The Inland revenue recently published guidelines contained the following misleading information on the 'Right of Substitution'. David Smith, an expert in employment law from Accountax states his view......
The Inland Revenue says:
44. My contract specifies that I am allowed to hire a substitute. Will the Inland Revenue take this at face
value? If not will I need to provide evidence to prove that this right is genuine?
The Inland Revenue will want to ensure that the right to send a substitute is a genuine right before it can be taken into account in deciding employment status. A right of substitution is only likely to exist where the client does not mind, from one day to the next for the duration of the contract, who carries out the work, provided that whoever does so is suitably qualified and experienced. We do not accept that such a right exists
where the client's permission has to be obtained before sending a substitute. Where the service company's contract is not with the client but with an agency, and there is a claimed right of substitution, the Inland Revenue would normally require a copy of the written contract between the agency and the client. If you are unable to get access to that contract then you should ask the agency to send a copy to the Inland Revenue direct. If this is not possible you may be asked to provide alternative evidence. This could take the form of a letter from the client which confirms that it has
agreed to your service company providing a substitute and that it does not matter which worker is provided on a day to day basis over the course of the contract.
David Smith from Accountax says:
"The right to send a substitute, to be fully effective, should be an "unfettered" right. This goes back to the case law from the late 1960s and was reinforced in the Privy Council in 1978 in the Chaplin appeal. In the recent 1999 Court of Appeal case of Express Echo v Tanton the right to send a
substitute was again given overwhelming legal importance in deciding tax status. It should be appreciated that a "right" to
send a substitute only with the client's permission or by giving say a week's notice is not really an unlimited right at all. In our view
the mere right to "offer" a substitute who the Client can reject is not the same thing as the clear right to send one at the
personal company's discretion. The right to send a substitute should therefore be open and unlimited. It is crucial that the unlimited
right to send a substitute is clearly spelt out in the contract. The contractual right should be between the individual contractor's
personal service business and its client which more often than not is the Agency. What the Agency agrees with its own end user Client
is not relevant to the contract agreed by the personal service business as it is not a party to it. The Finance Bill 2000 makes it
clear that the relevant contractual arrangements are only those it (the personal service company) enters into."
Published: Monday, May 01, 2000
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