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A substitute for substitution?
by Kevin Miller at 10:37 21/01/04 (News on IR35)
The right of substitution is often seen as the holy-grail in the fight against IR35. However, Qdos Consulting has recently helped a contractor fight off a Revenue IR35 challenge where a client had confirmed to the Revenue that there was no genuine right of substitution.
The Revenue's attack started with an employer's PAYE compliance review and a seemingly innocuous IR35 questionnaire. From that it rapidly progressed to the point where the Revenue was claiming that the company’s contracts were caught by IR35.

This is the point where most tax investigation insurances would kick in to provide expert assistance. Unusually, however, the company, Jensal Software Ltd, was not covered by any professional fees or tax investigation insurance. Nevertheless, its managing director had the good sense to call in consultancy help from the experts at Qdos, where consultant Andrew Vessey handled the case.

Initially the position looked difficult. One of the end clients was a Government department who provided the Revenue with written evidence that the contractor did not have a genuine right of substitution and that the personal service of the director was a requirement. Based on this and the Inspector’s view that the client exercised control over the contractor and that there was mutuality of obligation the Inspector issued an opinion that the Director was caught by IR35.

However, Qdos encouraged the Company to resist this view and together with the director Qdos re-examined the working practices. This indicated that the director had other strong and positive factors. Steve Greenwell, the Qdos director with overall responsibility for Qdos's tax investigation defence work, confirms that they were able to successfully argue against the Revenue’s stance on all three of these areas.


On the issue of substitution Qdos rightly pointed out that a lack of such a right was not a pointer towards employment. Further, in the Synaptek case the Revenue had themselves argued that substitution was just one of the factors to be considered, hence it was illogical for them to now claim that the lack of such a right was now a critical factor.


The Inspector argued that, whilst the contractor worked unsupervised, the client carried out reviews and checks on his output on an ad hoc basis, while time management was reported on a weekly basis and “signed off" by the business manager. Hence, in the Inspector's mind, there was a right of supervision, direction and control by the end client.

Qdos pointed out that timesheets are merely a form of budgetary control and not a procedure to control the actual services themselves. The fact was that the contractor had discretion as to when the services were performed and the methodology was their own. Further the contractor set their own agenda. The end client requirements were for consultancy services and for the contractor to make recommendations. How then, Qdos argued, could the Revenue possibly assert that the end user had the right to supervise, direct and control the work?

Mutuality of obligation (‘MOO’)

The Inland Revenue have a very narrow interpretation of MOO and it can be difficult to argue this matter. However, Qdos put forward the view that MOO was the mutual commitment by the employer to provide work and the commitment by the worker to do any work that is provided. This also encroached into the territory of control, i.e. the ability to move an employee from task to task. The end client had no such right in this case. If they wanted the contractor to carry out work other than those services defined in the contract then negotiation would have had to take place between the two parties.

Having responded in detail to all the Revenue's points Qdos invited the Revenue to make a Section 8 NIC decision and confirmed that the company would appeal against any such decision to the Commissioners. The Revenue re-considered their case and 10 months after the case began they accepted the contract as being a contract for services – i.e. outside IR35.

The managing director of Jensal Software Ltd confirmed that:

"I found Qdos's advice invaluable and would cite the following insights as being of particular value in contesting my case :-

* Understanding of the IR35 legislation and procedure.
* In depth knowledge of IR35 case law
* Appreciation of IR mindset and internal workings
* Understanding of Inland Revenues internal processes and guidelines.

"Further to this I would add that on two occasions I would have deferred to the ruling purely through attrition. However, Qdos was a constant source of encouragement within this context. Our first reward arrived after around six months when my working relationship with one of two end clients involved in the review was deemed outside the legislation. This proved an immense moral booster since my agency contract with each of the two end clients was identical. Qdos encouraged me to push further and supplied me with a marvellously challenging letter to the IR reiterating key points of my business status and inviting them to pursue my company at Special Commissioners if doubts remained. This effectively resolved the matter and justice was done. My actual working practices particularly in areas of supervision justified this view and I am now operating outside IR35.

"Many thanks to QDOS and in particular Andy Vessey for inspiration, support and expertise. They come highly recommended."

This is yet another example that confirms the value of having expert assistance, whether they are engaged as consultants, as in this case, or provided by virtue of having tax investigation insurance, such as Freelancers Outside IR35, and Qdos's own policies.

It also confirms that, while a right of substitution is a very powerful factor in ensuring a contract is outside IR35, its absence does not automatically mean a contract is caught and general business factors such as control can be equally powerful arguments against IR35 status.

For more information on Qdos Consulting see here: Qdos Consulting

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Kevin Miller, MA FCA
Kevin Miller Consulting Limited
Shout99.com 2004

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