HMRC are increasingly choosing to launch IR35 investigations on contractors who work through agencies. HMRC are particularly interested in the substitution clauses which are commonly used as a test of employment status. The right of substitution clauses exist to allow another contractor to complete a piece of work in place of the original contractor.

Kate Cottrell, former Inland Revenue tax inspector, commented: “We are seeing more and more IR35 investigation cases where a claimed substitution clause has simply been treated as one clause amongst many carrying little weight in the [employment] status argument.”

While speaking to Contractor UK, Ms Cottrell stated that her experience showed “most substitution rights are unrealistic where there is an agency in the middle.” The only difference occurs when contracts are back-to-back.

She continued: “In most cases the client will state that they would expect the agency to provide the replacement, if this was necessary, and there would be nothing wrong in a contract that passed this down the line.”
Commenting on IT contractors, Cottrell said: “It all comes down to educating all the parties in the contractual chain and ideally at the outset. A contractor should seek the views of the client if they are planning to rely upon a right of substitution to take them outside IR35. On the basis that most substitution clauses are unreasonably fettered and do not work, I would recommend concentrating on the control issues in the contract which is the most important status issue.”

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