Substitution Clauses: What, Why and How
One subject that has come up repeatedly in our recent blogs, especially those focusing on IR35 regulations, is the idea of a substitution clause. But what exactly is a substitution clause, and why do people keep urging you to have one?
Most contractors and freelancers operate as individuals, taking on projects themselves and seeing them through to completion. However, a substitution clause is a section within your contract that tells your clients of your right to provide an alternate person or persons to carry out the work that you have been contracted to do.
It can be useful if:
- you're ill
- you have a family emergency or other issue
- you're on holiday or abroad for another job but you have clients that need looking after
- you want to temporarily step back from work for some reason
There are clear benefits to having a substitution clause on a purely practical level in the event that you cannot or don't want to complete the work yourself, you can make sure it gets done, without the client terminating the contract and finding someone else. You also retain control of (and therefore, accept responsibility for) the quality of work carried out, being able to choose an appropriate substitute with the relevant qualifications and experience for the job. You can also brief them yourself.
Substitution clauses and IR35
However, the main reason that you have probably seen substitution clauses being recommended to contractors is because this is one area that has come under scrutiny as part of HMRC's IR35 regulations designed to crackdown on what tax officials see as off-payroll working. HMRC is specifically looking for cases in which the relationship between the contractor and the client is more akin to an employee/employer relationship. It uses the terminology of providing a personal service to describe the kind of relationship that it sees as disguised employment. In contrast, a contractor, it would argue, should be replaceable. Having a genuine substitution clause is just one factor in determining IR35 status, of course, but being able to demonstrate that your contract agrees that you can provide an alternate person to carry out the work is a good way to shore up your status. Essentially, you are looking to prove that the client is engaging you to provide a certain service and not to provide a specific individual.
However, for it to fulfil this purpose, your substitution clause needs to have certain features, including:
- Your client must to agree to it. As well as having it in your contract, you could look to obtain written confirmation with a confirmation of arrangements letter.
- You (the contractor) must pay for it. Payment can't sidestep you and go directly to your substitute. Instead, you must engage and pay the substitute for it to be seen as genuine substitution.
- You (the contractor, and definitely not the client) must choose the substitute. Don't offer your client a right to a say in who carries out the work. This might seem a magnanimous thing to do, but will weaken your case if you need to argue that this is a genuine self-employment. This is because it is then hard to argue any difference between this practice and the client just engaging another contractor - it could be argued to be a new contract rather than a substitution. In practice, most clients will be happy to rely on your expertise and knowledge of your field to provide them with someone who is up to the job.
- Your clause shouldn't only kick in when you are unable to do the work. You should retain the right to be able to choose to a substitute at any time. The devil is in the detail here. If your substitution clause specifies that it only applies in the event that you can't perform the work, this could be argued to not be a genuine substitution.
- A substitution clause may also be deemed to be a defunct if you are using an agency so be aware of this.
Of course, these are just rough guidelines and we would always advise that you seek professional legal advice on the terms of your contract.
Insurance for substitution
As you can see, under the terms of a contract like this, you will need to pay for a substitute, and will also be liable to pay for any damages or action arising from work carried out by the substitute. So how do you make sure you're covered in the event that something goes wrong with a job covered by a substitute? The good news is that if you have Kingsbridge's specialist insurance for contractors, we've already thought this through. Most sections of your policy your Employer's Liability, Public Liability, Products Liability and Professional Indemnity will extend to cover an authorised substitute provided by you, as long as you let us know within 7 days (for full information make sure you check your policy documents which we sent to you when you took out your cover). You just need to let us know who the substitute is, how long you expect them to be working in your place, and keep us updated about your expected return to work.
If your substitute is a fellow contractor, it is also worth ensuring that they have appropriate business insurance themselves. Did you know that if you refer a friend to Kingsbridge, you can get up to £40 of Amazon vouchers? And you'll be able to rest easy knowing that they are well covered, just like you.