One of the most important ways to ensure a contractor stays outside IR35, is the right to substitution. A substitute is someone the contractor can send in their place to undertake their role, if, for some reason, they are unwilling (but oddly, not unable) to perform their duties themselves. The right to reject a substitute means that even if the replacement is equally qualified for the role, and pass the screening process, you can refuse them.
CEST Tool Changes
In the previous version of the CEST tool, the contractor’s right to substitution was expected to be an unfettered one. HRMC subsequently recognised that even if a client can have a say on the substitute, there is still a chance that this could be rejected at tribunals. We have created some guidance, which will hopefully help ensure you are clear with your right to substitute, and therefore, it is less likely to be picked up by HMRC as inside IR35.
Tips for Passing the Substitute Question
We have compiled some tips for passing the right to substitute question, so that there is no confusion when HRMC are assessing IR35 status.
It is a good idea to have a clear substitution policy, which can be used by contractors and managers. The substitution policy should state the terms of the substitution and the process for screening/accepting a substitute. If you have guidance in place, it will be difficult for HMRC to question it.
Guidance and Training
Hiring managers should receive guidance and training for dealing with a notice of substitution from a contractor. This should include how they respond to a substitute and the procedure thereafter. If the process is not followed, it could be open the business up to liability issues. It is important to be prepared, and you still have a few months to get these checks and procedures in place.
Onboarding a Substitute
Although the thought of a substitute is often not very appealing to business owners, it is extremely important to have this option in place. One of the reasons businesses don’t like the idea of substitutes is that they need to onboard them and there may be cost implications of this. It is important to have clear guidelines on the onboarding process for substitutes, as well as an understanding of the potential costs this can incur. Contractors who genuinely care about their outside IR35 status may be willing to underwrite such costs.
The best way to get through this question is to have clear documentation and guidelines, as with this in place, it would be difficult to argue that the contractor is inside IR35.