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There are some suggestions going around that Personal Service Obligation (right of substitution / non personal service) may be legislated out of employment status tests for IR35 purposes soon.

Theres no formal detail on this yet, the suggestion was something to be published today but I’ve not seen any details.

My initial reaction is “don’t panic”.  Lets break it down.

IR35 cuts in if there is a failure in the Employment Status Tests when applied to an engagement between PSC and client, with or without an agency.

The Employment Status Tests don’t derive from legislation, instead they derive from case law.  There are considered three tests which are the “holy trinity” of employment status – all three must be present for an employment relationship to exist.  The converse is if one is missing employment status cannot exist, inter alia IR35 cannot apply.  The key three tests are:

~ Personal Service

~ Mutuality of Obligation

~ Control

Personal Service is the issue here – if someone isn’t obliged to do work personally then employment can’t apply.

Problem is, how do you show that, especially if the contractor does all the work under his/her PSC?

For a long time Substitution Clauses have been thought the salvation to this, i.e. a right to send a substitute.  The landmark employment law case of Express and Echo Publications v Tanton of 1999 confirmed this.  However HMRCs strategy, quite possibly with some due cause, has been to question the commercial reality of Substitution Clauses, principally:

~ Does the client accept them

~ Are they workable in practice

If not then potentially they are a sham and fall to be disregarded when constructing the IR35 hypothetical contact.  Of course if substitution or delegation/subcontract has actually occurred during a contract – other than minor admin chores – then that seals the issue to a large degree.

So what we are probably faced with – if anything – is legislation to negate the effect of otherwise unused substitution (or other non personal service) clauses.   If substitution / delegation has taken place then its difficult to see how, even with legislation, the position could be classified as employment / IR35 fail.

So where does this leave us with IR35?

For a long time we have been advising clients not to rely on untested substitution / non personal service clauses.  Instead the important thing is to get the fundamentals of recording working practices correct, particularly to demonstrate lack of control and lack of mutuality of obligation.  Its been clear for some while HMRC were adverse to relying on untested substitution / non personal service.

This furthers the reluctance of HMRC to rely solely on written contracts, and their wish to obtain evidence around actual, rather than documented, working practices.

To this end, apart form borderline cases, little probably changes.

However it does perhaps suggest a tightening by HMRC and all PSC users would be advised to check their record keeping, documentation and status assessments.