So can I sub myself yet? HMRC, CEST, and Substitution: The Cunning Plan!

So here we are, at the eleventh hour, General Melchett is crying ‘tally-ho’, as we prepare to stick our heads above the parapet and finally head off across the no man’s land of the off payroll regulations. But where’s Baldrick’s ‘cunning plan’ in all of this? I think I have an idea….

Firstly, let’s recap on what we know: the off payroll regulations come in to effect on April 6th 2021, meaning that hiring companies are now having to make status determinations on the assignments of limited company contractors in order to establish whether they are ‘inside’ or ‘outside’ of IR35.

Even the hapless Captain Darling could tell you that in order to make this determination, hirers must chiefly consider three major factors: mutuality of obligation, supervision & control and personal service (or ‘substitution’ as it is otherwise known.) So where do hirers stand on these key battlegrounds?

Mutuality of Obligation

Probably the easiest of the three factors to get to grips with. Most hirers understand that there should be no mutuality of obligation where engagement with limited companies is concerned. Once the contractor has completed their deliverables, there should be no requirement to offer them more work, and even if the hirer does offer more work, the contractor is not obliged to accept it. This concept is well rooted in the contracting industry and most hirers are comfortable with it. So far so good.

Supervision & Control

The ‘how, where and when’ the work gets done. Broadly speaking, the more influence the contractor has over these factors, the more likely they are to be outside of IR35, and the more influence the hirer has, the more likely the contractor will be inside of IR35. Over the years, this is certainly an area where some bad habits have crept in to working arrangements: working hours that must not deviate from those of permanent staff; an insistence that all services must be delivered at the hirer’s premises, regardless of practicality or necessity, these are niggles that some hirers are now having to grapple with.

However, at least they are tangible factors. At least a concession here and there will create the necessary daylight between permanent staff and contractor, between ‘inside’ and ‘outside’ of scope. If anything, the COVID pandemic has proved that contractors can be highly effective working from home, more reliant than ever on their own independent judgement. Hopefully this will be a lesson well learnt.

So with supervision & control, there is often some work to be done, but nevertheless, there is a clear pathway, a clear equation of ‘if we do A, B and C, then X, Y and Z will be the result’

Personal Service

Which leaves us with substitution. A strange battlefield if ever there was one. Of course, the theory is clear: a limited company contractor should be engaged on a business-to-business basis, and for that to happen it should be the contractor’s company that is responsible for delivering the services and not necessarily one specific individual. In other words, the representative of the company that is responsible for delivering the services, should be able to substitute themselves for another representative.

And here lies the problem. We know that limited company contractors number several million in the UK. We know that most of these companies are one-man-bands. They take on contract assignments because they are personally interested in doing the work and they have neither the inclination nor the interest in substituting themselves. And this is fine. I have yet to see an example in case law where a contractor was found inside of IR35 for having a substitution clause in their contract that was never executed. The question really is whether that right exists in the eyes of both contractor and hirer. And for the hirer, this is where life gets complicated because this is where we journey from the tangible to the intangible, from the practical to the theoretical.

Because the hirer is being asked to make a determination on something that probably hasn’t happened before, and probably won’t happen in the future. All of a sudden, they are being asked to take a step in to the unknown. And what makes it even worse? CEST.

CEST

CEST is the tool that many hirers use to make their determination. HMRC research shows that up to 91% of hirers used CEST as their determination tool when off payroll came in to the public sector in 2017. And why not? CEST is, after all, HMRC’s own tool, so why wouldn’t you use it? The problem is that on the issue of substitution, CEST really only boils down to one question: “Do you have the right to reject a substitute”. It’s so binary! One can imagine hiring managers throwing paper clips at their laptop, shouting ‘well sometimes I’d accept a substitute, but at others, I couldn’t…it depends on where we are at with our projects….if I’m in the middle of a shutdown and there’s a million things going on, then no way! But when things are on an even-keel, then OK!’

But there is no middle ground with CEST, the answer is either ‘yes’ or ‘no’. And this is where psychology comes in. In business, we like to base our decisions on certainty. We like to be in control of the facts. We like to be in a position where decision ‘A’ will lead to outcome ‘B’, and this is why on mutuality of obligation and supervision & control, most hirers can get themselves comfortable. But on the issue of substitution, the subject matter is so theoretical, the question in CEST so binary, that caution often kicks in: ‘if it’s ‘yes’ or ‘no’, and in reality the answer would sometimes be ‘yes’ and sometimes ‘no’, then I’d better play safe and just say ‘no’.

The problem is exacerbated by the fact that CEST is seemingly weighted so heavily upon this one single question. If the hirer answers ‘yes’ to being able to reject a substitute, then, give or take, the determination will be inside of scope no matter what the answers to the remaining questions is. Conversely, if the answer is ‘no’, a substitute cannot be rejected, then the hirer can go on to answer a whole glut of questions, especially around supervision and control, in the most ‘inside of IR35’ way possible, and the determination will still end up being ‘outside of IR35’.

So why is HMRC so fixated by this one question? Is it not slightly absurd that the whole debate of IR35 is framed around something that in reality, hardly ever happens? Something that is far more theoretical than practical? Or is that the whole point? Is it really about weaponizing the psychology of caution? The best generals always pick their own battlefield. Maybe that is exactly what HMRC has done with off payroll, CEST and substitution. Coincidence or ‘cunning plan’? You decide.