PART THREE: HOW THE JSL PROVISIONS AFFECT SPECIFIC ENTITIES
INTRODUCTION
If Part Two examined the point of impact, Part Three looks at what happens in the aftermath. The statutory framework is one thing… how it applies across real-world structures is quite another.
In practice, the new JSL rules do not land evenly. Instead, their effect depends on the role each party plays in the supply chain, the contractual arrangements in place, and how closely a given model resembles the labour-supply archetype targeted by the legislation.
In this Part, I consider how the rules apply to specific entities — and where, in reality, the damage is most likely to be felt.
UMBRELLA COMPANIES
From a legal standpoint, the umbrella remains the primary employer and retains the formal duty to operate PAYE, NICs, RTI and so on. The new regime does not remove that.
However, the umbrella is now jointly liable with one or more “relevant parties” for any unpaid or underpaid PAYE/NIC liability tied to qualifying umbrella company payments. If the umbrella fails – for example, because it becomes insolvent, disappears or simply mismanages funds – HMRC can pursue the tax debt upstream to the agency or client directly, without first exhausting recovery against the umbrella.
There is no defence in the draft legislation allowing a relevant party to say, “we took all reasonable steps” or “we did not know”. If the conditions are met, liability arises.
As a result, many agencies and clients will demand proof of umbrella compliance (for example, audit reports, real-time payment verification or accreditation), or will shift towards payment models that minimise exposure, such as agency withholding and operating PAYE itself.
The regime also contemplates “purported umbrellas” – in other words, schemes that mimic umbrella pay structures while avoiding formal employer status, or the sort of ‘front-end’ / ‘back-end’ structure described earlier in this note. In those cases, the worker may be treated as employed by the purported umbrella and the supply-chain liabilities will still be triggered.
AGENCIES
Agencies, of course, sit right in the crosshairs of the new JSL rules.
Under Chapter 11, the “relevant party” most often jointly and severally liable with the umbrella will be the agency that contracts directly with the end client.
In practice, that means that if an umbrella fails to account for PAYE/NIC, HMRC can simply look to the agency for payment, regardless of whether the agency had any knowledge of, or involvement in, the non-compliance.
This is a profound shift. Historically, agencies could say that the umbrella was the employer of record and therefore solely responsible for PAYE. Their exposure was largely limited to reputational risk or, in more extreme cases, the Managed Service Company rules. The JSL regime removes that shield. Where multiple agencies exist in a chain, the legislation borrows from the Chapter 7 agency rules to determine which agency is the relevant party, typically the one contracting with the end client.
Again, it is worth re-emphasising, there is no statutory “reasonable care” defence in the draft.
Even diligent checks will not eliminate liability, although they will remain critical in managing commercial relationships.
In effect, agencies are being positioned as the primary compliance gatekeepers in labour supply chains.
By making agencies jointly and severally liable, HMRC ensures that there is always a deep-pocketed UK entity available to meet any PAYE shortfall.
PERSONAL SERVICE COMPANIES
The provision of personal services in the usual way should not fall within the scope of these new rules. On one view, a PSC is not there to supply labour but to provide services, and so cannot be an umbrella company.
In any event, that point is largely academic because the worker need only have a material interest in the relevant company for it to fall outside the definition of umbrella company. A PSC, of course, carries its own exposure under IR35 / off-payroll working rules. With HMRC policing these areas, there is always the prospect of “sweet shop” risk.
In other words, HMRC may try in borderline cases to argue that Chapter 11 applies, or to choose between chapters, if a contractual chain blurs the distinction between PSC supply and umbrella supply. In the consultation response, the government itself recognised the importance of keeping the PSC / IR35 framework distinct rather than subsuming it into the umbrella tax rules. Accordingly, PSCs remain subject to:
- IR35 / off-payroll working rules (Chapter 8 and Chapter 10 of ITEPA 2003): if a PSC is deemed “inside IR35,” the client or agency will need to deduct PAYE/NIC as if the worker were employed. That continues unchanged by JSL.
