If you’ve ever looked into getting a subcontractor contract drawn up, you’ve probably come across the “right to substitution” clause. It’s something we’ve mentioned ourselves in previous blog posts.
But what does it mean, how important is it, and are you obliged to honour it? After all, you probably don’t want your subbies sending any old substitute whenever they feel like taking a day off.
Let’s take a look at this clause in more detail so you know what your options are.
What does “right to substitution” mean?
The right to substitution clause is pretty much exactly as it sounds – it means a subcontractor has the right to send a substitute to carry out work on their behalf.
Let’s say you’ve contracted Bill as a labourer for a long-term construction project. Bill gets ill, has a family emergency, or just needs some time off. He sends Ben in his place.
Ben has the relevant qualifications and experience, so (in theory) he can carry out the work Bill was contracted for.
Why is the right to substitution clause important?
When HMRC and the courts are determining employment status, there are three key “tests” they use:
- Personal service
- Control
- Mutuality of Obligation (MOO)
The first of these tests – personal service – looks at whether you are expecting the subcontractor to carry out the work personally.
The right to substitution demonstrates that you do not need your subbies to deliver the services personally – any individual with the relevant qualifications, skills and experience can represent their company to deliver those services.
If you expect the subcontractor to personally carry out work and deny them the right to substitution, this can indicate to HMRC that the relationship is more one of employer-employee.
Who can be sent as a substitute?
A substitute doesn’t have to be an employee of your subcontractor’s business. It can be any individual with the experience, skills and qualifications to carry out the work.
It could be someone your subcontractor has worked with before or knows personally. Or it can be someone they have sourced from a networking site or agency.
How do you pay substitutes?
You, as the contractor, don’t pay substitutes directly.
You pay your subcontractor, and they pay their substitute.
This is very important. If you pay the substitute, they aren’t a substitute – they are a replacement.
It might seem like a minor detail, but if HMRC ever enquired about a subcontractor’s employment status, this detail would matter.
Paying your subcontractor when they send substitutes provides evidence that the right to substitution clause is honoured. You demonstrate that your contract with your subcontractor is for the completion of a project, not for personal service, and therefore they are genuinely self-employed.
If you pay the substitute directly, HMRC will view this as additional labour, not substitution.
Do you have to accept substitutes?
Your contract has to reflect reality. That means you can’t just stick a right to substitution clause in the contract if you have no intention of ever honouring it.
That said, you do have some rights when it comes to refusing substitutes to protect the integrity of your business.
If the proposed substitute falls short in terms of skill, experience, and qualifications, you have the right to refuse them on that basis.
But you need to make this right to refuse part of your contract terms. If your contracts aren’t clear about your refusal terms and you refuse a substitute, HMRC could question whether your right to substitution clause is genuine.
Can you just leave the right to substitution clause out of your contracts?
According to HMRC’s own CEST tool:
A client will have the right to reject a substitute if:
- the contract specifies that the worker will perform the work and is silent on substitution;
- the hirer has an explicit right to reject a substitute;
- the worker can only provide a substitute from a pre-approved pool of workers.
So, in theory, you can specify in your contracts that the subcontractor has to carry out the work themselves, or you can leave the substitution clause out completely.
But here’s the problem with that.
If HMRC ever opens an enquiry, they will use this against you (it goes back to the personal service test). On its own, it probably wouldn’t be enough for them to reclassify your subcontractors, but combined with other factors, it adds a lot of fuel to the fire.
Why take the risk?
If your subcontractors are genuinely self-employed, the right to substitution shouldn’t be a problem for you.
But if there is a legitimate business reason why you can’t offer unfettered substitution, let’s document it in your contract so there can be no confusion or misinterpretation.
Get a watertight contract with an insurance-backed guarantee
The key to protecting yourself from an enquiry into employment status is to fully and clearly document your working relationship with your subcontractors. How do you work with your subbies, and why do you work that way?
If there is a legitimate business reason for working the way you do, document it so if HMRC ever comes calling, they can’t use it against you.
HardHats can help you do exactly that.
We create bespoke, watertight contracts that reflect your true working relationship with your subbies and leave nothing open to misinterpretation.
And we’re so confident in our contracts, they all come with an insurance-backed guarantee. If HMRC ever opens an enquiry, we’ll handle it on your behalf. And if they do reclassify your subbies, we pay any associated costs.
You can find out more about how it works here or book a call to get started.