Guide to Joint and Several Liability for Agencies and MSPs

If you are a recruitment agency or an MSP and workers in your supply chain are placed through umbrella companies, the rules of the game are changing — and fast. From April 2026, a new legislation will make agencies, MSPs or end clients jointly and severally liable for any unpaid PAYE and National Insurance Contributions in umbrella arrangements.

This is not a minor compliance update. It’s a strategic move by HMRC to force better behaviour across the temporary labour market. Agencies will no longer be able to claim “we didn’t know.” If a non-compliant umbrella fails to pay PAYE or National Insurance, HMRC can recover the debt from the agency, MSP or End clients — even if they acted in good faith.

This article walks you through our understanding of exactly what’s changing, why it matters, and — most importantly — what you need to do now to avoid being left exposed. Whether you’re a recruiter, compliance officer or umbrella provider, these changes demand your full attention.

Let’s break it down:

What’s Happening and Why It Matters
What’s Changed: A Summary of the New Law
Who’s on the Hook? Section 61Z Defines the “Relevant Party”
The “Purported Umbrella” Trap: What Happens When an Umbrella Isn’t What It Seems
What’s at Stake: Legal, Financial, and Reputational Risks

1. What’s Happening and Why It Matters

From 6 April 2026, the compliance landscape for recruitment agencies and umbrella companies will change dramatically.

In newly drafted legislation and the accompanying policy paper published on 21 July 2025, the government has confirmed it will introduce joint and several liability for PAYE and National Insurance Contributions (NICs) in umbrella company arrangements. This means that if an umbrella company fails to pay the correct employment taxes on wages, HMRC can now recover the unpaid amounts directly from the agency that placed the worker — or the end client, if no agency is involved.

This isn’t theoretical. It’s a practical, enforceable power. And it applies regardless of intent — even if you didn’t know the umbrella had failed to meet its obligations.

A Simple Explanation: What Is Joint and Several Liability?

Think of your labour supply chain like a night out at a restaurant with friends. One person orders for the table. The food arrives. Everyone eats. But when the bill comes, your friend has disappeared — and the waiter hands it to you.

That’s how joint and several liability works. Even if you weren’t the one who hired the umbrella company — even if you didn’t see the fine print — you’re still at the table. And HMRC expects someone to pay the tax bill.

Under this new law, a party — agency, MSP, or client depending the supply chain — will be held jointly and severally liable if the umbrella company fails to account for PAYE or NICs.

Why Is This Happening?

The government has made clear that this measure is not just about tax collection. It’s about reforming a broken system. According to HMRC’s policy paper and the draft Finance Bill:

● Hundreds of millions in unpaid tax are lost each year through non-compliant umbrella companies — often linked to organised crime.
● Temporary workers are left exposed, receiving increased pay and later facing unexpected tax bills when umbrellas fail to pay HMRC.
● Compliant businesses are being undercut by operators that bend or break the rules.

By shifting legal liability upstream the government aims to close these loopholes for good.

“The government believes that making those who can control labour supply chains legally responsible for ensuring that PAYE is properly accounted for will improve compliance in the market.”
— HMRC Policy Paper, 21 July 2025

Coming Into Force: 6 April 2026

You have eight months. That’s all.

From 6 April 2026, every recruitment agency, MSP or client with umbrella companies in their supply chain must be ready for this new liability regime. The time to act is now — not next financial year.

Because once the measure comes into force, it won’t matter how good your intentions were. If your umbrella company doesn’t pay the tax — and they meet the legal criteria — you’ll be liable to pay it instead.

2. What’s Changed: A Summary of the New Law

The UK government is introducing new legislation that rewrites the compliance playbook for how workers are paid through umbrella companies. It does this by adding Chapter 11 to Part 2 of ITEPA 2003 (sections 61Y–61Z1), which brings joint and several liability into play for any unpaid PAYE or National Insurance Contributions (NICs) due from an umbrella company.

Let’s break this down into what you really need to know — who’s affected, what arrangements are caught, and when liability kicks in.

The Building Blocks of Liability: Section 61Y

At its heart, Section 61Y says that another party in a labour supply chain alongside the umbrella company can be jointly and severally liable for PAYE tax if all of the following are true:

A worker provides services personally to a client — either directly or under arrangements that lead to them doing so.
That worker is employed by a third party (the umbrella company), which:
○ Is in the business of supplying labour; and
○ Is not a company in which the worker has a material interest (more than 5% of shares or profit rights).
The umbrella company arrangements conditions are met — meaning there’s a chain of contracts that results in:
○ The client receiving the worker’s services; and
○ The umbrella company being paid for those services.

When these three conditions are in place, the law treats the umbrella company and any relevant party (defined in Section 61Z - see below) as equally responsible for the PAYE tax due on the worker’s pay — even if the relevant party didn’t know anything was wrong.

What Exactly Is an “Umbrella Company Arrangement”?

To trigger liability under the new law, HMRC needs to see that an “umbrella company arrangement” exists.

Instead, all the law requires is a chain of contracts that connects:

The umbrella company, which employs and pays the worker;
The client, which benefits from the worker’s services;
Anyone in between — like an agency or MSP — who arranges the supply and payments.

Here’s the important bit:
It doesn’t matter how many intermediaries are in the chain, or whether you’ve even spoken to the umbrella. If a party pays the umbrella, and the client receives the worker’s services, the arrangement is caught.

Think of it like a power cable:
If one end plugs into the umbrella’s payroll and the other into the client’s business — even through none or several adapters — it’s still a live connection. And that’s all HMRC needs to establish liability.

