IR35: has the right to a sub been sunk?

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In Northern Light Solutions Ltd v HMRC, the Upper Tribunal upheld the First-tier Tax Tribunal’s decision that a worker’s hypothetical contracts with the Nationwide Building Society (NBS) were ones of employment when applying IR35. They found there was mutuality of obligation within each contract, and the dominant feature of the hypothetical contracts was an obligation for personal performance.

Interestingly, in considering the question of the obligation of personal performance/right to substitution, the Upper Tribunal referred to the employment law case of Pimlico Plumbers v Smith. In this case, the obligation of personal performance was seen as a dominant feature of the relationship and, in turn, was indicative of employee status.

This ‘dominant feature test’ was adopted by the Upper Tribunal to show that, although there was a right to substitution under the contract in principle, NBS valued the worker’s expertise and familiarity with their processes in a way that meant it would be difficult or even impossible for the worker to realistically offer them a substitute who had the same experience and familiarity with NBS’ projects.

This case shows that the Upper Tribunal take a very narrow view on right to substitution. HMRC highlights that personal service (i.e. not having the right to substitution) is a key indicator of employee status under IR35 rules, and will carefully consider the personal service contract and how it operates in practice. This means that including a limited right to substitution in the contract on paper will not be enough to ensure contracts fall outside the scope of IR35, if the dominant feature in reality was that of a contract of personal service.

The application of a legal principle concerning substitution under employment law to an IR35 case demonstrates the risks end users and contractors have in placing undue weight to a right of substitution as a basis for arguing an arrangement falls outside IR35, and we anticipate a possible change to the online HMRC CEST tool in consequence of this judgment.

Here at Capital Law, we are able to assist you to understand and adapt to the new IR35 rules. We have created a nifty tool to allow you to quickly check if you may be within scope – IR35 in 60 seconds. If it does apply, we can provide you with a clear and straightforward understanding of your obligations and commercial solutions to the issues.

If you need help, please contact David Sheppard ( or Rebecca Mahon (