How the proposed ban on substitution clauses will impact contractors and businesses
Updated October 2026: The amendment discussed below did not become law. New Clause 12 was tabled by Nick Timothy MP at the Commons committee stage of the Employment Rights Bill and withdrawn after debate on 14 January 2025. A related amendment in the House of Lords, proposing a register of dependent contractors in the courier, delivery and taxi sectors, was also withdrawn. The Employment Rights Act 2025 contains no ban on substitution clauses, so a genuine right of substitution remains one of the factors in an IR35 status assessment. The government has said it will consult more widely on employment status, so the question may return in another form. For where substitution sits among the status tests today, see IR35 compliance in recruitment: are you at risk of costly non-compliance?
The article below is left as we originally published it in March 2025, with one correction to the first sentence, which wrongly described the amendment as the government's.
A published amendment to the Employment Rights Bill, tabled by Conservative MP Nick Timothy, proposed to prohibit the use of substitution clauses in contracts with employees, workers or dependent contractors, and was likely to apply to contracts for the supply and engagement of PSCs.
This has sparked widespread debate but what does this mean in practical terms? Let's break it down.
Understanding substitution clauses
A substitution clause is a contractual provision that allows a contractor to send a substitute to perform the work instead of doing it themselves. This is a key factor in determining whether a contractor is genuinely self-employed or, for tax purposes, should be treated as an employee under IR35 regulations. A genuine right of substitution has often been used as evidence that a contractor is operating outside of IR35, thereby avoiding higher tax liabilities associated with employment. Whilst a substitution clause in and of itself is not enough to prove that a contractor is genuinely self-employed, it is a significant part of that assessment.
Why was a ban on substitution clauses proposed?
The rationale behind banning substitution clauses appears to stem from a desire to clamp down on tax avoidance and perceived loopholes in the contractor model. It could be argued that many substitution clauses are often theoretical rather than practical, meaning that despite their presence in contracts, contractors rarely exercise their right to substitute someone else to do the work. The proposal sat alongside the government's broader efforts to tighten regulations around employment status and tax compliance.
Impact on contractors
For limited company contractors, the removal of substitution clauses could have far-reaching effects. Without a substitution clause, it becomes harder to argue that a contractor is genuinely self-employed, so more contracts may be deemed inside IR35, with higher taxes and reduced take-home pay. The ability to substitute another worker is a hallmark of true self-employment, and losing this right could undermine the independence of contractors and push them closer to employee-like status. And some businesses may reconsider engaging contractors if they perceive that the regulatory burden has increased, opting instead for permanent hires or outsourcing to larger firms.
Impact on businesses hiring contractors
Employers that rely on highly skilled contractors may find it harder to maintain operational flexibility, as they can no longer expect substitutes to fill in when needed. Businesses may need to reassess their contracts and working arrangements to comply with any new rules, with the administrative burden that brings. And if more contractors are deemed to be inside IR35, businesses may face increased costs, as they may be required to deduct tax and National Insurance contributions at source.
Much will depend on the definition of "dependent contractor", and remember this is not yet law, only an indicator of potential things to come. It is not likely to be much further into 2025 before we know more, but it is essential to stay updated on any further government clarifications or amendments to the rules.
The full impact of this policy will unfold over time, but one thing is certain: contractors and businesses alike must stay prepared for the evolving regulatory environment. We will continue to monitor developments closely and keep you informed of further updates.
If you'd like help understanding what changes like this mean for the way you engage contractors, our managed service builds status determinations, documentation and compliant engagement routes into contractor hiring. Call 01892 553360 or email info@vermelorpo.com. Nothing here is legal or tax advice.
Sources: UK Parliament: Amendment NC12, Employment Rights Bill (Nick Timothy MP, withdrawn), UK Parliament: Amendment 280, Employment Rights Bill (Baroness Penn, withdrawn)