- MSC (Managed Service Company) rules (Chapter 9 of ITEPA 2003): where relevant, for schemes that resemble disguised employment through PSCs.
Accordingly, PSCs likely face less direct impact from the JSL umbrella regime, although risks remain in mixed or hybrid supply-chain structures.
PSCs therefore continue within their existing regime (IR35, MSC and so on), but may become relatively more attractive than umbrella models under JSL.
EMPLOYER OF RECORD ARRANGEMENTS
“What is an Employer of Record (“EOR”) arrangement?”
Classically, these arrangements are used as an international employment solution. For instance, where a company wants to hire someone abroad but does not want to set up a local entity, it may use a local third-party entity as the employer of record. On the face of it, that looks very much like an umbrella.
The EOR is the legal employer of the worker in that jurisdiction. It signs the employment contract and is responsible for payroll, tax withholding, social security and compliance. The client company directs the work but has no legal presence in the country. In many cases, however, EOR models are structured more as consultancy or payroll services than as classic supply-of-labour intermediaries. The precise nature of the arrangements therefore matters more than the label.
JSL Analysis
This is a more nuanced area, because EORs are often international and may not naturally sit within the “umbrella supply chain” setting that Chapter 11 targets. But, given the breadth of the drafting, they should be assessed carefully. The Chapter 11 definition is broad enough to catch professional employment organisation and EOR-type arrangements insofar as they supply labour. Accordingly, if an EOR is structurally operating like a labour supplier – hiring staff and then ‘leasing’ them to a client – it may be caught by the JSL regime.
However, as noted, many EOR models are structured more as consultancy or payroll services than as supply-of-labour intermediaries. If so, they fall outside Chapter 11.
Also, because many EOR relationships are international, questions of jurisdiction, foreign law and treaty interaction will complicate HMRC’s ability to enforce or pursue upstream liability.
Businesses using EOR providers should therefore check whether their EOR would be treated as a labour supplier and whether it purports to ‘lease’ staff rather than merely providing payroll administration.
In short, EORs are at risk of being drawn into JSL where their model looks like a labour-supply chain.
JOINT EMPLOYMENT
It is arguable whether these changes apply to what I call a joint employment scenario, but that may ultimately depend on the precise arrangements and contracts. Even if they do not, I am not sure one is in a better position simply by being one of two joint employers. I return to that below.
Is the worker employed by a third person? In one sense, yes: he or she is employed by the client and a third person simultaneously. I think that probably satisfies the condition, even though the worker is also employed by a non-third person.
Secondly, is the third person carrying on a business of supplying labour? In this context, I think that must mean employing people on behalf of others on a commercial basis. That appears capable of being satisfied, particularly given the legislation’s statement that one must consider whether this is done ‘in conjunction with any other business’.
Finally, it is assumed that the worker does not have a material interest in the company that is jointly employing the worker.
As such, the final question is whether the Umbrella Company Arrangements Conditions are satisfied.
That will depend on the agreements between the parties. If there is simply a joint contract of employment between the worker and the joint employers, I do not think this condition is satisfied.
However, where there is an agreement between the client and the third-party employer for the payment of fees for the worker’s services, the position becomes more complicated.
My broader view of joint employment has not changed. Where there are joint employers and there is an insufficiency of tax, HMRC will first go to the employer of record and, if that employer cannot cover the shortfall, will look to the other employer.
Accordingly, determining the position under new s61Y may not be especially important for this type of arrangement. One was, and remains, on the hook alongside one’s fellow joint employer.
PROFESSIONAL EMPLOYER ORGANISATION (“PEO”) MODEL
A PEO is similar in spirit to an umbrella or EOR in that it intermediates HR and payroll functions, but under a co-employment model rather than pure outsourcing.
The draft umbrella legislation explicitly brings PEOs within the umbrella-company definition.
