Umbrella Company Joint and Several Liability: What Agencies Need to Know
In brief: From 6 April 2026, the umbrella-company joint and several liability regime can expose recruitment agencies and certain other parties in a labour supply chain to liability for PAYE amounts unpaid by an umbrella company. Whether liability arises depends upon sections 61Y, 61Z and 61Z1 ITEPA 2003 and the particular contractual supply chain.
The new umbrella company joint and several liability rules in Chapter 11 of ITEPA 2003 materially increase the tax risk faced by employment agencies and other businesses operating in labour supply chains.
Under section 61Y ITEPA 2003, a “relevant party” can be made jointly and severally liable with an umbrella company for PAYE amounts due in relation to qualifying umbrella company payments.
For recruitment agencies and end-clients, this means that using an umbrella company does not necessarily isolate the business from the umbrella’s PAYE and NIC compliance failures.
When can an agency become liable for an umbrella company’s PAYE?
Section 61Y applies where a worker personally provides services to a client, is employed by an umbrella company, and the statutory umbrella-company arrangement conditions are satisfied.
The legislation deliberately extends beyond the immediate relationship between the worker and umbrella company.
Sections 61Y, 61Z and 61Z1 ITEPA 2003 can bring into scope:
the umbrella company;
an employment or recruitment agency;
the end-client in specified circumstances;
UK entities within chains involving non-UK participants; and
arrangements involving a “purported umbrella company”.
The critical question is therefore not simply which company employs the worker. The entire contractual labour supply chain must be examined.
Does HMRC have to establish the PAYE debt in court first?
Ordinarily, no.
Court proceedings are not normally required before HMRC can establish that PAYE or NIC is due. HMRC has statutory machinery for establishing and collecting employment tax liabilities, including Regulation 80 determinations and section 8 NIC decisions.
But HMRC cannot simply rely upon an unexplained assertion that an umbrella company has failed to pay tax.
Where liability or payment is genuinely disputed, an agency should require HMRC to identify, amongst other matters:
the statutory basis of the liability;
the relevant workers and qualifying payments;
the relevant pay periods;
how the alleged debt has been calculated;
payments or credits already received;
the umbrella company concerned; and
why the agency falls within the statutory definition of a relevant party.
The relevant RTI information and PAYE account position may be particularly important where the dispute is not about what tax was reported, but whether the umbrella company actually paid it.
What if PAYE or NIC figures have been corrected?
Corrections and amendments may materially affect the amount allegedly outstanding.
If PAYE or NIC information has actually been amended or corrected, HMRC must take that information into account when determining the true liability.
Businesses should therefore ensure that any demand based on an umbrella company’s alleged default is reconciled against subsequent RTI corrections, payments and other adjustments.
A dispute does not necessarily suspend HMRC collection automatically. Depending upon the particular decision or determination, a business may need to consider an appeal, statutory review and an express request for postponement or a standstill.
Can HMRC pursue another company in the corporate group?
Chapter 11 does not simply give HMRC power to move an umbrella-company liability to any company within the same corporate group.
The statutory focus is the labour supply chain.
Whether another company is potentially liable therefore depends upon the contractual arrangements and whether that company falls within the statutory provisions governing relevant parties. Corporate association by itself is not the test. If your business needs to re-structure to limit regulatory risk, timely and shrewd legal advice is essential.
What is the relationship between umbrella-company JSL and Kittel?
The new PAYE joint and several liability rules should be kept conceptually separate from Kittel VAT fraud cases.
Under the Kittel principle, HMRC may seek to deny input VAT where it establishes that a trader knew or should have known that its transactions were connected with fraudulent VAT evasion.
The Court of Appeal's judgment in Mobilx Ltd v HMRC [2010] EWCA Civ 517 is important.The legal test is not merely whether a trader knew there was a risk that fraud might exist. The issue is whether the trader knew or should have known that it was participating in transactions connected with fraudulent evasion of VAT.
Nor is inadequate due diligence itself the legal test. The ultimate question remains what the business knew or should have known in the circumstances.
Nevertheless, good due diligence can be crucial evidence when HMRC investigates a labour supply chain.
What due diligence should recruitment agencies undertake on umbrella companies?
Businesses should be able to demonstrate a contemporaneous, risk-based and independently verified compliance process.
Depending upon the particular supply chain, sensible measures can include:
mapping every company and contract in the labour supply chain;
identifying the legal employer and payroll operator;
checking directors, beneficial ownership, trading addresses and registrations;
reviewing employment contracts, payslips and worker documentation;
reconciling umbrella invoices against gross pay, employer costs, deductions, net pay and the umbrella margin;
obtaining reliable evidence of RTI submissions and PAYE/NIC payments;
checking VAT registrations and payment arrangements;
monitoring changes in ownership, banking arrangements and filing patterns;
screening relevant insolvency, disqualification, regulatory and HMRC information;
operating a documented red-flag and escalation procedure; and
ceasing to use a supplier where serious anomalies remain unexplained.
Accreditation can form part of the evidence but should not replace the agency's own assessment.
The objective is to create evidence showing what enquiries were undertaken, what information was obtained, how anomalies were investigated and why the business concluded that the supplier could properly remain within its labour supply chain.
Can directors face personal penalties?
Potentially.
Where a company's tax return contains a deliberate inaccuracy attributable to an officer, section 69D can expose an officer to a penalty.
Directors should therefore avoid treating umbrella-company compliance as something that can simply be delegated to an internal compliance department.
Where warning signs appear, evidence that the director or responsible officers actively considered and responded to them can become important. Again, timely legal advice on this issue is sensible.
What about CIS workers and personal service companies?
Chapter 11 should also be distinguished from other employment-tax regimes.
A genuinely self-employed worker would ordinarily fall outside the Chapter 11 umbrella-company definition because the statutory regime requires employment by an umbrella company.
Likewise, the legislation contains a material-interest requirement relevant to workers operating through their own companies.
Questions concerning CIS, the agency legislation, employment status or Chapter 10 and off-payroll working therefore require separate analysis rather than simply being treated as part of the umbrella-company JSL regime.
The practical message for agencies and end-clients
The new legislation makes understanding the labour supply chain much more important.
Recruitment agencies and businesses using umbrella workers should know:
who employs the worker, who pays whom, how PAYE and NIC are accounted for, what contractual chain sits between the worker and end-client, and what evidence exists that the umbrella company is complying with its tax obligations.
Where HMRC seeks to impose liability, however, businesses should not assume that HMRC's calculation or analysis is necessarily correct.
The statutory conditions for liability, the identity of the relevant party, the underlying PAYE debt and the treatment of payments and corrections may all require careful examination.
Specialist advice on umbrella companies, PAYE and HMRC disputes
Michael Paulin is a tax barrister at 1 Crown Office Row who advises employment agencies, businesses and taxpayers on HMRC disputes, PAYE and NIC, labour supply chains, employment status, off-payroll working, VAT fraud allegations and related public-law issues.
He accepts instructions through solicitors and, where appropriate, directly from businesses and individuals under the Public Access scheme.
For advice concerning umbrella company joint and several liability, section 61Y ITEPA 2003, PAYE disputes, Kittel allegations or labour supply-chain tax risk, contact Michael.paulin@1cor.com to discuss the circumstances of the case.