What is a Right of Substitution (RoS)?

A right of substitution (RoS) is a key indicator in determining whether an engagement falls outside IR35 and is often touted in the contracting world as a golden ticket. In theory, if a contractor has the freedom to send someone else to complete the work, there is no requirement for personal service, and this suggests a business-to-business relationship rather than one of employment. However, while a well-crafted RoS clause in a contract can support an outside IR35 determination, relying on it as a standalone defence can be risky.

Establishing an IR35 position requires looking at the whole picture – not just ticking the substitution box. To fully understand how RoS fits into the puzzle, we need to explore its practical application and limitations.

The theory behind a Right of Substitution

The concept of RoS is simple: if there are no constraints on who does the work (other than that they can do it), it is clear that the client is engaging a business rather than a person. On paper, this sounds straightforward and appealing – especially since HMRC’s Check Employment Status for Tax (CEST) tool provides an automatic outside IR35 result if the substitution question is answered favourably. However, while RoS may exist in theory, it must also be practical and realistic to exercise.

In a lot of cases, practical and contractual limitations restrict the effectiveness of substitution clauses. For instance:

• Many contractors are “one-person businesses” – sometimes referred to as “personal service companies” (PSCs), without readily available replacements who match their skill set.
• Clients often impose restrictions, or the nature of the work may add limitations, such as the need for interviews, vetting or security clearance, which can make substitution impractical or impossible.

Why Right of Substitution alone isn’t enough

While RoS is an important factor, IR35 status is never determined by one element alone. Courts and HMRC focus on the entire working relationship, considering factors like control, whether the contractor is genuinely “in business”, mutuality of obligation (MOO), and financial risk.

A substitution clause that exists only on paper, without being exercisable in practice, carries little weight in HMRC investigations or tribunals. Similarly, if the actual engagement shows a high level of client control or mutual obligation to provide and accept ongoing work, the theoretical existence of RoS that has never been exercised becomes irrelevant.

In high-profile cases like Atholl House (Kaye Adams) and Canal Street Productions (Lorraine Kelly), both presenters were found outside IR35 despite having no RoS. These cases demonstrate that tribunals give significant weight to other factors and the overall relationship.

Common misconceptions about substitution

One of the biggest myths about RoS is that including it in a contract guarantees an outside IR35 position. Unfortunately, this misconception has been fuelled by HMRC’s CEST tool, which emphasises RoS in its determination logic.

Consider this example: A client completes CEST, confirms they won’t reject a substitute, and receives an outside IR35 result. However, further investigation reveals:

1. The contractor requires weeks of vetting and security clearance, meaning substitution is not practical in reality.
2. The client controls when, where, and how work is performed.
3. The contractor takes on no financial risk and has no other clients.

Despite the substitution clause, which is a sham in this case, the overall relationship suggests employment. Relying solely on RoS in such cases can lead to a false sense of security and a failure to exercise reasonable care in the status determination process.

Practical considerations 

In some cases, the need for personal service is unavoidable. This by no means puts the engagement inside IR35 on its own, but it does emphasise the importance of ensuring that other factors point towards a genuine business-to-business relationship.

To strengthen the defensibility of an outside IR35 position, contractors and engagers must address the practicalities of substitution:

• Ensure the substitution clause is unfettered (beyond skills, qualifications and security requirements) and realistic in practice.
• Keep evidence of instances where substitution has been exercised, or around why a substitute could reasonably be provided, and within a reasonable timeframe.
• Align all aspects of the engagement – independence, control, financial risk, MOO, and actual working practices – with an outside IR35 position.

Conclusion: The Bigger Picture

While the right of substitution can play a key role in defending an outside IR35 position, it should never be relied upon in isolation. IR35 status depends on the entirety of the working relationship, not just one clause in the contract.

For contractors and engagers, the safest approach is to focus on aligning every aspect of the engagement – from control and MOO to financial risk and in-business features – with the that of an outside IR35 position. By taking a holistic approach, you’ll be better equipped to withstand HMRC scrutiny and demonstrate compliance.

Need expert advice? Bauer & Cottrell is here to help with all aspects of IR35, from IR35 contract reviews to engager IR35 status determinations. Browse our full range of services here.