No substitute for Dragonfly on IR35
If you provide services through an intermediary company and think you are protected from the so-called IR35 rules, you may need to look at your arrangements again. A recent decision in the High Court has made it easier for HM Revenue & Customs (HMRC) to ignore a ‘substitution clause’ in a contract if, in practice, substitution would not happen.
Although there are many factors to consider, a strong indication that an engagement is not akin to employment is a contractual right for the intermediary to send a different individual to do the work. Until the Dragonfly Consulting Ltd case, many people thought that the presence of a substitution clause was nearly conclusive in taking income outside IR35. The court made it clear that other elements are significant, in particular, the extent to which the client would allow substitution in reality. In the Dragonfly case, the client company wanted the services of the particular individual, a skilled IT system tester, and the manager said substitution would not happen in practice.
A complication here was that Dragonfly provided services through an agency, so there were two contracts. The ‘lower contract’ between Dragonfly and the agency contained a substitution clause but the contract between the agency and the client did not. This ‘upper contract’ is usually outside the control of the worker, who often is unaware of its terms.
Coupled with the need to find out what the client would allow in practice, this makes it very difficult for the worker to decide up front whether income falls within IR35. And it is hard to argue against a ruling by HMRC that it does.
If the ultimate client wants the services of a particular individual, it now appears to be very difficult to put in place contracts that take the arrangement outside IR35. This leaves the worker having to suffer the full tax and NICs equivalent to an employee without the protection that employment legislation would provide if he or she were employed directly by the client or even by the agency.
Even so, a substitution right is not the only factor. In the Dragonfly case, there were many other factors pointing to employment. If an arrangement is otherwise indicative of self-employment, then the lack of a clear substitution right is unlikely to be decisive. If you would like to discuss this issue with us, please get in touch.