The right of substitution and employment status

Q: How does this play out on two contracts?

Illustration only. Contract A. A developer's company signs agency terms that allow a substitute with the client's written consent. The client interviewed the developer, its contract with the agency names him and says nothing about substitution, and no substitute has been offered during 18 months that included a fortnight's illness. Following Usetech, the hypothetical contract would probably contain no real right, and personal service points to employment. Contract B. A data consultancy agrees a fixed price migration. Both the client contract and the agency contract allow any suitably qualified person, with a veto limited to failed security vetting. The consultancy has twice sent an associate, whom it paid, and the client accepted the work. This is a genuine right and a strong pointer away from employment, though it is still weighed with control and the other factors.

A worker who is genuinely free to send someone else to do the work, and who engages and pays that person, is not providing personal service, and without personal service there is no contract of employment. Most substitution clauses are narrower than that, so they become one factor among many. Tribunals ignore a clause altogether if it does not reflect the real agreement.

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Why does personal service sit at the heart of employment?

The first condition for a contract of service in Ready Mixed Concrete is that the worker provides their own work and skill. HMRC’s Employment Status Manual at ESM0531 quotes MacKenna J: “The servant must be obliged to provide his own work and skill. Freedom to do a job either by one’s own hands or by another’s is inconsistent with a contract of service, though a limited or occasional power of delegation may not be.” The same page quotes Lord Fraser in the Privy Council: a “power of unlimited delegation is almost conclusive against the contract being a contract of service.”

ESM0530 calls personal service a very important factor in any status case and stresses that it is the right to provide a substitute that counts, not whether the right is used. The reverse does not hold. ESM0534 points out that many self employed professionals must do the work themselves, so the lack of a substitution right is a pointer to employment but not conclusive. Substitution is one part of the wider employment status tests.

What kind of clause can defeat personal service?

The strongest example is Express and Echo Publications Ltd v Tanton (ESM7210). A newspaper delivery driver’s agreement said that if he was unable or unwilling to perform the services personally, he would arrange at his own expense for another suitable person to do them. He had in fact used substitutes, including for six months when he was ill. The Court of Appeal held he was self employed, even though the company fixed his route and supplied his van and uniform.

Clauses become weaker as the conditions attached to them grow:

Substitute only with the client’s approval. In Byrne Brothers (Formwork) Ltd v Baird, discussed at ESM0533, a clause allowing an alternative worker only with the contractor’s express approval fell “far short of giving the subcontractor a blanket licence”. In Synaptek Ltd v Young (ESM7260), where substitution needed the client’s consent, the High Court said that unless and until agreed otherwise the services had to be performed personally.
Substitute chosen from the engager’s own list. In MacFarlane v Glasgow City Council (ESM0536), coaches could only call on someone from the council’s register and the council paid the replacement.
A right to suggest a replacement. ESM0534 says that where a worker may only suggest a substitute there is no right to send one at all.

In Usetech Ltd v Young, ESM0533 records Park J’s summary that a substitution clause is an indicium pointing towards self employment, and that a clause as wide as the one in Tanton may be determinative by itself. More recently, the Upper Tribunal in Northern Lights Solutions Ltd (ESM7325) applied the dominant feature test from Pimlico Plumbers v Smith to IR35: a limited right of substitution does not change the answer where the dominant feature of the arrangement is the personal service of a specific worker.

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What makes a substitution right genuine?

ESM0530 and ESM0531 set out what HMRC looks for:

the worker has a real choice over who does the work;
the substitute is answerable to, engaged by and paid by the worker, not the engager;
any limit on the engager’s veto is real. Limiting substitutes to suitably qualified people does not necessarily destroy the right, but an unlimited veto may mean the worker in reality has to do the work personally.

The questions HMRC asks include when and how the right arose, who decides when a substitute is used, who recruits and pays them, who is responsible for their work and whether a substitute has ever been used.

How do tribunals decide whether a clause is a sham?

The approach depends on the type of tribunal and the question being decided.

