Business Services, Business Tax, Payroll Tax, Personal tax

IR35 changes – understanding the difference between subcontracting and substitution

By RJP LLP

IR35 changes – understanding the difference between subcontracting and substitution

If you are a contractor you will be aware of changes introduced recently to the IR35 legislation. Being caught by IR35 can mean a lot of extra tax to pay, so it is well worth being on top of what are increasingly complex regulations.

One of the key tests for checking whether IR35 applies to your company is to review whether you are providing ‘personal services’ i.e. whether you as the company shareholder/ director are offering your own personal services, albeit through an intermediary like an employment agency, or not. A question to ask is whether there is scope to substitute someone else on your behalf, either within the terms of contract or in practice? Having a genuine right of substitution is the most straightforward way to demonstrate that you are not an employee and so not caught by IR35.

In any employment relationship, the element of personal service is always present. If you work for someone else, you can’t just substitute a colleague in order to take a day off. In the event that this was possible (and acceptable), you could argue that IR35 does not apply. A former HMRC Tribunal case between Express & Echo Publications Ltd and Tanton highlighted that where a worker had the genuine right to send a replacement (a substitute) if they are unwilling or unable to provide their services, this was not consistent with employment and therefore contracts are not caught by IR35.

Understanding HMRC’s definition of ‘true substitution’

According to HMRC, this means a provider engages another contractor or business to perform an entire range of services during the period when the original provider is unavailable. A separate agreement is then held between them, and the entity that engaged the substitute is responsible for ensuring the service is delivered and for paying the substitute.

If an agency or the original client sources and pays for the replacement, this is not regarded as true substitution by HMRC. If you are an independent business completing a piece of work, you will need to demonstrate to HMRC that in situations where you cannot fulfil the contract, you remain responsible for ensuring that your client receives the services, by providing and paying for an alternative consultant.

An IR35 case between Usetech Ltd v Young illustrates this point. Here the worker had the right to send a replacement, but the agency was required to interview the replacement first. The substitute then had a separate contract with the agency, and the end client specifically wanted that substitute – there was no flexibility over sending another alternative contractor. If the substitute was not available, the process needed to be repeated to find another suitable provider. There was no freedom to decide who performed the work and therefore an element of ‘personal service’ was present – the arrangement was caught by IR35.

What this highlights is that just having the right to substitution may not on its own be enough to demonstrate that no personal service is required, because the necessary conditions for that substitution may not be met.

If you are a business using contractors or consultants and want to discuss any tax planning matters please get in touch via partners@rjp.co.uk.

How to get onboard with RJP

Talk to us

Have an initial discussion with a member of the RJP team to identify ways we can enhance your business's growth with our comprehensive support and strategic advice.

Hassle-free migration

Choose RJP and we'll smoothly manage all transitions, handling paperwork, coordinating with your current accountant, and ensuring no deadlines are missed for a worry-free experience.

A pathway to growth

Finally, we will send you the required documents to sign and return, leaving you to continue leading your business, backed by our abundant, responsive advice and support.

Companies House Identity Checks for Directors: What You Need to Know

Business Services

Half a Million More People Now Pay 45% Income Tax: What It Means for You

Business Services, Personal Taxation

Business Asset Disposal Relief in 2025: Are You Still Eligible?

Business Services, Business Tax

Here’s what our clients have to say

Hear directly from our clients about how RJP's personal, straightforward approach has made all the difference in their business and personal success.

"I just wanted to drop you a short note to say how grateful I am for the support that RJP has provided over the past 4 weeks while our Financial Controller was away. I struggle to comprehend how much work your staff get through during their weekly visits and they are always a pleasure to have around the office."

"I wanted to write and express our gratitude for your help and hard work in getting Probate through and settling all the taxes. I am so pleased that we selected RJP, as your professional help and updates throughout this process have been invaluable. If at any time in the future Probate assessment may be needed, you will be our first port of call. Once again, many thanks to the whole team."

"I would like to take this opportunity to thank you very much for the amazing job you have done navigating us through this whole process. My family and I also really appreciate the care and compassion demonstrated by you and your team in every dealing. Our thanks to everyone."

"Just a quick e-mail from me to thank you for achieving the target for producing the draft accounts – it is very much appreciated and gives a first class impression of your firm. Many thanks."

"RJP provide our company with a complete service which takes the stress and strain away from the day to day running of our accounts! Their understanding of our business and their patience and advice is invaluable."

Get the latest tax tips to your inbox every month

FAQs

At RJP, we understand that keeping a finger on the pulse of your business's health is crucial. That's why we offer management reporting services—think of them as a regular health check for your company. These insights show you the real-time performance of your business, helping you make informed decisions to nurture and grow your enterprise.

We love seeing your business flourish! Growth and improvement are at the heart of our practical advice. From the ins and outs of everyday operations to big-picture strategic moves, we're here to offer clear, actionable steps that can propel your business forward.

We know dealing with the issue of compliance and auditing can be less than thrilling. That's exactly why we're here—to handle the complex stuff so you don't have to. We offer comprehensive compliance services, ensuring everything is up-to-date without you having to wade through a sea of regulations.

Absolutely! There's a world of opportunity out there to support your business financially, and we're well-equipped to be your guide. We can help you understand and access HMRC’s tax relief schemes that are relevant to you and your business, making sure you're not missing out on any potential benefits.

When you need us, we're just a call or an email away—no question is too small or too large. We're known for our quick responses and our fixed fees mean you can reach out without worrying about unexpected costs. Plus, we always keep things simple and straight to the point. We're not just your accountants; we're part of your team, ready to support both your business and personal needs.