PART TWO: THE FINANCE BILL THROUGH TO FINANCE ACT
INTRODUCTION
If Part One mapped the trajectory of the incoming rules, Part Two is where we examine the point of impact.
The draft legislation, introduced in Finance Bill 2025/26 and now enacted in Finance Act 2026, sets out in precise terms how liability is reallocated across the supply chain.
At first glance, the framework appears highly mechanical. A series of definitions, conditions and caveats.
But, much like any well-plotted disaster scenario, the real significance lies not in the individual components, but in how they combine, accelerate and ultimately make impact.
In this Part, I break down the statutory machinery and show how the new JSL “equation” operates in practice.
THE JSL ‘EQUATION’
INDIVIDUAL + (EMPLOYED BY) UMBRELLA + UMBRELLA ARRANGEMENT REQUIREMENT = UMBRELLA.
The equation
Under the new tax legislation[1], there are three Threshold Requirements for there to be an umbrella company:
There must be an individual (“the worker”) who personally provides services, or enters into arrangements with a view to personally providing services, to another person (“the client”).
The worker must be employed by a third person (the “umbrella co”) which (1) carries on a business, whether or not with a view to profit and whether or not in conjunction with any other business, of supplying labour, and (2) is not a company in which the worker has a material interest.
The Umbrella Company Arrangement Requirement must also be satisfied.
There must be an individual who…
The requirement for there to be an individual is self-explanatory.
There must be an umbrella…
The entity cannot be an umbrella company unless it is in the business of supplying labour. Accordingly, the mere provision of payroll or other administrative services would not, of itself, appear to be enough.
The individual must be employed by the Umbrella…
It is important to note that the individual must be employed by the umbrella. Accordingly, someone who works under a contract for services – that is, someone who is genuinely self-employed – should fall outside this legislation.
It should also be noted that these provisions do not apply to those who are merely deemed to be employees under the IR35 or agency provisions. Other rules, of course, may apply in those scenarios.
The two qualifications
The umbrella must also satisfy two further qualifications:
- who carries on a business (whether or not with a view to profit and whether or not in conjunction with any other business) of supplying labour, and
- that is not a company in which the worker has a material interest”
The first qualification is relatively straightforward and is likely to be met in any scenario where an entity is operated on a commercial footing, whether by itself or alongside other business activity.
The second qualification, perhaps, has more legs.
(5) For the purposes of subsection (1)(b)(ii)—
(a) “material interest”, in relation to a company, means—
(i) beneficial ownership of, or the ability to control, directly or through the medium of other companies or by any other indirect means, more than 5% of the ordinary share capital of the company,
(ii) possession of, or entitlement to acquire, rights entitling the holder to receive more than 5% of any distributions that may be made by the company, or
(iii) where the company is a close company, possession of, or entitlement to acquire, rights that would in the event of the winding up of the company, or in any other circumstances, entitle the holder to receive more than 5% of the assets that would then be available for distribution among the participators, but…
Looked at in somewhat naïve isolation, it would therefore be possible, in theory, to have:
- an umbrella with no more than 19 members, each holding more than 5% of the ordinary share capital etc. (let us call these Small Umbrella Companies, or SUCs); or
- a mixed umbrella with, say, 19 members to whom JSL would not apply because they have a material interest, together with an unlimited number of workers to whom JSL would apply (Hybrid Umbrella Companies, or HUCs).
However, this ‘exception’ is itself subject to its own targeted anti-avoidance rule (“TAAR”):
(b) the worker is to be regarded as not having a material interest in a company if that interest is a result, to any extent, of any arrangements the main purpose, or one of the main purposes, of which is to secure that subsection (2) does not apply.
Accordingly, there must be some genuine reason for the entity to be structured in that way other than simply seeking to avoid the JSL provisions.
It is worth noting that the carve-out for material interest is available only to companies. A partnership or LLP does not appear to enjoy the same exemption. That said, if the relevant individuals are genuinely self-employed partners or members, the point may not matter in practice.
Umbrella Company Arrangement Requirement (“UCAR”) is satisfied
General
The final element of our equation, aside from there being an insufficiency of tax, is that UCAR must be satisfied.
There are two possible ways in which this requirement may be satisfied:
- a direct contract; or
- an indirect contract.
Direct contract:
The umbrella company arrangements conditions are as follows:
(a) there is a contract between the umbrella company and—
(i) the client, or
(ii) (ii) another person,
(b) under or in consequence of the contract—
(i) the services are provided, or
(ii) (ii) the umbrella company is paid, or otherwise provided with consideration, for the services…
Accordingly, there is a direct contract where the umbrella company is a party to a contract with either the client or another person, such as an agency. That contract must, of course, be one under which the services are provided and paid for.