Employment tribunals deciding statutory rights

In Autoclenz Ltd v Belcher, summarised at ESM7310, car valeters had signed contracts containing a substitution clause and a right to refuse work. The Court of Appeal said the tribunal must consider whether the written words represent the true intentions or expectations of the parties, and that there is no need to show an intention to mislead. The tribunal was entitled to find the clause was not genuine where the depot manager knew of no example of substitution and a valeter with 17 years’ service did not know he had the right. The Supreme Court dismissed the appeal in 2011. The tribunal had adopted the guidance from Consistent Group Ltd v Kalwak that if “no one seriously expects that a worker will seek to provide a substitute”, an express clause providing for it will not alter the true nature of the relationship.

Tax tribunals deciding employment for IR35 and PAYE

The Court of Appeal in HMRC v Atholl House Productions Ltd (ESM7335) limited Autoclenz to cases where an arrangement is compared with a statutory definition, such as worker in employment rights law. Because tax law gives no special meaning to employee, the question is one of common law contract interpretation, using facts known or reasonably available to both parties when the contract was made. HMRC’s guidance at ESM0535 accepts that a written clause will stand unless there is evidence that it does not represent the true agreement, and that the onus is on HMRC to show a sham or a later variation. Express and Echo still applies: the tribunal should look at the reality of the obligations and, if a clause is a sham, say so.

For IR35 there is a further step. The test is applied to a hypothetical direct contract between the worker and the end client, built from all the contracts in the chain (section 49(4) ITEPA 2003). In Usetech Ltd v Young (ESM7270) the substitution clause sat in the service company’s contract with the agency but not in the agency’s contract with the client, which had interviewed and wanted the specific worker. The High Court held that the hypothetical contract would not have contained a substitution right at all.

Does a right that has never been used still count?

Yes, but it attracts scrutiny. ESM0535 says the fact that substitution has not occurred is not necessarily relevant, although HMRC may look critically at a claimed right that is never used over a long period. ESM0538 adds that HMRC cannot assert that a right does not exist just because a substitute has never been provided. The other half of the Kalwak guidance quoted in Autoclenz makes the same point: if a clause genuinely reflects what might realistically be expected to occur, the fact that it has not been exercised does not make it meaningless. In Synaptek, however, the court accepted that the weight given to a clause can take account of how far it was used in practice.

What evidence does HMRC look for?

ESM0538 lists the lines of enquiry an officer should follow, including documents such as pre contract letters and job adverts, whether illness or holidays arose when a substitute would have been expected, whether any substitute has been rejected and why, and whether similar workers on similar terms have ever sent substitutes. ESM0537 gives situations where an engager is unlikely to accept a substitute, such as specialist skills personal to the worker, an individual chosen for a high quality job, or complex team work where ongoing work relies on knowledge of the whole system, which HMRC gives some computer programming roles as an example of. HMRC’s CEST tool also asks detailed substitution questions.

How does this play out on two contracts?

Illustration only.

Contract A. A developer’s company signs agency terms that allow a substitute with the client’s written consent. The client interviewed the developer, its contract with the agency names him and says nothing about substitution, and no substitute has been offered during 18 months that included a fortnight’s illness. Following Usetech, the hypothetical contract would probably contain no real right, and personal service points to employment.
Contract B. A data consultancy agrees a fixed price migration. Both the client contract and the agency contract allow any suitably qualified person, with a veto limited to failed security vetting. The consultancy has twice sent an associate, whom it paid, and the client accepted the work. This is a genuine right and a strong pointer away from employment, though it is still weighed with control and the other factors.

What mistakes do contractors and engagers make?

Adding a clause to the contractor’s own contract without it appearing in the client contract.
Calling a right to “recommend a replacement” a right of substitution.
Letting the client choose, interview or pay the substitute.
Assuming a substitution clause wins on its own when control and mutuality of obligation point the other way.
Treating an employment tribunal’s finding on worker status as deciding the tax position. The two use different approaches to written terms, as Atholl House shows, and the off payroll rules covered in our IR35 guide apply the tax test.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.