Joint and Several Liability – Umbrella Reforms: The Calm before the Storm…
The long-awaited umbrella tax reforms have now gone through the consultation period (which ended on 15th September) and so we can expect final legislation soon. True to form, the marketplace is already replete with ‘solutions’, ‘guarantees’ and ‘systems’ that promise full compliance. It is of course trite to remind our readers that they should tread carefully when considering any of these so-called ‘solutions’. However, given the seismic nature of these changes and the scale of potential liabilities, it is a vitally important reminder. To this end, we’ve set out below a summary of the salient points from the draft legislation and the key first steps that businesses should take to truly protect themselves and remain compliance.
The legislation has the fundamental aim of cracking down on unscrupulous players in the umbrella market and given recent HMRC guidance, is unlikely to change by any great degree from the draft legislation that was previously published. It is set to be formally introduced in the Finance Bill 2025-26 for its first reading and come into force on 6 April 2026. To be precise Part 2 of the Income Tax (Earnings and Pensions) Act 2003 will be amended to introduce a new Chapter 11.
It may seem a long way off and there is plenty of time to get prepared. But as they say, time flies and with the Christmas festivities on the horizon there is no time like the present to get the proverbial ducks in a row.
To remind you the legislation is set to introduce a number of new concepts for all parties in a supply chain to consider very carefully, not least of which being Joint and Several Liability and Purported Umbrella Companies.
In essence, Joint and Several Liability means that those higher up the contractual chain will be liable for any PAYE deductions that may be due from an umbrella company. Specifically, liability could fall either on the client themselves in a chain where it contracts directly with an umbrella company (as defined by the legislation) or, alternatively, the party that has a contract with the client (usually an agency) and the umbrella company has a contract with that party. Without doubt this aspect alone has drawn much debate and concern and we would say rightly so. It heralds or rather continues the push by HMRC for businesses to self-regulate and leave the door open for them to commence investigations and police the system with ever harsher sanctions.
Further while the intention of the definition of a ‘Purported Umbrella Company’ is quite clearly aimed at the mini-umbrella company market it also, potentially, brings into the picture other businesses given, as it stands, the definition is rather vague. Time will tell whether the definition will remain as drafted and of course, the definition may further develop in the tribunals once finalised. Meanwhile it is incumbent on us to highlight the possibility and, where appropriate, for businesses to take steps to protect themselves.
All in all, wherever you are in a contractual and supply chain be it an end client, agency or an umbrella company the sea change, which had been forecast for some time, will now require businesses to steer their ship safely around such, potentially, turbulent waters.
To aid businesses in preparing for the new legislation, we will over the coming weeks and months be publishing some dedicated guidance for each stage of the contractual chain. So, keep an eye out! Until then, we’ve set out some key principles, that all businesses affected by the upcoming reforms, should keep at the forefront of their thinking as they begin their preparations:
- Understand where your business sits in the contractual chain: Your position in the contractual chain will determine your liability (or not, as the case maybe) and responsibilities under the new legislation. Understanding your position in the chain, is the starting point for the work you need to do, to protect your business.
- Every potential supplier will tell you they’re compliant: Whether you’re an end-client dealing with agencies and/ or umbrella companies, an agency that uses umbrella companies, or an umbrella company seeking accreditations, all potential suppliers will extol their own compliance. If there is one lesson to take from the upcoming legislation, it is that HMRC will have the power to ignore any ‘compliance assurances’ you were given and, if you are one of the parties in the chain that can be liable under the new law, then they can and will pursue you for any unpaid amounts. As such, it is vital that businesses take their own independent and detailed advice on their position. Reliance on untested ‘assurances’ of compliance will simply not be enough in the new world – the stakes are too high.
- Avoid assumptions about the scope of the legislation: Many will look at the legislation and assume that because they are not an umbrella company, not operating mini-umbrella companies or don’t engage workers on a PAYE basis, the legislation does not apply to them. This could be an expensive fallacy. While the legislation is clearly targeted at certain, well publicised arrangements, the drafting extends far beyond those. Definitions of ‘umbrella company’ and ‘purported umbrella company’ are wide and just because your business doesn’t ‘fit’ what you understand these to, colloquially, mean does not mean you are outside of the legislation’s reach.
- Understand the whole process: A lot of focus right now, is on the calculation of a worker’s pay and verifying that it is accurate and that the appropriate tax and NI has been accounted for. In terms of compliance with the upcoming legislation, while this is important, it is only part of the compliance puzzle that needs to be solved. Businesses also need to apply equal, if not more focus, on other risk areas. These include, but are not limited to:
- the contracts in place,
- the process for agreeing terms,
- the contractual chain,
- correspondence between the parties (at all stages of the relationship),
- the methodology and legal accuracy of the pay rate, before it gets anywhere near the payslip,
- contractual liabilities and indemnities,
- collaboration between all parties in the chain,
- processes and protections for when HMRC analyse any arrangements.
These are just some of the necessary considerations, and any businesses being told by potential suppliers that they only need to consider the accuracy of the payslip, should be wary.
In short, this is not the time to take half measures. Starting the work now, understanding your own liability profile first and then working in collaboration with like-minded suppliers/ clients will ensure the best chance of compliance and risk mitigation.
As you know, we’re on-hand to advise on the legislation, its scope and how to remain compliant. Contact us, if you would like 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.
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