In Pimlico Plumbers v Smith [2017] EWCA Civ 51, [2017] IRLR 323 [Para 84] the principles were summarised as:
Firstly, an unfettered right to substitute another person to do the work or perform the services is inconsistent with an undertaking to do so personally.
Secondly, a conditional right to substitute another person may or may not be inconsistent with personal performance depending upon the conditionality. It will depend on the precise contractual arrangements and, in particular, the nature and degree of any fetter on a right of substitution or, using different language, the extent to which the right of substitution is limited or occasional.
Thirdly, by way of example, a right of substitution only when the contractor is unable to carry out the work will, subject to any exceptional facts, be consistent with personal performance.
Fourthly, again by way of example, a right of substitution limited only by the need to show that the substitute is as qualified as the contractor to do the work, whether or not that entails a particular procedure, will, subject to any exceptional facts, be inconsistent with personal performance.
Fifthly, again by way of example, a right to substitute only with the consent of another person who has an absolute and unqualified discretion to withhold consent will be consistent with personal performance.”
This was not overruled in the Supreme Court, which also provided some helpful guidance:
- “assistance in performance is not the substitution of performance” [Para 24]
- “an informal concession to substitute is not a right to substitute” [Para 25]
- “It is important to note that the right was not limited to days when, by reason of illness or otherwise, Mr Smith was unable to do the work.” [Para 28]
- “the right to substitute another Pimlico operative…… was a means of work distribution between the operatives and akin to the swapping of shifts within a workforce.” [Para 29]
- “It was the converse of a situation in which the other party is uninterested in the identity of the substitute, provided only that the work gets done” [Para 34]
Discussion:
Despite some claims made, including by some HMRC representatives themselves, there is no law that says a contractor must have someone “waiting on the bench to cover them” in order for the substitution clause to be valid.
If personal service is required, and the facts suggest that the clause is nothing more than window dressing then a substitution clause put into a contract by an army of lawyers which is subsequently unexercised holds very little weight when it comes to applying the rules of evidence in a tax tribunal. It would be misguided to rely on it.
Demonstrating that you know people who have similar skills to you, and that they could perhaps take over, may also hold very little weight.
All is takes is for a client to accidentally say “I wanted to hire John, it was John I wanted, and I would not have accepted someone else turning up.” And when HMRC do their fact-finding, chances are they will find someone who does not understand the expressed contractual obligations on the parties and will say something that will make it unlikely that an unexercised right of substitution clause will be transposed into the hypothetical contract when it is formed, against the backdrop of the “circumstances”, as per Section 49(4) or 61M(3).
We are aware of products emerging in the market like “substitution networks”, but many of these appear to be based on a flawed understanding of the laws on substitution and how they are argued in tribunals.
It’s actually perfectly fine to provide personal service, and in that instance the area of central importance to focus on is control. For contractors that do have a genuine right to substitute, clauses typically fall into the fourth category described above.
Substitution clauses
A valid substitution clause:
The Contractor shall be entitled to substitute the Personnel and the Client may only refuse to accept any such substitute Personnel if in its reasonable opinion such substitute Personnel is not suitable with regard to skills, qualifications or security clearance. The Contractor will remain responsible for any work undertaken by a subcontractor and for payment.
Invalid substitution clause:
Subject to written agreement and an unqualified right to refusal, the Contractor shall be entitled to substitute the Personnel. The Client will be responsible for payment of the substitute.
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