Right to work checks and the Outside IR35 substitution trap
Starting October 2026, the UK government is rolling out strict new “Right to Work” rules with massive fines for businesses. To dodge the paperwork, risk-averse clients might ban your right to send a substitute worker. This could mean you unknowingly strip away your best IR35 tax defence
If you are an independent contractor operating through your own Personal Service Company (PSC), you are probably familiar with IR35 compliance. To stay safely “outside IR35,” your contract must feature a genuine right of substitution, meaning you can send another qualified professional to do your work when you cannot.
However, a major policy collision is scheduled for 1 October 2026. Under the government’s expanded Right to Work (RTW) Scheme, responsibilities for immigration checks are expanding. If you engage a worker under a contract that allows them to substitute another person, you must complete Right to Work checks on that substitute before they start. If a business gets this check wrong or ignores it, the civil penalties are rising to an eye-watering £60,000 per illegal worker for repeat offences.
Due to this financial risk, corporate legal departments are growing highly risk-averse. To avoid the regulatory burden of verifying substitute workers at intervals of no less than once in any 24 hours of activity, many clients are choosing to ban substitution clauses entirely in their contractor agreements.
The rules on who needs to carry out right to work checks are changing on 1 October, but that is not the only change businesses should have on their radar.
Under the extended liability rules, the Home Office will be able to extend civil penalties to businesses that do not directly employ illegal workers but benefit from work carried out by them, including in certain contractor, subcontractor and labour supply chain arrangements.
This is likely to be particularly relevant for sectors that rely on contracting and subcontracting arrangements. In some cases, the Home Office may be able to impose a civil penalty on a business further up the contracting chain if the direct employer of the worker cannot be identified or does not pay the civil penalty. With civil penalties for illegal working starting at £45,000 per illegal worker and increasing to £60,000 for subsequent offences, businesses that rely on subcontractors should consider whether their current arrangements provide enough protection.
-Morton, Fraser Macroberts
If your client bans substitution, they strip away one of the primary pillars of your outside-IR35 status. According to The Freelance Informer’s update on Single Worker Status and IR35, Off-Payroll Working rules remain fully in force, meaning any change to substitution clauses directly increases your tax risk.
To bypass this tension, many contractors are shifting their engagement models entirely. The Freelance Informer reported that outcome-based Statements of Work (SOW) are now the safest bet for freelancers who want to preserve their commercial autonomy, prove genuine B2B status and remain outside the scope of client-side immigration panic.
How to make this work for your business:
- Do not sign away your right of substitution: If a client attempts to remove your substitution clause to avoid RTW admin, explain the IR35 tax consequences
- Offer a digital compliance solution: Point your clients to OFDIA-registered Digital Verification Service Providers (RtW DVSPs). These services use facial recognition technology to perform quick, compliant, outsourced digital identity checks on substitute workers
- Check a freelancer’s right to work if you sub-contract them: use their share code
- Draft clear approval processes: Work with your clients to write a contract clause outlining exactly how and when you will provide them with a pre-verified substitute, satisfying both tax and immigration departments.
Extending the Right to Work Scheme to other working arrangements and the related consultation questions were published under the 2024 to 2026 Starmer Labour government. Therefore, please keep on top of developments by signing up for The Freelance Informer newsletter:
