Employment status: Lessons of substitution
The right to provide a substitute is one of the main indicators of self-employed status but as the workplace changes, the principles and guidance around the nature of substitution in the worker-engager relationship are also developing, writes Rebecca Seeley Harris.
You might also be interested in
Replies (20)
Please login or register to join the discussion.
Great piece Rebecca. We must remind ourselves that HMRC guidance is not justicable before the courts. What this means in plain English is this: HMRC can write whatever they want, but it may not align with the law, and guidance cannot be printed off and used as evidence in court as if it is factually correct in law. Or, even simpler. It cannot be relied upon.
Re substitution, from the thousands upon thousands of assessments we have conducted, only about 3% of contractors have even substituted. For IR35, the other factors need to be focused on, particularly control and mutuality of obligation.
Could the editor please read this conclusion . . .
"For substitution to be truly effective the worker must be:
* both unwilling and unable to provide the services;
* pay the substitute, and not allow the client or agency to pay them;
* have an unfettered, or commercially fettered contractual right to substitute; and
* there must be a clear commercial reason for a pre-approved pool of workers.
Substitution is the silver bullet which kills off personal service, but only if you can rely on it."
. . . and then rewrite it using the normal rules of normal English? Thank you.
I hope all the contractors with ineffective substitution clauses inserted into what are otherwise employment contracts read this and now realise that they are actually inside IR35 and always have been. Over the years I have heard many contractors and accountants say that IR35 cannot apply simply because there is a substitution clause when in fact the client has a total right of refusal. Excellent article (despite the grammatical error in the conclusion - proactivepaul's pedantic comment - which does not make it any less intelligible)!
I may be mistaken, but I believe that it is the role of legal experts such as Rebecca, and it is the role of professional resources such as AccountingWeb, to reduce ambiguity and not to increase it.
Rebecca's conclusion states "For substitution to be truly effective there must be a clear commercial reason for a pre-approved pool of workers".
I have reviewed dozens and dozens of contracts and IR35 issues. All of them have been silent on the issue of "a pre-approved pool of workers". I can second guess what is meant, but that is not what it says.
My clients expect professional, unambiguous advice from me, written in competent English. Can we not expect the same of the legal profession?
I'm not an expert but it seems there is something wrong with this 'substitution' idea for some kinds of workers. Suppose a former Prime Minister retires from politics and begins working as an after-dinner speaker. He gives 100 or so performances a year for many different organizations. Can he substitute someone else to do the speech? No, obviously. It has to be the former PM or people will be angry and baffled. He can't substitute, but does that in any way tell us he might be employed by the various clubs, businesses, and agencies he speaks at? I don't think so.
Thanks Rebecca. They are not weighted according to circumstance on the revised CEST tool, which still thinks I am a casual worker because of lack of substitution, even though I am more of a mini-celebrity (not retired PM level of course). Rather frustrating.
That's the first hit on Google, but seemed a bit too exciting for AWeb.
I was expecting an extra on Coronation Street, or a town crier.
I'm not the actor, but I've written a couple of books, have been involved with standardisation in the area of risk management, and now lecture on the management of risk and uncertainty. As I say, a mini-celebrity, but it does matter that it's me not just anyone with a Powerpoint file.
Who, when they were based in England pre D Day, were in Aldbourne, Wiltshire, where my grandfather was originally from - a very pretty village which I visited for the first time about three years ago.
Hi Matthew, this is a general article on substitution and doesn't get in to any depth. If it did I would discuss the position of the expert, who cannot substitute and balance that with the lack of control that the client has over an expert. It's too complicated to explain in full but, all the employment status factors are weighted according to the circumstance.
Thanks for this article, Rebecca. It is indeed helpful. I, too, am interested in this topic, having just been approached by an expert similar to that which Matthew describes. A new area for me.
I, too, cannot see that the CEST tool allows for other factors to be 'weighted according the circumstance' (like not having total control over what and how she will say and do her 'thing' while stipulating the time and place of the event - and the expected outcomes). My client is hired, by many different organisations, for her expertise - which includes the contracting entity's estimate of how she will 'fit' with the audience and presentation team. She can offer a replacement suggestion in an emergency - but not a substitute within the described meaning of the guidance. My viewing of the CEST tool is that it is too unsubtle for this. I can only hope for any challenge being rebuffed at a later stage by some common sense, such as you describe. It will, however, cost us to find out ...
Unfortunately HMRC are not looking to cover any eventuality. They just want as many people as possible back on PAYE and they will use whatever means possible. When an entity such as HMRC are guided by that thesis, then it's not rocket science to discover the mess it creates.
The obvious answer is that HMRC have no right to determine employment status, it is a commercial decision (the tax benefits or not are a by product). This new Government could well do away with IR35 and HMRC sticking its nose in where it shouldn't. In fact I wouldn't be surprised that within the next 5 year we will see Accountants taking over the administration, allowing HMRC to concentrate on investigations and tax collecting.
The whole system of personal taxation needs reform. It is fundamentally designed to be unfair. Consider this: my son had income from 8 sources last year; 2 were restricted hours employments, 6 were short term casual work which he declared as self employment. The shortest was three days warehouse cover. He is dyspraxic His total income is hardly above the tax threshold. Completing the tax return and complying with tax legislation is a nightmare for him. The first question on the tax return is what is your business name. Err, it does not have a name. What does it do - warehouse work, caring for an elderly person, anything really that earns a few pennies. He lives in fear that he will get something wrong and be penalised. I am retired, I have pension income and some share and building society investments. I get a tax allowance for the pension, capital gains allowance for part of any capital gains, a dividend allowance and a savings allowance! I can live on tax free income reasonably comfortably. And in addition I have investments sheltered in an ISA all tax free. Is that fair? NO! Income should be taxed as income at the same rates from whatever source, and everyone should be entitled to claim legitimate expenses incurred in generating that income, whether employed, self employed or from other sources. The economy would work more efficiently; resources would not need to be wasted on arguments about employment status. Everyone would be able to make work arrangements that work for them. A mantra of the Conservative party is that we all benefit from a healthy economy. Let us hope that BJ addresses this issue over the next five years.
It's not the most urgent or talked about priority for the government, but if they wanted an easy way to get started perhaps the way forward would be this: Develop one or more alternative tax regimes for individuals that people can opt into that are radically simpler and more flexible, acknowledging that more people than ever are doing a variety of things to be useful and make ends meet. As someone on this page suggested, let the tax payer choose which regime to use, but make sure the tax paid tends to be very similar and the administration is radically easier. That way, eventually, people will switch to the new, simpler calculations.
Done properly, the new calculation would be so simple that anyone can do it, with a spreadsheet or the back of an envelope. Unrealistic? It depends on whether you have a vested interest in keeping tax complicated or not. It means letting go of obsolete incentive schemes, vote hunting tweaks, anti-evasion ideas that cost more than the tax saved, and all the other historical junk that has accumulated over the decades. Radical simplification, a free choice for tax payers, and an end goal of retiring the old stuff when nearly everyone has forgotten it's still available.
Agreed- in Germany where my son worked in Frankfurt as a contractor (software development) they have a particular form of entity especially designed for professional contractors. It is surely not beyond the wit of the UK government to create something similar.
Now he is back in the UK (contracting for the Scottish Government at present) he jumps through multiple hoops re how he operates- our tax system is really behind in how it operates and is just not fit for purpose in the 21st century.
https://www.contractoruk.com/overseas_guides/contractors_guide_contracti...