The concept of ‘personal service’ has played a key role in determining employment and worker status for a number of years. For much of this time the importance of personal service was clear. Where an operative has a genuine and unfettered right to send a substitute to do the work then they do not qualify as an employee or as a worker. In many circumstances this is still the case.

However, over recent years the law has become more complicated and the division between the tax and the employment law jurisdictions has widened. Furthermore, our recent experience of HMRC enquiries has uncovered a trend whereby HMRC are attempting to use their tax and NI powers to investigate whether there have been any breaches of ‘worker rights’ including holiday pay. We have asked HMRC to provide us with the statutory authority that allows them to investigate matters like holiday pay but we are still waiting.

Regardless of whether HMRC has the authority or not to look into holiday pay their attempt to do so is another example of the ‘joined-up’ approach that is more likely to be taken by HMRC, the GLA and immigration authorities following the creation of the Director of Labour Market Enforcement.

All of the above means that the role of personal service has altered in some circumstances and this newsletter will analyse those changes and how the law stands now.

TAX & NI (where there is an ‘intermediary’)

In April 2014 the Government enacted the Onshore Intermediaries legislation (Section 44 ITEPA) which fundamentally altered the rules on employment status where an intermediary (like an employment agency or an umbrella company) is involved. These changes removed the role of personal service in determining the status of individuals (for tax and NI purposes) who were engaged via an intermediary.

The pre-April 2014 position was that where there was an intermediary involved, the individual did not have to be treated as employed unless there was supervision, direction or control (SDC) and there was a personal obligation on the individual to provide the services. In short, where the individual had a genuine right to send a substitute (that was suitably unfettered) then the position regarding SDC was irrelevant.

The post-April 2014 position altered Section 44 so that the personal service element of the pre-April 2014 rules was no longer a factor. What we have now is a test largely centred on SDC without reference to whether the individual is personally obliged to do the work.

So, with regards to employment status, for tax and NI purposes (where an intermediary is involved) the issue of personal service (aka substitution) is largely irrelevant. We have heard of rumours stating that ‘models’ are being propagated whereby the changes in Section 44 (the removal of the personal service necessity) are ignored. Where there is an intermediary the legislation (and Parliament’s intention) is clear that with regards to Section 44 a substitution clause will not have a bearing on their tax treatment.



Personal service still has relevance for employment law purposes and tax/NI (where there is no intermediary). This relevance persists and has done so since the seminal case of Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 1 All E.R. In Ready Mixed it was held that in order for an individual to be an employee he/she must be obliged to provide their own work or skill.

This concept was expanded upon in the case of Express and Echo Publications Ltd v Tanton [1999] IRLR 367 where it was held that if an individual has the genuine right to send a substitute and that this right is not unreasonably fettered then the individual cannot be an employee. The decision in Tanton led to a proliferation of substitution clauses being used in contracts in order to show that individuals are self-employed. Whilst Tanton gave clarity to the role that substitution clauses play with regards to employment status it also contained a warning for future Tribunals that would encounter substitution clauses;

“Of course, it is important that the industrial tribunal should be alert in this area of the law to look at the reality of any obligations. If the obligation is a sham, it will want to say so.”

In essence, Tanton was requiring future Tribunals to test substitution clauses to ensure that they are genuine and not a sham.

The concept of a sham was further expanded upon by the case of Autoclenz Limited v Belcher & Others [2011] UKSC 41. Here it was held that Tribunals must assess the reality of any obligations or rights that are written into contracts. Tribunals must be satisfied that these obligations and rights are the genuine intentions and expectations of the parties. To put it bluntly, if you include a substitution clause in a contract you must be satisfied and be prepared to show a Tribunal that it is genuine, relevant, can actually be utilised and consistent with the intentions and expectations of the parties. If you cannot then the substitution clause will be found to be a sham and ineffective.

So, with regards to employment status for employment law and tax/NI (where there is no intermediary) purposes a genuine, unfettered right to send a substitute will mean that an individual does not qualify as an employee.

Worker status

As you will know from our various newsletters and seminars there is a third major status that is specific to the employment law jurisdiction. Where an individual qualifies as a ‘worker’ then they are entitled to some employment rights but not all. A ‘worker’ qualifies for rights like:

  • The National Minimum Wage
  • The Agency Worker Regulations
  • Holiday pay
  • The right not to suffer unlawful deductions from wages
  • Auto-enrolment pension
  • Whistle-blower protection

The test for worker status differs from the test for employment status (where there is no intermediary). However, one similarity that the two tests share is that where an individual is not personally obliged to do the work (they can send a substitute) then they cannot qualify as a ‘worker’ or as an employee. Consequently, an individual will not qualify for worker or employee rights.

However, as with the test for employment status where you are seeking to rely on a substitution clause it must be genuine and not be a sham. All of the provisos referenced above regarding substitution clauses and the need for them to be genuine apply equally to worker status. Ultimately, if a substitution clause is not genuine and cannot be exercised then it will be found to be a sham and will not be effective.


The above article provides a breakdown of the differing role that personal service now plays within the major forms of status. It highlights differences in the jurisdictions (particularly where an intermediary is involved) as well as the requirement that any substitution clause be genuine and practically applicable.

As referenced above, HMRC are now seeking to expand their purview beyond tax and NI by requiring information pertinent to ‘worker rights’. We are still waiting for HMRC’s justification for this and in particular their current interest in holiday pay. However, what is clear is that HMRC not only have dominion over tax and NI but also over the NMW. This means that their interest in the veracity of substitution clauses is firmly within their purview and therefore the evidence provided to them could (following the new joined up approach) be provided to other Government organisations that do have purview over other rights.

With a rise in HMRC enquiries and Employment Tribunal claims it is crucial that where you are reliant on showing a lack of personal service that you are satisfied that substitution clauses are genuine, are agreed freely, can be practically exercised and are a true reflection of the parties’ intentions and expectations.

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