Indirect contract:
(c) if the contract is not between the umbrella company and the client—
(i) there is a contract between the client and another person,
(ii) the provision of the services or of payment or other consideration for the services is also a consequence of that other contract (whether directly or as a result of a series of contracts involving other persons).
This might be seen as another targeted anti-avoidance measure: it prevents parties from simply contracting around UCAR by inserting additional intermediaries into the chain.
WHO IS LIABLE?
General
Each relevant party becomes jointly and severally liable for the umbrella company’s PAYE liability in relation to the “qualifying umbrella company payment” (“QP”).
(2) Each relevant party (see section 61Z) is, along with the umbrella company, jointly and severally liable to pay any amount payable, in accordance with the PAYE provisions, by the umbrella company in relation to a qualifying umbrella company payment.
(3) A “qualifying umbrella company payment” means a payment made in respect of the employment of the worker to the extent that it is not in respect of the provision of services to a person other than the client. The QP is the “payment made in respect of the employment of the worker to the extent that it is not in respect of the provision of services to a person other than the client”.
Relevant parties
Where there is a Direct Umbrella Contract:
- if there is a direct contract between the client and the umbrella, the client is the Relevant Party;
- if there is a direct contract between another person (such as an agency) and the umbrella, that other person is the Relevant Party.
Where there is an Indirect Umbrella Contract, the position is slightly more complex. The client may also be the Relevant Party where the other person who is party to the contract with the client is either:
- Connected[2] with the umbrella company; or
- resident outside the UK. If both the client and the other person are non-UK resident, and there is any other UK-resident party in the chain (other than the worker), then the UK-resident party closest to the client is the Relevant Party.
Scenario – who might be the Relevant Party?
Agent
An agency will only be a Relevant Party where it is party to a contract with an umbrella company or where it falls within “Other?” below.
Client
The client will be a Relevant Party where:
- there is a direct contract between the umbrella company and the client (i.e. no agency); or
- there is an indirect contract between, say, the client and an intermediary, and that intermediary is connected with the umbrella company or is resident outside the UK.
Other?
If the client and the other person are both:
- non-UK resident; and
- there is another UK-resident party in the chain (other than the worker), then the UK-resident party closest to the client is the Relevant Party.
UMBRELLA + INSUFFICIENCY OF TAX ON A QP = JSL IS TRIGGERED
WHAT IS THE PARTY LIABLE FOR?
Joint and several liability
We have defined the relevant parties – those potentially on the hook under JSL – above. It remains to establish what, precisely, they are on the hook for:
“Each relevant party (see section 61Z) is, along with the umbrella company, jointly and severally liable to pay any amount payable, in accordance with the PAYE provisions, by the umbrella company in relation to a qualifying umbrella company payment.”
The Qualifying Payment
It seems to me that, for these provisions, it is important to trace both the worker and his or her qualifying payment when applying the JSL rules.
As set out above, a Qualifying Umbrella Company Payment (“QP”) is required:
A “qualifying umbrella company payment” means a payment made in respect of the employment of the worker to the extent that it is not in respect of the provision of services to a person other than the client.
This appears to impose an element of tracing. The amount paid by the client is broken down by worker, and that becomes the QP. In my view, that means the total amounts are not simply mixed together in a single pot with the PAYE provisions then applied generally to any shortfall in that pot.
Instead, each QP for each worker is preserved, and the PAYE provisions must be applied to that amount separately. Only those QPs in respect of which PAYE has not been properly operated fall within the scope of JSL.
I think this is reinforced by the following:
“Each relevant party… is, along with the umbrella company, jointly and severally liable to pay any amount payable… by the umbrella company in relation to a qualifying umbrella company payment”
That may matter in some scenarios.
PURPORTED UMBRELLA COMPANIES (“PUCs”)
General
These might be regarded as further anti-avoidance measures. There are two circumstances in which a person can be a so-called PUC.
PUC – case one
The first case is as follows:
“61Z1 Purported umbrella companies
(1) This section applies if —
(a) a person (“the purported umbrella company”) participates in arrangements that would, if an individual were employed by the purported umbrella company, result in the umbrella company arrangements conditions being met,
(b) it is reasonable to suppose that one or more participants in the arrangements, other than the purported umbrella company or the individual, would assume that the purported umbrella company is the employer of that individual,
(c) the individual is not employed by the purported umbrella company, and
(d) if the individual were employed by the purported umbrella company subsection (2) of section 61Y would apply
I have seen commentary describing this as a mechanism to capture umbrellas that simply collect PAYE, fail to hand it over to HMRC, and then disappear. But that is not the only type of case at which this measure is aimed.
