One thing seems very clear from the Dragonfly Consulting Verdict and that is that the clauses in most IT Contractors’ contracts which have a Right of Substitution clause won’t have any effect in putting them outside IR35.

The reason is that the Commissioners and the courts look like they are going to insist that there has to be an free right to send along a substitute unvetted by the client before they will look upon it as something which shows that IT Contractors are in business in their own right.

They see most contractors as one man bands and their limited companies as being set up with the sole purpose of supplying the services of the individual contractor who set up the company.

As there is no one else in the company then the company can’t supply the services of anyone else.

To get around this contractors could try banding together either inside a single company or perhaps with structured relationships with other contractors who have limited companies.

Possibilities

One would suggest these possibilities:-

1.Two or more contractors with similar skills setting up a limited company which would handle all their work.

2.Contractors and their limited companies having well defined relationships with other contractors and their limited companies who have similar skills. It would be a fantastic benefit if they were able to get each other work. If they were able to get those contractors ‘in’ at companies where they work then that would help a fantastic deal, especially if there was a written covenant where the contractor / company finding them the work would get a set fee or percentage of the contract fee. If there was an covenant amongst those contractors to provide the services of the other contractors in the loose (but well defined) relationship then that might be usual as being outside IR35

Bugbear

The big bugbear in the Right of Substitution is in convincing client companies to accept an free right to substitute someone else to do your work at the company.

I suppose that one way to do it, once you’ve got the contract, is to send the person that you want to substitute for you along to see the company right at the beginning so that the right of substitution and an covenant on the substitute is made before any work starts.

If it is the same substitute you use all the time it could be deemed that, although you have a limited company and the substitute has a limited company that the business relationship could mean that you are in business on your own account.

But, until it is tested by the courts or there is further clarification, IT Contractors are still in the dark and have to try and second guess whether they are inside IR35 or not and what puts them outside or inside – and this lack of clarification has been the big problem all along.

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