INTRO & PART ONE
INTRODUCTION
Something significant shifted with the arrival of the new JSL rules.
Where an umbrella company leaves a PAYE shortfall behind, the damage is no longer confined to the entity at the centre of the problem.
Instead, it now threatens to spread across the supply chain, hitting agencies and end-users who may have thought they were safely out of range.
In classic meteor-based disaster-movie fashion, it is not merely where our extra-terrestrial foe lands that causes the problem. It is the resulting tidal waves, ash and debris, the secondary effects, that do the real damage.
In this series of articles, I will:
- Consider the development of the new Joint and Several Liability (“JSL”) rules in relation to umbrella companies and the legislation now found in Chapter 11 of Part 2 of ITEPA 2003 (Part One);
- Analyse those new rules in more detail (Part Two); and
- Look at how the new rules apply to specific models (Part Three).
To keep faith with the Deep Impact theme, Part One tracks the trajectory, Part Two looks at the mechanics of impact, and Part Three considers where the debris is most likely to land.
More prosaically, the new legislation does not change how a PAYE liability is calculated.
Nor does it change who has primary responsibility for operating PAYE.
What it does change is who may have to pay if the umbrella company cannot, or will not, pay the tax.
PART ONE: BACKGROUND TO THE JSL PROVISIONS
GENERAL
In this Part, I look at how the JSL rules developed from the initial consultation document (“ConDoc”) published in June 2023 and the policy paper published in October 2024. In other words, the developments that led to the final legislation.
THE CONDOC OF JUNE 2023 & POLICY PAPER OF 30 OCTOBER 2024
General
In this section, I look at:
- the consultation document issued in June 2023; and
- the policy paper, “Tackling Non-Compliance in the Umbrella Company Market”, published on 30 October 2024 (alongside the Autumn Budget 2024).
The Policy Paper
Introduction
The policy paper explained that the government would introduce legislation so that PAYE/NIC compliance risk would no longer sit with the umbrella company alone. The proposal was that, ultimately, that risk would reside with:
- the end client (where the end client engages directly with the umbrella company); or
- the recruitment agency closest to the end client, which would be responsible for any PAYE/NIC non-compliance.
The policy paper set out only limited details as to how this would be achieved in practice.
Definition of umbrella company
The description of umbrella company is set out at the beginning of Part Two of the document:
“Umbrella companies are employment intermediaries that employ workers on behalf of agencies and end clients…”
Of course, this is not a legal definition of an umbrella company. But it does show that the measures are targeted at a specific activity: employing workers on behalf of others.
Target of the legislation
The persons and activities targeted were described as follows:
“The government will introduce legislation to make agencies that use umbrella companies to employ workers responsible for ensuring that the correct income tax and National Insurance contributions (NICs) are deducted and paid to HMRC.”
Where an agency is in the supply chain, there is further elaboration:
“This will mean that the agency that supplies the worker to the end client will be legally responsible for operating PAYE on the worker’s pay and will be liable for any shortfall, whether they operated their payroll themselves or used the umbrella company to run payroll for them.”
Where there is no agency involved:
“If there is no agency involved in the supply of the umbrella company worker, this responsibility will be placed on the end client itself.”
The effect of the legislation
The paper then distilled how the legislation might achieve this, albeit without going into any great detail:
This measure will only change where tax obligations sit when using an umbrella company to pay a worker. The underlying tax and NICs liabilities will not change and PAYE will operate in the usual way. This will make the tax position for workers employed by umbrella companies the same as for other agency workers.
The envisaged mechanism was described as follows:
Legislation has been in place since the 1970s to treat most agency workers as employees for tax purposes. Since 2014, where this legislation applies (Chapter 7, Part 2 of the Income Tax (Earnings and Pensions) Act 2003), responsibility for operating PAYE on payments to agency workers is placed on the agency that supplies the worker to the end client.
This legislation does not apply if an umbrella company is used to employ a worker. One reason why the umbrella company model has become more popular is that it can be used to sidestep the obligations arising under that legislation.
By making the same agency responsible for PAYE when an umbrella company is used, this measure will make PAYE obligations consistent for agency workers regardless of how they are engaged.
It is clear that this is “Option Three” from the June 2023 ConDoc. I set out more detail from that document in the next section.
The ConDoc
Definition of Umbrella
A similar definition appears at the beginning of the ConDoc:
One such employment intermediary, which has grown in use over the last two decades, is the umbrella company. Umbrella companies employ individuals on behalf of employment businesses (often referred to as recruitment agencies) who are then supplied to end clients. Employment businesses (which usually sit in between umbrella companies and end clients in the labour supply chain) find work for individuals, rather than umbrella companies.
While an umbrella company is the legal employer, the individual does not provide services to or for the umbrella company itself. Umbrella companies must provide individuals with the same employment rights as any other employee (subject to qualifying periods) and must operate Pay As You Earn (PAYE) on any payments of earnings made.
Overview of options for consultation
The original ConDoc set out three potential options for addressing ‘non-compliance’ in the market:
The first of these options is the introduction of a mandatory due diligence requirement, with penalties applying to those employment businesses or end clients that do not comply. This requirement could sit with the employment business or the end client depending on the specific arrangements of the contract. The government would support businesses by providing guidance setting out due diligence principles and how compliance can be demonstrated.
The second option is to legislate to give HMRC the power to collect an umbrella company tax debt from another business in the labour supply chain, in specified circumstances. This would primarily apply to outstanding amounts of Income Tax and National Insurance contributions (NICs) that should have been collected via Pay As You Earn (PAYE). This would encourage employment businesses and end clients to be more selective in the umbrella companies they contract with by making them potentially liable for unpaid tax debts in the event of non-compliant behaviour by the umbrella company.
