In July 2025, we hosted a webinar with the FCSA, "Umbrella legislation and You", to answer all the questions recruitment agencies and end clients have about umbrella regulations and the introduction of the Joint and Several Liability (JSL) model .
Below, you'll find a roundup of everything that came up during the session, with answers provided by our our Director of Compliance, Chris Bloor.
FAQs: Umbrella regulations and Joint and Several Liability
Are non-compliant umbrella companies now essentially never liable?
"Not quite. The umbrella company is still liable - but not alone. Under Section 61Y of the draft legislation, the umbrella company remains jointly and severally liable for PAYE tax due on qualifying payments to the worker. However, the law extends that liability to other parties in the labour supply chain - such as recruitment agencies, MSPs, or even clients - if certain conditions are met.
This means:
- HMRC can pursue any one or more of the parties, including the umbrella, for the full amount of unpaid PAYE. So the umbrella doesn’t escape liability; it’s just not the only one on the hook.
- The intent is to prevent non-compliant umbrellas from hiding behind complex supply chains, and to ensure that others who benefit from the arrangement also bear responsibility - even if they weren’t aware of the non-compliance.
So, while the umbrella company is always liable, the legislation ensures that others can’t simply point fingers and walk away."
In terms of the "connected umbrella", I thought the purpose of the changes was to stop the end client being held liable where those businesses are connected?
"You're absolutely right to question the intent versus the practical outcome of the new legislation. The JSL framework introduced in the draft Finance Bill 2025–26 is indeed designed to prevent rogue umbrella companies and agencies from dodging liability and leaving HMRC unable to recover unpaid taxes.
But here's the nuance: What happens when the umbrella and agency are connected?
If an umbrella company and the agency closest to the end client are connected - meaning they share common ownership or control - then the legislation does allow liability to pass to the end client.
This might seem counterintuitive, but the rationale is to prevent artificial structures where a rogue organisation owns both entities and uses that setup to shield itself from liability. In such cases, HMRC may treat the agency and umbrella as a single entity and look to the end client as the next viable UK-based party in the chain.
Why would the end client be liable?
- Section 61Z of the draft legislation defines the “relevant party” as the entity closest to the end client in the supply chain.
- If that entity (the agency) is connected to the umbrella, HMRC assumes there’s a risk of collusion or avoidance.
- To ensure accountability, the liability bounces up to the end client, who is presumed to have more oversight and resources to ensure compliance."
Isn’t the legislation meant to protect end clients?
"Yes, but only when the supply chain is genuinely independent and compliant. The legislation aims to protect end clients from being unfairly burdened, but not when they’ve engaged with a supply chain that includes connected parties that could facilitate non-compliance."
If this is coming into effect from April 2026, does this mean that up until this point the tax liability is solely with the umbrella? Therefore any tax not paid by an umbrella up until this point will be only on the umbrella? And April 2026 onwards it is joint liability with the agency?
"Yes, that’s broadly correct but with an important nuance. Under current rules (up to 5th April 2026), the umbrella company is solely responsible for accounting for PAYE and National Insurance Contributions (NICs) on the worker’s pay. If the umbrella fails to meet its obligations, HMRC’s recourse is limited to the umbrella itself, unless fraud or other exceptional circumstances apply.
However, from 6th April 2026, the new legislation introduces JSL. This means:
- Recruitment agencies, MSPs, or even end clients can be held equally liable for unpaid PAYE/NICs if they are part of the labour supply chain.
- HMRC can recover the full amount from any one of the parties, regardless of whether they were aware of the umbrella’s non-compliance. The aim is to incentivise due diligence and reduce tolerance for risky or opaque umbrella arrangements.
So, to summarise:
Before April 2026: Liability rests with the umbrella company.
From April 2026 onwards: Liability is shared with agencies and others in the chain, even if they acted in good faith."
Today if an umbrella went bust, the agency is not liable as it is a B2B contract under normal law. In future, if an umbrella goes bust owing a large amount to HMRC, how would this play out? Is there a proportionality calculation i.e. if the agency has 5 workers with the umbrella, is there a calculation covering only those 5?
"Under current law, you're right: if an umbrella company collapses today owing PAYE/NICs, the agency is not liable - it's a standard B2B contract and HMRC can only pursue the umbrella (unless fraud or other exceptional circumstances apply).
However, from 6th April 2026, the new rules under Section 61Y change that significantly.
Joint and Several Liability
If the umbrella fails to pay PAYE tax, any “relevant party” in the supply chain - including the agency - can be held jointly and severally liable.
This means:
- HMRC can recover the full amount from any one of the liable parties.
- It doesn’t matter who was “at fault” or how many workers were involved — liability is not automatically limited to the agency’s share of workers."
Is there a proportionality calculation?
UPDATE 11/08/2025: "HMRC have now confirmed that they each agency will only be proportionally liable for any unpaid income tax or NIC's. Further details to follow in the final legislation. "
Aside from using FCSA umbrella organisations, what more should we as agency suppliers do to ensure our umbrella is applying the right deductions?
"We would strongly suggest the following:
- Enhanced due diligence particularly with regards to financials.
- Insist on FCSA Accreditation.
- Ensure the umbrella company is integrated with a payslip/payment verification tool such as Veripaye or Saferec (as they will do the checking for you).
- Consider indemnities or insurance where appropriate."
All these changes beg the question...why would a recruitment agency now use an umbrella at all, and risk being liable for someone else's non-compliance?
"That’s a valid question and one that the legislation is designed to surface. However, importantly it is not saying “don’t use umbrellas” - it’s saying “don’t use non-compliant ones.” The goal is to shift accountability and incentivise better behaviour across the supply chain.
So why would an agency still use an umbrella? Agencies may still choose to work with umbrella companies because they offer operational efficiency. By outsourcing payroll, tax, and employment administration, agencies can reduce internal overhead and focus on core recruitment activities.
Additionally, many contractors prefer the umbrella model. It provides simplicity, statutory benefits like holiday pay and pension contributions, and continuity across multiple assignments - making it an attractive option in competitive talent markets.
In some sectors, umbrella use is deeply embedded in the labour supply chain. It’s often the norm rather than the exception, especially where flexible or contingent workforces are common.
Crucially, the risks associated with non-compliant umbrellas can be managed. Agencies can protect themselves by conducting thorough due diligence, working only with audited or approved umbrella providers, embedding strong compliance clauses in contracts, and monitoring payment flows - including requesting real-time PAYE evidence."
We understand not all umbrellas take the same approach with expenses. How can we be sure that taxation on expenses is carried out strictly in line with HMRC guidelines? What can we do to be sure appropriate action is being taken?
In respect to expenses, all FCSA umbrella providers adhere to HMRC guidelines. If/where there are any differences, it is usually due to software or processes but all are assessed by independent assessors to ensure that they align with HMRC expectations.
How quickly will HMRC make FCSA aware of unpaid tax by an umbrella, and what action would FCSA take to protect any agencies at risk of a claim? Could HMRC action go on for months before the agency knows, and therefore the potential liability could continue to grow, without the agency realising?
At this stage the timeframes are unknown. However, HMRC have committed to updating IT systems which I suspect is to ensure that payments can be tracked and non-compliance picked up quickly.
If/where an agency insists the umbrella company uses a payslip verification software, the agency will have full awareness of any potential lability, and more importantly when this liability has been paid to HMRC.
Here's a few more resources you may find useful
