Should you let your contractor send a substitute?
A key IR35 test is the right to send a substitute. You spent time and effort in choosing the right contractor for your business. So why would you want to accept a substitute and let someone else do the work?
If you don’t allow them to send a suitably qualified replacement, that’s one factor HMRC will consider in deciding whether you actually have a form of disguised employment. Which could bring your contractor within scope for IR35 (or mean you ought to put them on the payroll if they are a sole trader).
You need to be sure you:
- have a contract that provides for substitution
- haven’t given yourself an unlimited right to say no
- keep records of when substitutions were allowed
Substitution helps with HMRC and tax
While it can be tempting to want only the person you pay in all circumstances, this can leave you in the lurch.
- What happens if your single-person contractor gets ill, has a massive system failure, or even a family bereavement?
If you and your freelancer have set up proper substitution arrangements, that may help you both to overcome unexpected business challenges without forcing you to take your business elsewhere or miss a key deadline. This is all part of having a resilient business plan. Relying on one person who has no backup plan is bound to go wrong sooner or later.
- What happens if your contractor is not really first-rate on some of the work?
If you are looking for a wide range of support your contractor may be working at the outer edge of their expertise. Wouldn’t you rather they got a team member who was really good at that element to do that part of the work?
- What if your contractor is simply overloaded and can’t meet your deadlines?
The key thing about having your own business is you have more than one client. If you are running late on a project your contractor may be able to speed things up by giving some tasks to a team member. Putting all your deadlines through one person may cause your projects to run seriously late.
All of these are great reasons to substitute. We all know there are times when two heads are better than one.
And it will help you with HMRC if they start saying this is really an employee or should be within IR35. Make this part of your thinking when you look at who you pay – even if you imagine you won’t ever need it.
What if I really can’t accept a substitute?
If the people you pay are in the UK and you want to be sure you only get them, you may be reaching the point when you should be thinking about employing them. That would also give you more legal control. Not everyone wants to be an employee though and you will pay employers national insurance and other benefits to them as well as their basic wage.
If you are really buying a famous media person and no substitute will do – that’s another thing.
Be really sure why you can’t accept a substitute and the effect this may have on the status of the person you are paying. It is not enough to say in your contract they are self-employed. You can trigger employment or IR35 by the way you work with them. Even if they are ‘workers’ rather than employees, workers have a significant number of employment rights.
There are many other factors in determining who is within the scope of IR35 but you are going to have to tick all the other boxes if you can’t or won’t accept a substitute.
How does IR35 affect GDPR?
Some people don’t want a substitute because of fears of data security and GDPR issues. Data security is all about controlling the data. But if you control the person too much you will end up with an employee or someone inside IR35. It is a bit of a dark art making sure you control the data without over-controlling the person. You need to get the contract and the processes right for both.
Freelance contracts and agreements
We’d love you to check out our REAL agreements for freelancers who invoice you.
Your accountant would love it too.
They handle substitution and a lot more you are going to need to please the taxman and make a resilient business plan. They also handle GDPR and data security too. There is no reason to sacrifice one for the other.
Check out our team hiring options here
HMRC and IR35
If you are not sure where ducks come into it – have a look at our earlier post – you can find it here. If you like your ‘duck test’ set out in legal and technical terms here is the link to the relevant part of HMRC’s guidance. Please note that HMRC are consulting on changing IR35 – see our other posts. Changes came into effect in April 2019 and these will be extended to the private sector in April 2020.
This blog is part of a series on IR35 and we are publishing updates and new IR35 related blogs as we approach the implementation date for the private sector.
For more information on how it is that companies have rights – see our earlier post – you can find it here.
