Most people now know that the Court of Appeal, in the case of Express & Echo Publications v. Tanton (1999) ICR 693, has held the existence of a right of substitution to be a key factor in establishing that a contract arrangement containing the right could not be an employment arrangement. However, the right of substitution in a contract has been trumpeted by some advisers as the panacea that will exclude a contract from being regarded by the Inland Revenue as a deemed contract of employment. There are clear dangers in relying on this view.

In reviewing any legal case the individual circumstances of the case are relevant and the reasons for reaching the decision are all important. It is always open to any party challenging a written agreement that the terms of the agreement do not reflect the real arrangement. In the recent case on substitution Tanton, the validity of the substitute clause could not be questioned as the relevant party had actually substituted. The point of fact was established before the point of law could be applied. This was also the case in Ready Mixed Concrete (South East) Ltd. v. Minister of Pensions and National Insurance [1968] 2 QB 497.

It has just become apparent that the Employment Appeal Tribunal in Glasgow City Council v (1) Mrs MacFarlane (2) Mrs Stacy Skivington EAT has confirmed the limited application of Tanton. The Tribunal found that "Tanton does not deal with a limited ability to delegate". It further held that Tanton was not applicable in "a case in which, in limited circumstances, it would not be a breach of the individual's contract if, the individual being unable to attend, arranged for another person approved by the employer to attend". Such a scenario would appear to be more closely related to the circumstances of substitution in the knowledge-based industries except that in this case any substitute was paid directly.

Tanton does not therefore provide any adviser with the opportunity of correctly advising that a substitution clause in itself will be effective. Given the complexity of the work being undertaken and the security required by most clients, to insert an unfettered substitution clause may be interpreted as wholly unrealistic and found to be a sham. Any contractor relying solely upon such a clause in a contract is open to having the existence of the right ignored by the Inland Revenue and by those courts that establish the points of fact of an arrangement.

Also important is that, whether or not an agency is involved, the Client is aware of and agrees to the right. In the absence of that written agreement, likely to be encountered in a back to back scenario, it is a statement of logic that the right cannot have been agreed as part of the circumstances of the arrangement, and therefore can have no effect.

The only way forward is that if there really is a right of substitution, and a genuine self-employment arrangement, the contract should correctly reflect all of the self-employment terms agreed without fear of retribution for the contractor.

As any responsible legal adviser will know, it is the substance of the contract that is relevant, over and above the form. It is unlikely that the Revenue or the Courts will be impressed by a contract that bears little relation to industry practice, the actual working methods or to what the end client has agreed.

Advisors should be careful not to read too much into Tanton.

This article was first published on Accountingweb on 14th June 2000.

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