That suggests that PEOs which act as labour suppliers – i.e. they employ workers and supply them to clients – will be drawn into the JSL regime as an umbrella company for tax purposes. PEOs normally involve co-employment, with the PEO handling HR and payroll while the client retains day-to-day control. Under JSL, however, the PEO may be treated in much the same way as an umbrella labour supplier for PAYE purposes. That means upstream parties (clients and agencies) engaging PEOs may become “relevant parties” if the structural conditions of Chapter 11 are met. The position is likely to be similar to joint employment above in that joint employers are already, in substance, exposed to PAYE risk even before Chapter 11. Sometimes, however, the PEO is doing no more than providing payroll and administration rather than labour supply. In that case, it is more likely to fall outside Chapter 11.
MINI UMBRELLA COMPANIES (MUCS)
MUCs are arrangements in which, instead of a single umbrella employing large numbers of workers, many small “mini” companies are incorporated, each employing only a handful of workers. They are typically set up deliberately to exploit reliefs designed for small employers, most notoriously:
- Employment Allowance (the £5,000 NIC relief)
- Flat-rate VAT schemes
Often the MUCs are also run by nominee or overseas directors – sometimes unsuspecting individuals in the Philippines or elsewhere – which makes enforcement difficult.
HMRC has publicly cited MUCs as a form of supply-chain fraud. It says MUCs exist “solely to abuse tax reliefs and defraud HMRC.”
HMRC guidance has warned recruitment agencies and end clients that engaging with MUCs creates a serious risk of unpaid PAYE, VAT and NICs, and potentially exposure under the Criminal Finances Act 2017 if they are seen to facilitate fraud. Quite apart from those general warnings, MUCs are squarely within the scope of the new umbrella-company JSL regime because they are umbrella-type entities supplying labour.
The new joint and several liability provisions mean that HMRC no longer has to chase dozens of insolvent mini entities. Instead, it can go straight to:
- the agency contracting with the MUCs; or
- the end client, if there is no compliant UK agency in the chain.
This is a deliberate legislative response to MUC abuse. HMRC can leapfrog the non-viable mini entities and impose PAYE/NIC liability directly on better-capitalised agencies and clients.
One could look at the possibility of creating companies in which each worker owns more than 5% of the shares. In theory, that might appear to revive the use of, if not mini, then at least small umbrellas outside Chapter 11.
However, one must take careful note of s61Y(5)(b), which provides a caveat to the material interest exception, and s61Z1(2) (purported umbrella companies).
LLPs / PARTNERSHIPS
It is worth noting that the carve-out for material interest is available only to companies; partnerships and LLPs do not appear to receive the same exemption. That said, if the individuals are genuinely self-employed partners or members, the exemption may not be needed.
However, I can see nothing in the legislation that specifically requires the relevant business to be a company in order to fall within the rules.
Genuine partners in a partnership, or members in an LLP, should not, however, be treated as employees for the purposes of the JSL rules.
CONCLUSION
Taken as a whole, the new regime is less about changing the underlying PAYE calculation than about ensuring HMRC can always find someone solvent, visible and worth pursuing when an umbrella structure fails.
The umbrella remains the formal employer, but Chapter 11 spreads the practical risk across the supply chain.
For agencies, that is the real deep impact. They move from bystanders to principal shock absorbers.
For end clients, the danger is greatest where there is no agency in the chain, or where overseas or connected entities complicate collection.
For everyone else, labels matter less than structure. Businesses therefore need to map their supply chains carefully, tighten contracts, gather real evidence of payroll compliance and decide in advance who is standing in the impact zone if the umbrella disappears.
In proper disaster-movie fashion, the real danger is often the fragment of comer everyone assumed would burn up harmlessly. By the time the resulting tidal wave is visible on the horizon, it is far too late to discover that nobody agreed who was paying for the bunker.
Cue Aerosmith.