The third option would deem the employment business that supplies the worker to the end client to be the employer for tax purposes. This option would require a party further up the labour supply chain to operate PAYE on payments to contingent workers. This would not prevent the deemed employer from using a payroll bureau or umbrella company to discharge their PAYE obligations, but the deemed employer would be ultimately responsible for ensuring the correct operation of PAYE.
The selected option
It is clear, therefore, that the Government had plumped for option three. It is worth looking at that in a little more detail:
Option 3: Deeming the employment business which supplies the worker to the end client to be the employer for tax purposes where the worker is employed by an umbrella company, moving the responsibility to operate PAYE
4.37 Some stakeholders suggested that an effective way to prevent non-compliance by umbrella companies would be to prevent them from handling gross funds. This could be achieved by requiring a party sitting above the umbrella company in the labour supply chain (such as the employment business) to make deductions of Income Tax and NICs from the fee paid for the supply of the worker’s services. This would mean for example that non-compliant umbrella companies would not be able to incorrectly treat payments to workers as non-taxable, such as with the “loans” commonly seen in avoidance schemes, if the tax had already been withheld and paid to HMRC.
4.38 The government welcomes views from stakeholders on how this might work in practice, whether it would be a proportionate change and the extent of any wider risks and impacts. General operation
4.39 This option would involve legislating to change the entity in the labour supply chain that would be treated as the employer for tax purposes and secondary contributor for NICs purposes. This deemed employer would be responsible for deductions of Income Tax and NICs and also for payment of employer NICs. Under this option, the deemed employer would still be able to use the services of another business, for example a payroll bureau or umbrella company, to calculate the Income Tax and NICs liabilities but would remain ultimately responsible for PAYE being operated correctly.
4.40 It is the government’s view that the most appropriate party to act as the deemed employer would be the [1] employment business which has a contract with the end client to supply the worker to them.
This would mirror the existing agency legislation at Chapter 7, Part 2 ITEPA 2003. In the event that an umbrella company was engaged directly by the client, the client would be the deemed employer.
Another party which could act as the deemed employer would [2] be the employment business that has a contract with the umbrella company. This would be similar to the approach taken in the off-payroll working rules at Chapter 10, Part 2 ITEPA 2003. Under these rules, the intermediary that pays the worker’s Personal Service Company is treated as the deemed employer, assuming the end client and any other parties in the labour supply have met their obligations under the legislation. The government is interested to hear views from stakeholders on which entity would be best placed to be the deemed employer, were this option to be taken forward.
4.41 This option is expected to have a substantial impact on much of the non-compliant tax behaviour currently seen in the umbrella company market.
4.42 By placing responsibility for operating PAYE nearer the top of the labour supply chain, the government believes that non-compliant umbrella companies would be less likely to enter the chain. Employment businesses and clients that want to outsource the administration of operating a payroll would still be able to do so. However, they would be incentivised to ensure that any outsourcing is only contracted to reputable firms because the ultimate responsibility for compliance would remain with them.
As outlined in June 2023, Option Three involved transferring responsibility for operating PAYE upstream to the agency. The June 2023 text did not expressly say that the end client would become the deemed employer where there was no agency in the chain. That appears to have been added by the time the policy paper was published in October 2024.
Accordingly, where there is an umbrella business in the supply chain, the deemed employer (and the person responsible for operating PAYE) will be:
- where there is an agency, the agency; and
- where there is no agency, the end user.
EMPLOYMENT RIGHTS BILL
In addition to the publications above that dealt directly with the proposed tax measures, an amendment was made on 5 March 2025 to the Employment Rights Bill.
The purpose of the amendment was to bring umbrella companies within the scope of future regulation of ‘employment businesses’ (as defined).
“Extension of regulation of employment businesses
In section 13 of the Employment Agencies Act 1973 (interpretation), for subsection (3) substitute—
“(3) For the purposes of this Act “employment business” means the business (whether or not carried on with a view to profit and whether or not carried on in conjunction with any other business) of participating in employment arrangements.
(3A) “Employment arrangements” means arrangements under which persons who are, or are intended to be, in the employment of a person are, or are intended to be, supplied to act for, and under the control of, another person in any capacity.
(3B) “Participating in” employment arrangements means doing any of the following in connection with the arrangements— (a) being an employer of the persons who are, or are intended to be, supplied under the arrangements; (b) paying for, or receiving or forwarding payment for, the services of those persons, in consideration of directly or indirectly receiving a fee from those persons; (c) supplying those persons (whether or not under the arrangements); (d) taking steps with a view to doing anything mentioned in paragraphs (a) to (c).””
The Explanatory notes say this:
Member’s explanatory statement This new clause would expand the scope of the Employment Agencies Act 1973 to cover other types of business that participate in arrangements under which persons are supplied by their employer to work for other persons (such as “umbrella companies”).
On first reading, the proposed amendment seems wide. If there is an employment business – that is, if a worker is supplied by anyone – there are employment arrangements. So the presence of even an agency in the chain, supplying workers, would appear to trigger the definition.
Once that threshold is crossed, it seems to me that an employer can, on the wording above, be regarded as ‘participating in’ those arrangements.
CONCLUSION (ON THIS PART)
Taken together, Part One shows a clear direction of travel: tax policy moves the PAYE risk upstream to a better-capitalised party, while employment-law reform pulls umbrella-style structures more squarely into the regulatory frame.
Having traced that trajectory – the legal equivalent of spotting the comet early enough to conceive, train and launch a bunch of B list actors into orbit to implement a ‘hail Mary’ type plan – Part Two turns to the operative provisions themselves.
Ready for blast off?