I think it is also aimed at scenarios where there is a ‘front-end’ entity with accreditation from an accrediting body. Payments from the end user flow through that entity to a non-accredited umbrella which actually employs the workers and administers payroll. The front-end simply takes a small skim from the arrangement. Sometimes the front-end acts as agent for the substantive umbrella. I think one purpose of these provisions is to ensure that the front-end is treated as a purported umbrella and is therefore subject to JSL.
PUC – Case two
There is also a second case in which the PUC rules may apply:
(2) This section also applies if —
(a) a company (“the purported umbrella company”) in which an individual has a material interest, within the meaning given by subsection (5)(a) of section 61Y, participates in arrangements that would, if the company were the umbrella company, result in the umbrella company arrangements conditions being met in relation to services the individual provides to the client,
(b) it is reasonable to suppose that one or more participants in the arrangements, other than the purported umbrella company or the individual, would assume that a substantial proportion of amounts provided to the purported umbrella company in respect of the services will be paid to the individual as earnings,
(c) it is not the case that a substantial proportion of amounts provided to the purported umbrella company in respect of the services is paid to the individual as earnings, and
(d) subsection (2) of section 61Y would apply if subsection (1)(b)(ii) of that section (requirement that the umbrella company is not a company in which the worker has a material interest) were omitted.
At first, this seems as though it provides a substantial fetter to the carve out for companies where the worker has a material interest (ie a personal service company[3]). However, I am not sure that the qualification is as dramatic as it might appear as a result of subsection (b). In a normal PSC / client scenario then client would not make the assumption required by the legislation (in other words, all parties would understand that the director / shareholder of a service company was free to extract value (or not extract value) as he or she wished).
What I think this qualification is trying to do is prevent the 5% material-interest carve-out from being used to create small umbrellas of, say, up to 20 people which then operate in a similar way to MUCs. In other words, the government did not want to create an easy exemption for quasi-mini umbrellas with a maximum of 20 workers.
HMRC has since published guidance[4], in the form of examples, where something that otherwise would not be in the rules is so as a result of the Purported Umbrella Companies provisions:
HMRC examples
HMRC has since published examples showing when something that might otherwise fall outside the rules is brought back in by the purported umbrella company provisions.
Example 1
ABC Bank approaches 123 Personnel, an agency, to supply them with a worker to support some IT infrastructure changes. ABC Bank and 123 Personnel agree that the worker will be supplied via an umbrella company. 123 Personnel sources a worker and arranges for them to be engaged via ZXC Umbrella. 123 Personnel wants ZXC Umbrella to employ the worker and, as part of due diligence checks, requests supporting evidence of this. ZXC Umbrella provides a specimen contract of employment and some payslips showing PAYE deductions. However, this evidence is fabricated and ZXC Umbrella does not actually employ the worker, making gross payments to them.
It is reasonable to suppose that one or more of the participants in the arrangements (other than ZXC Umbrella and the worker), namely ABC Bank and 123 Personnel, would assume that the worker was employed by ZXC Umbrella. It also appears to be the case here that ZXC Umbrella has taken at least one step that it is reasonable to suppose was intended to give the impression that it is the worker’s employer. Assuming the remaining conditions for Case 1 to apply are met, ZXC is a purported umbrella company and the purported umbrella company rules will apply to it. 123 Personnel will be a relevant party and will be jointly and severally liable.
This is a Case 1 example. It is perhaps no surprise that an entity fraudulently pretending to be an umbrella is a ‘purported umbrella’. The employment is false. The only surprise is that, after such egregious conduct, it is the innocent party – 123 Personnel – that is financially liable. That illustrates how harsh the rules are.
Example 2
QWE Catering needs temporary staff to support the running of an event. It has a bank of workers that it has used previously and one agrees to take the role. QWE Catering agrees with the worker that they will be engaged via an umbrella company – ZXC Umbrella. ZXC Umbrella engages the worker on a contract for services, meaning that it is not an umbrella company for the purposes of Chapter 11. ZXC Umbrella enters into a contract with QWE Catering to supply the worker to it. The conditions are met for the agency legislation to apply to treat ZXC Umbrella as the worker’s employer (see ESM2000 – Agency and Temporary workers).
