Contractors working through their own limited companies benefit twofold from using substitutes, subcontractors and helpers. Bringing on board another worker can contribute to fulfilling the requirements of a contract, particularly if the lead contractor falls ill or has to take unplanned time off.
The actual use of a substitute is considered by many IR35 experts to be the closest thing there is to a ‘silver bullet’ that places a contractor outside IR35. That’s because using substitutes is seen as a strong indicator of contractors being self-employed, rather than ‘disguised employees’.
Contractors who are able to supply substitutes, particularly at short notice and without sanction from clients, should be considered firmly outside IR35, even when other evidence points another way.
Substitutes, subcontractors and helpers
The distinctions between substitutes and subcontractors/helpers are important in the eyes of a tax tribunal or court, because they demonstrate different aspects of how a contractor might be outside IR35 and not a disguised employee.
A substitute is usually considered a short-term fix to cover the contractor during periods of holiday, illness or other unexpected absence. An individual with the right skill set replaces the contractor directly on the project for a short period of time, and the client is informed that a substitute is to be supplied by the contractor’s limited company.
Helpers or subcontractors generally refers to additional workers that a contractor uses to perform tasks to help cope with periods of intense activity, or to lend specialist skills to one particular aspect of the project.
The case law on right on substitution
The case law authority on RoS is laid down in the Court of Appeal ruling, Pimlico Plumbers v Smith  EWCA Civ 51,  IRLR 323 [Para 84]. The principles were summarised as:
“Firstly, an unfettered right to substitute another person to do the work or perform the services is inconsistent with an undertaking to do so personally.
Secondly, a conditional right to substitute another person may or may not be inconsistent with personal performance depending upon the conditionality. It will depend on the precise contractual arrangements and, in particular, the nature and degree of any fetter on a right of substitution or, using different language, the extent to which the right of substitution is limited or occasional.
Thirdly, by way of example, a right of substitution only when the contractor is unable to carry out the work will, subject to any exceptional facts, be consistent with personal performance.
Fourthly, again by way of example, a right of substitution limited only by the need to show that the substitute is as qualified as the contractor to do the work, whether or not that entails a particular procedure, will, subject to any exceptional facts, be inconsistent with personal performance.
Fifthly, again by way of example, a right to substitute only with the consent of another person who has an absolute and unqualified discretion to withhold consent will be consistent with personal performance.”
This was not overruled in the Supreme Court and is the legal authority for case law substitution.
‘RoS’ – right of substitution
A substitution is a very powerful argument against IR35, as this implies that there is no personal service on the part of the contractor. So assuming all other evidence points towards self-employment, a contractor who has supplied a substitute will almost certainly be found outside IR35 by a tax tribunal or court.
Where the right of substitution is ‘unfettered’, ie when the client cannot object or does not indicate that they are expecting all the work to be done by the contractor, this is thought by many IR35 experts to be a ‘silver bullet’ against IR35.
But when a client becomes involved in the process, the impact of substitution is diluted. A fettered right of substitution, when the client has some control over or involvement in the substitution process does not completely negate the impact of substitution. But it does indicate an element of control by the client, and may warrant the substitution invalid.
Subcontractors point away from personal service
Subcontractors who have been engaged on a basis that is intrinsic to the completion of the contract, or where the lead contractor needs additional specialist skills to complete the project, are the most likely to be viewed by HMRC as evidence that the contractor is not a disguised employee.
There are a host of issues pointing away from personal service and towards self-employment and being in business on your own account that arise from using subcontractors. They all contribute to the overall picture of the contractor’s employment status.
Such issues include the contractor hiring the subcontractors on their own terms, and not the client’s; delegating specific tasks to the subcontractor; bearing the financial risk of the contractor’s limited company paying any subcontractors directly.
Employ helpers legitimately and demonstrate risk
If a contractor formally employs temporary helpers, then they must do so legitimately – making income tax and National Insurance Contributions (NICs) payments to HMRC, where necessary, plus informing their employee liability insurer that they have non-director/shareholder employees.
The latter could impact on premiums and contribute further to the financial risk of the contractor and their limited company, but must still be undertaken to ensure the contractor is covered and fulfilling their obligations to both their employee and the client.
Current and case law dating back 20 years recognises the importance of being able to provide a substitute and hiring helpers. Any contract that contains a genuine right to engage people to undertake work on the contract should leave a contractor home and dry and outside IR35, especially if the contractor actually uses that right during the contract.