Joint and Several Liability – Umbrella Reforms
The end of the beginning, NOT the beginning of the end…
The long-awaited umbrella company tax legislation was published by the Government in draft late Monday afternoon. Whether the time of publishing was due to some last-minute cramming is yet to be determined…
Now that we have draft legislation, we’ve set out our initial observations on the draft legislation with further details to come in due course over the next few weeks and beyond.
A long time coming…
The legislation has been long awaited given HMRC’s current view of the labour supply market and the perceived tax avoidance that goes unchallenged in the sector. With various marketing campaigns initiated by HMRC over the years to deter individuals and companies from engaging with umbrella companies achieving very little (or so is suggested by HMRC), it was time (and rightfully so in our opinion) to legislate.
The intention of the measure was to try to make parties further up the contractual chain, such as employment agencies (that primarily engage with umbrella companies) liable for the PAYE tax and NICs due from the umbrella companies that they engage.
With draft legislation now available, we can better understand the Government’s intention with regards to the sector and determine how the sector will be affected. Of course, given the intention above, different parts of the contractual chain (that involve an umbrella company) will be affected in different ways and each party will need to consider the implications as well as consider how to implement the legislation within their business.
In addition, businesses should also take note that the legislation is currently in draft and in consultation until mid-September 2025. With tax legislation, there are often last-minute changes (the MSC and the original IR35 legislation are examples) prior to legislation coming into effect but of course, the draft wording provides details of the Government’s current intention with the sector and so is vitally important for all parts of the contractual chain to consider the detail but with caution given last minute changes that may occur.
Joint and Several Liability…
Turning now to the draft legislation. As was widely reported, the government has opted for a ‘joint and several’ approach to liability. The legislation confirms that those higher up in the contractual chain will be jointly and severally liable to pay any amount due in accordance with the PAYE provisions by the umbrella company. Specifically, the legislation confirms joint and several liability and so the umbrella company is liable along with:
- The client, where the umbrella company contracts directly with the client;
- The party that has a contract with the client, where the umbrella company does not contract with the client directly but contracts with any other party.
The legislation confirms that where there are multiple (or a chain of) contracts, the jointly and severally liable party remains the party that has the contract with the client.
Finally, on this matter the draft legislation confirms that the client remains jointly and severally liable in circumstances where the ‘employment agency’ is connected with the umbrella company or is non-UK resident.
Shyam Pattani (Director at Chartergates):
“It is important to remember that the legislation is currently in draft and therefore subject to change. However, the proposed joint and several approach to liability means that it is crucial that businesses within the labour supply chain take independent advice on their own position based on where they sit in the supply chain.”
New Definitions and Consequences…
As always with legislation, there are conditions and definitions that set out the nature of the contractual chain to which the legislation will apply as well as different definitions of the various parties and circumstances that could arise, an example being where there are non-UK resident companies (including non-UK resident clients).
The draft legislation also appears to directly target the mini-umbrella company model under the section that brings ‘purported umbrella companies’ into the anti-avoidance provisions. This is certainly interesting as the model, as we understand, seeks to take advantage of the flat rate scheme for VAT (a tax that does not come within this measure) and the employment allowance for NICs (we are still waiting on the corresponding NICs legislation). The inclusion therefore appears to target the circumstances in which the mini-umbrella company does not pay its PAYE liability over to HMRC (by making others jointly and severally liable) rather than a change to specifically target the abuse of the flat rate scheme and employment allowance.
It is also important to note that with any new legislative definition there is always the possibility of unintended (or deliberately intended but not directly communicated) consequences. The new definition of ‘purported umbrella companies’ is vague and imprecise enough to potentially apply to more than mini-umbrella companies. As such, we will be studying this and the remainder of the legislation in detail to advise our clients on it beyond the obvious and non-contentious elements.
Furthermore, the legislation includes new concepts for PAYE such as a joint and several liability which is different to other such anti-avoidance legislation. Two examples being the off-payroll rules which place the IR35 decision on the end client but allow the passing of liability down the chain if the relevant conditions are met and the MSC legislation which was the first to introduce a debt-transfer provision in certain circumstances and only once all attempts to recover the debt from the prima facie liable party had been exhausted.
It will certainly be interesting to see whether, on this attempt, HMRC have finally landed on a concept that they are prepared to enforce when previous attempts do not appear to have been enforced as vigorously as originally purported by HMRC.
Mark Taylor (Director and Co-founder of Chartergates):
“While it is easy to appreciate the targets of the new definitions, it is relatively rare that a statutory definition only captures the intended target. As such, businesses should not take it for granted that because they are not the intended target that they are not within the legislation. Time and careful analysis will tell what, if any, unintended consequences follow the creation of these new definitions and statutory concepts.”
Moving Forward…
Needless to say, the draft legislation will have teeth if/when the legislation is enacted and will no doubt result in parties that use umbrella companies undertaking careful and meticulous due diligence to ensure that their supply chains are operating as they should and that umbrella company suppliers are correctly deducting the necessary PAYE and NICs from the payments made to individuals.
Mark Taylor (Director and Co-founder of Chartergates):
“With the consultation ending mid-September, we are hopeful (based on usual timescales) that we will get final legislation in short order thereafter. Affected businesses need to strike the right balance. There is no value in ignoring the draft legislation but committing to a kneejerk reaction is equally as dangerous. Now is the time to take advice and give careful consideration to the current draft, with a view to making changes when the legislation is confirmed.”
Register for our webinar to hear more analysis:
All draft legislation comes with unanswered questions, and it is these that we will be analysing over the coming weeks including in our upcoming webinar on 13 August 2025. If you would like to register for our webinar, you can do so here or by emailing seminars@chartergates.com.
Book a consultation now:
With details now available, albeit in draft, affected businesses should be making plans for the post April 2026 world. As such, our team of experts are available for consultations to discuss the legislation and its ramifications. Contact us for more information.
Disclaimer: Chartergate Legal Services Ltd has drafted this update to provide you with a general overview of the relevant law and developments at the date of sending only. This update is provided as a general overview and should be taken as such. It is not a substitute for professional advice that is specific to your circumstances and should not be relied upon as such.
