other sites.

Would hiring subcontractors have the same impact as providing a substitute on my IR35 status?

Thanks

Tina

Contractor Doctor says:

“The relevance of the subcontractor to the lead contractor’s IR35 status would depend on the type of work that the subcontractor was doing and the level of remuneration,” explains Andy Vessey, Qdos Consulting’s IR35 expert.

“The fact that the client has gone on record denying substitution is not helpful, but is only one of the pointers towards an absence of personal service, albeit a very strong one. But in answer to Tina’s query, subcontracting is certainly one of the factors that can help disprove personal service and therefore help prove a contract is outside IR35.”

Role and payment: HMRC’s milkman

According to Vessey, when considering the relevance of a subcontractor in an employment status case, HMRC will typically refer to its example of the milkman hiring a school-age assistant during the school holidays to help with a milk round.

“In the milkman scenario, the dairy – or client – turns a blind eye as the assistant is helping in a nominal way, being paid ‘pocket money’ to do menial tasks with little responsibility.

HMRC would argue that this does not prove the milkman is self-employed, because the school-age assistant does not negate the requirement for the milkman’s personal service to the dairy when completing the milk round.

What constitutes meaningful responsibly to prove no personal service?

“Underpinning the unfettered right to substitution in an employment status case, such as an IR35 one, is the requirement to demonstrate that the contractor’s personal service is not needed,” notes Vessey. “If there is no personal service required, then the contractor cannot be employed.

If there is no personal service required, then the contractor cannot be employed

Andy Vessey, Qdos Consulting

“In a contracting context, the work completed by the sub-contractor needs to be meaningful if it is to show no personal service is required. ‘Meaningful’ is not an exact term, but applies if the work is similar to what the main contractor is doing.”

A contractor allocating back office and menial tasks to a subcontractor is still delivering personal service to the client, and not substituting, and HMRC would not accept this as negating personal service.

“However,” highlights Vessey, “something noteworthy, such as an IT contractor who is tasking a subcontractor to complete a core piece of programming code, is demonstrating that their personal service is not required in order to fulfil that element of the contract.”

Pay rates and actual amounts being paid are a key factor

Alongside the nature of the task, the rate of pay and the actual amount paid are also significant factors towards determining whether a subcontractor can play a part in demonstrating the lead contractor’s personal service is not required.

“If the subcontractor received £50 for a few hours work of a basic nature, HMRC would refer back to its milkman example,” says Vessey, “particularly if the total amount over the duration of the contract was a very small percentage.

“But if the subcontractor is earning close to market hourly or day rates for their particular specialism, and was hired on a regular basis, so had become a significant cost of sales to the lead contractor over the life of the contract, that points strongly towards the subcontractor actually fulfilling the role of a substitute.”

Of course the subcontract work must actually be done by the subcontractor and paid for at the agreed rates. HMRC may be unlikely to accept two contractors subcontracting the same number of hours at the same rate and ‘calling it quits’ over payment, unless there was substantive evidence to support this arrangement. However, if the subcontracting is genuine, and paid for, this may well support both contractors’ claims to be working outside IR35 on their own contracts.

The implication of the client saying ‘no substitution’

Vessey acknowledges that it is not helpful if the client states that they would not be happy with a substitution, even if the contract includes a substitution clause. But he stresses that the client’s view is only a single factor pointing towards personal service, and the evidence of other factors could point strongly towards no personal service.

He concludes: “Subcontracting in general, including direct engagement of workers such as employees or apprentices, is a strong pointer away from personal service, and therefore to placing a contractor outside IR35.”

Published: Wednesday, May 15, 2013

If you need an accountant or are thinking of switching accountant please complete the enquiry form below:

InTouch accounting are our chosen partner for providing specialist accounting advice to contractors.

  • We only send your data to our chosen partner. More on how we use your data.

© 2018 All rights reserved. Reproduction in whole or in part without permission is prohibited. Please see our copyright notice.

Contractors handbook