Nikola Nowak explains the important differences between subcontracting and substitution and what that might mean for IR35 rules.
One of the three key factors to consider when looking at whether IR35 applies is personal service. This tests whether the hypothetical contract which would exist between the parties if the intermediary were removed includes a requirement for the worker to provide their personal service.
It is common knowledge within the contracting world that a genuine right of substitution, both within the contract and in practice, is one of the easier ways to demonstrate that you are not an employee.
In an employment relationship, personal service is always present – it is hard to imagine a situation where an employee would be able to send someone else in their place if they were unable to come to work (although in the Ready Mix Concrete judgment, MacKenna J did concede that an occasional power of delegation is still consistent with employment).
As established in the Express & Echo Publications Ltd v Tanton case, where the worker has a genuine right to send a replacement if they are unwilling or unable to provide services, as a matter of law, this is inconsistent with employment.
So, what about subcontracting? Can subcontracting be used to demonstrate a lack of personal service?
There is an important distinction between subcontracting and substitution. The difference here is that with subcontracting you are engaging a third party to complete specific services or part of a project. The obligation for completing those services is passed on to the subcontractor and they may even enter into a contract with the client directly. You may still carry on providing your services at the same time as the subcontractor is carrying out their works.
In true substitution, you would engage another contractor or business to perform the entirety of the services for the period for which you are unavailable. You enter into an agreement with the replacement contractor and remain responsible for the services and for paying the substitute.
Where the client or agency is responsible for sourcing and paying a replacement, this is not genuine substitution. As an independent business taking on a piece of work, you need to be able to demonstrate that if for whatever reason you cannot fulfil the contract using the original personnel, you are responsible for ensuring that your client still receives the services by paying for an alternative consultant.
A useful case to note where substitution was not enough to demonstrate a lack of personal service is the case of Usetech Ltd v Young. Mr Hood (the worker) had the right to send a replacement, albeit the agency in the chain would have to interview the replacement.
The substitute would then enter into a new contract with the agency and before Mr Hood was able to take any holiday, he would have to seek agreement from the client. Usetech Ltd (the worker’s intermediary) did not have free will to decide who performed the work and it was therefore found that a requirement for personal service was present. The client wanted Mr Hood specifically and any substitution would be the responsibility of the agency, which led to the decision that the relationship between the parties resembled employment.
The other factors in this case were also not indicative of self-employment, which meant that the substitution provision was not enough to swing the judgement. Had the substitution clause been more clear-cut and allowed for Usetech to utilise any suitably qualified worker in the provision of the services, it is likely the judgement would have been in favour of Usetech.
In short, subcontracting on its own is not sufficient in showing a lack of personal service. It is helpful in demonstrating that you are a business which can delegate parts of the contract to other providers, but it does not prove that the client is not engaging you personally. A requirement for your personal service can exist in situations where you are able to offload parts of the contract to other parties.
Click here to learn more about IR35 and how to determine your IR35 status.