In this scenario, no party in the chain has provided work-finding services to the worker that result in the worker providing services to QWE Catering. Assuming the remaining conditions for Case 2 to apply are met, ZXC Umbrella is a purported umbrella company and the purported umbrella company rules will apply rather than the agency legislation. The worker will be treated as ZXC Umbrella’s employee and QWE Catering will be a jointly and severally liable relevant party.
This is another Case 1 example. Rather than being employed under a contract of employment, the worker is engaged under a consultancy agreement (that is, a contract for services). Again, the example shows that one of the parties must be misled, or operating under an incorrect understanding of the relationships, for the rules to bite.
Example 3
ABC Bank approaches 123 Personnel, an agency, to supply a worker to support some IT infrastructure changes. ABC and 123 Personnel agree that the worker can be engaged via their own personal service company. 123 Personnel sources a worker who operates through PSC Ltd, a company in which the worker holds a material interest and if PSC Ltd were an umbrella company, the umbrella company conditions would be met. The worker provides 123 Personnel with a contract showing PSC Ltd as the employer and payslips which give the impression to 123 Personnel and ABC Bank that PSC Ltd is employing the worker and that a substantial proportion of the sums payable will be paid as taxable earnings.
However, in practice PSC Ltd does not pay a substantial proportion of the sums it receives to the worker as earnings.
Here it is reasonable to suppose that one or more participants in the arrangements (other than PSC Ltd and the worker), namely ABC Bank and 123 Personnel, would assume that a substantial proportion of amounts provided to PSC Ltd in respect of the services will be paid to the worker as earnings. Assuming the remaining conditions for Case 3 to apply are met, PSC Ltd is a purported umbrella company and the purported umbrella company rules will apply to it. 123 Personnel will be a jointly and severally liable relevant party.
This is a Case 2 example. Again, it involves a misrepresentation of the position by the PSC operator, here in the form of false payslips. It is unclear why the PSC operator would misrepresent the position, because if he did not, there would be no purported umbrella: neither s61Z1(2)(b) nor (c) would be satisfied.
Accordingly, in my view, these examples support the technical analysis of the purported umbrella company provisions set out in the earlier sections.
THE FINAL LEGISLATION (FINANCE ACT 2026)
General
The draft legislation discussed above was, in substance, almost wholly implemented in the final legislation contained in Finance Act 2026, which received Royal Assent on 18 March 2026.
Some amendments were made as the Finance Bill passed through the two Houses. I set them out briefly below, although none appears material to instructing advisers.
A new s61Z2 was added
At committee stage, the Government amendment 5 inserted a new section 61Z2, “Disclosures to liable persons”.
That provision was not in the Bill as introduced and appears in the final text. Its function is to permit disclosures to people who may be jointly and severally liable under the new regime.
The Regulation 80 consequential amendment was rewritten.
In the Bill as introduced, the PAYE machinery was framed around a person being a “relevant party” for Chapter 11 purposes. Following committee amendments 6 to 8, the final text instead applies where a person is jointly and severally liable to pay an amount as a result of Chapter 11.
That makes the collection machinery in the PAYE Regulations line up more directly with the JSL liability itself.
The “purported umbrella company” exclusion in s61Z1(3)(e) was widened at report stage.
The Bill as introduced used a narrower Case 2 test. Government amendment 14 then widened it so that, in a chain of contracts, the relevant work-finding services could have been provided not only by the purported umbrella company itself but also by one or more parties in that contractual chain.
The stated purpose was to stop more complex agency chains from being treated as involving a purported umbrella company when they should not be.
CONCLUSION (TO THIS PART)
Stepping back, the final Act did not produce a plot twist. The core architecture of Chapter 11 survived the Bill process largely intact: the umbrella remains primarily responsible for PAYE, but HMRC can look beyond it to a better-capitalised party when there is a shortfall.
The amendments refined the machinery rather than the mission.
Part Three therefore moves from statutory mechanics to the impact zone, considering how the regime lands on umbrellas, agencies, PSCs, EORs, PEOs, joint employment models, MUCs, SUCs and LLP/partnership structures.
So, brace yourself for impact… and the resulting fall out.
[1] Draft new ITEPA 2003, s61Y(1)
[2] There was no definition of “connection” in the draft legislation, as such the general ITEPA 2003 definition applies.
[3] I use this to describe a one-man bank consultancy company and not one that is necessarily in the scope of IR35.
[4] https://www.gov.uk/hmrc-internal-manuals/employment-status-manual/esm2445