When dealing with compliance relating to self-employment there are a few key topics which crop up time and time again, regardless of the industry.
One of these key elements of self-employment within logistics is ‘the right to substitute’ – but what exactly does it mean? We’ve taken a closer look and laid out all of the facts below.
The right to substitute is an important element of self-employment which HMRC looks for when carrying out an IR35 investigation. It is therefore essential that, for all subcontractors who want to work outside IR35, a real right to substitution exists in practice throughout the entire time of the working agreement, with this also being present in the contract.
If the end-client doesn’t accept that the right of substitution is determined on working with a specific subcontractor, this invalidates the logic behind working with the subcontractor’s limited company from the start, because they actually want to work with the specific individual instead. From HMRC’s point of view, they could argue that if there is no legitimate right of substitution in practice, the individual is being treated like an employee and should be taxed in this way.
What does the right to substitute mean?
The right to substitution means that the working contract is for the execution of the project, rather than for the individual’s time and effort specifically. This means that, if needed to, another person could complete the work instead.
This ‘substitute’ does not need to be an employee of the limited company, it can be anyone the contractor knows that works within the same industry, or even someone who is found through an agency etc.
The limited company is responsible for all costs associated with the substitute, with the limited company being paid as normal by the end-client and the limited company will then need to pay the substitute directly.
The substitution clause
If the end-client/agency has issued a contract of engagement, the contractor should look for the substitution clause. If the substitution clause can not be found in the contract, this could mean that the end-client will not allow for substitution or they are not fully aware of the importance of this.
For main contractors, it is crucial the substitution clause is inputted into the contract, but this also needs to be acknowledged and confirmed by the subcontractor to provide further protection. However, this right to substitution needs to be evident and available in practice, not simply in place within contractual agreements.
Finally, any evidence of the right to substitution written into a contract should be kept on file, as it could be very useful in the event of an investigation by HMRC.
At Wise, we’re experts in all aspects of self-employment and are able to offer our clients industry-leading advice on all aspects of employment status and tax law. To find out more about how Wise can help your business better engage self-employed subcontractors, book a FREE demo with one of our experts, here.