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Contractor specialists, Qdos Consulting, takes a closer look:
Personal service
One of the key tests to determining your employment status under the IR35 legislation, is the existence of personal service, also known as the right of substitution. Although it is one of the most weighted tests of genuine self-employment, it continues to flummox many contractors and there is sound reason why.
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The substitution can be for full or part of the contract term.
Personal skills
Most self-employed contractors operating via a limited company are working on their own, and you are probably no different. You promote your company on the basis of your personal skills, qualifications and experience, it is, after all, you who is going to be doing the work as you are the only one who works for your company.
The majority of contractors will never feel the need to engage a substitute worker neither, perhaps they never needed to because they never needed sufficient time off of the contract to warrant it. Others may feel that they wouldn’t know a suitable worker who could substitute for them, especially those who work niche fields or have a set of highly specialised skills. So it is understandable that many contractors question the substitution test’s practicality.
Differentiate
To help you understand this test of self-employment, you must remember one thing only; IR35 tries to differentiate the genuine business from the disguised employee. So what would a business vs an employee be able to do?
A permanent employee would not be able to start a contract of employment and then send a friend in to do their work when they needed to do something else, regardless of how capable that friend might be. An employee is required for their personal service and they have no right to provide a substitute in their place.
A business would hold a contract with the client and send the workers that they saw fit. There may be an element of cooperation required from the client but as long as the worker has the sufficient skills to complete the task, there is no reason for them to be declined. A business would not be held into a contract for just one of their employees and so would hold an unfettered right to provide a substitute.
Acting as a business
As a limited company contractor, you should be acting as a business and not as a permanent employee. Your contracts are held between your company and client/agency, not yourself personally (or at least they should be), meaning that you are personally not involved within the contract and so your company should be able to provide a suitable alternative worker to uphold the engagement.
This is how a business would do it and so this is how you should.
Proof
So the next big question is how to prove it. So it says in your contract that you have the right of substitution and your client has agreed that this would be honoured. Is this enough?
The golden ticket for proving your right to substitute is, of course, to use it. If you should use your right, ensure you maintain records of the agreement including payment records to present to HMRC in the event of an enquiry. You do not, however, need to make a contrived use of this right for the purpose of proving your status, e.g. using a substitute for a single day. Without a genuine need for it, HMRC will likely see right through your attempt and ignore it from their assessments. Besides this, it is an unnecessary effort.
The best way to prove your right of substitution without using it, is to obtain confirmation from your end client, preferably in written form, confirming that the substitute would not be denied without reasonable grounds and that your company would maintain responsibility of the contract and worker. You will have the opportunity to explain to HMRC if you have not needed to exercise your right or if you did not have a suitable candidate to hand.
So what if you do not have the right to provide a substitute and your personal service is in fact required?
A single status test alone cannot determine your status, although this test does tend to hold the most weight in an investigation. Your whole contract and working practices should be assessed under the rules of the IR35 legislation by a dedicated professional.
If you find that your contract falls within the scope of the legislation, you may need to apply full PAYE to the engagement and so should seek advice about making a deemed payment at the end of the tax year from your accountant.
Remember that there is nothing wrong with operating within IR35, it is just less favourable on your finances and so most will tend to make efforts in operating outside the legislation. Paying the correct tax and NICs for your particular situation will avoid any nasty penalties and backdated liabilities owed at the end of a lengthy IR35 investigation.
Shout99 works in close co-operation with Qdos Consulting who provide a specialist range of products and services to offer protection and support to contractors in the event of an HMRC investigation.
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Susie Hughes © Shout99 2015
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