Exclusions: When the Rules Don’t Apply

There are three key carve-outs where these rules won’t apply, even if a worker is providing services:

IR35 and Deemed Employment Rules: If the worker is taxed under IR35 and other deemed employment rules this new chapter doesn’t apply. That includes cases where a limited company or intermediary is deemed the employer.
Partners in LLPs (Limited Liability Partnerships): Workers treated as employed under section 863A of ITTOIA 2005 (i.e. disguised partners) are also excluded from these new rules.
Material Interest Clauses: If the worker owns more than 5% of the umbrella company — through shares or rights to profits — the company is not considered an umbrella under Section 61Y. But beware: if the ownership is part of a scheme to dodge this rule, HMRC will disregard it and apply the rules anyway (Section 61Y(5)(b)).

Why This Matters

The umbrella arrangement definition is deliberately broad. It’s meant to reflect the real world — where labour supply chains are messy, multi-layered, and constantly shifting. HMRC isn’t interested in technicalities or paperwork trails. They care about who got paid, who got the labour, and who is based in the UK (More on this below).

If those three stars align, you’re likely in scope.

3. Who’s on the Hook? Section 61Z Defines the “Relevant Party”

Once the umbrella company arrangement conditions are met, the next question is: who else is legally liable alongside the umbrella?

That depends on who holds which contracts. Section 61Z sets out the rules:

Scenario 1: Direct Contract Between Umbrella and Client

● The client is the relevant party.
● HMRC can recover PAYE/NICs from the client if the umbrella fails to pay.

Scenario 2: Umbrella Contracts with an Intermediary (e.g. Agency or MSP)

● The intermediary that has the direct contract with the client becomes the relevant party.
● That means the first UK-based agency or MSP supplying to the client is on the hook — not necessarily the one that paid the worker.

Exceptions: When the Client Remains Liable Despite an Intermediary

Even if there’s an intermediary between the umbrella and client, the liability bounces back to the client in two specific situations:

The intermediary is “connected” to the umbrella
If the agency or MSP that has the contract with the client is under common control or ownership with the umbrella (for example, same directors or shareholders), we imagine the law will treat them as a single entity — and looks to the client for liability.

Example: A recruitment agency owns the umbrella company it uses. That’s a connected relationship. If the umbrella fails to pay tax, HMRC can recover it from the client — not just the staffing agency.

The intermediary is non-UK resident
If the intermediary that sits between the umbrella and the client is based offshore, HMRC may find it harder to enforce. So, the liability passes back up to the UK client.

Example: A UK company contracts with a Dubai-based MSP, which hires a UK umbrella to engage workers. If the umbrella fails to pay, the UK client is liable — not the offshore MSP.

The Offshore Catch-All: Ensuring HMRC Always Has a UK Target

The legislation is carefully worded to prevent all relevant parties being outside the UK. Section 61Z(3) provides a safety valve for HMRC enforcement:

If:

● The client is not UK-based,
● The agency is not UK-based,
● But there’s at least one UK-based entity in the chain,

Then: The UK-based party that is closest to the client in the chain becomes the relevant party.

Example: An overseas tech company uses a global staffing firm (also overseas), which subcontracts to a UK-based recruitment agency who engages a UK umbrella. Even if the recruiter is far down the chain, they’re still liable if the umbrella defaults on PAYE.

4. The “Purported Umbrella” Trap: What Happens When an Umbrella Isn’t What It Seems

Some non-compliant operators go to great lengths to create the illusion of a legitimate umbrella company — on paper it all looks above board, but under the hood, it’s something else entirely.

Sections 61Z1(1) and 61Z1(2) are designed to close these loopholes, so even if a setup looks like an umbrella model, but doesn’t behave like one, HMRC can still enforce full liability across the supply chain.

Here’s how these traps work in practice:

Fake Employers (Section 61Z1(1))

In this scenario, the company appears to employ the worker, but no actual employment relationship exists.

What this might look like:
● The worker is registered with a so-called “umbrella company”, but there’s no signed employment contract, no minimum wage compliance, and no PAYE applied.
● The agency or MSP may believe the umbrella is the legitimate employer.
● Payslips may be fake, or generated just to give the appearance of compliance.

Why this matters?
HMRC sees this as a sham setup — and treats the worker as employed by the umbrella anyway. That triggers the umbrella arrangement rules, and joint and several liability applies.

Real-world risk?
You think the worker is employed and taxed properly — but the umbrella does not employ the worker and pay directly in their PSC (i.e Gross Payment Model) . HMRC holds your agency or client liable for the missing tax.

Worker-Owned Umbrella Schemes (Section 61Z1(2))

This targets structures where the worker owns a stake in the umbrella — usually more than 5% — and uses that ownership to extract income in non-taxed ways (like dividends, loans, or retained profits). We read this as targeting structures where the worker owns a stake in the employing entity

What this might look like:
● The worker is set up in a personal service company but this is invisible to the rest of the supply chain.
● The worker might be listed as a shareholder or director.
● Others in the chain assume they’ll be paid a salary with PAYE and NICs.

Why this matters?
HMRC says: if it walks like an umbrella, talks like an umbrella, but taxes are not paid — it’s still caught. The company is treated as if it employed the worker, and liability applies as if the arrangement were genuine.

The Bottom Line: No More Disguises

These rules mean:
● You can’t rely on appearances.
● If HMRC thinks the setup is an umbrella arrangement in disguise, they will treat it like one.
● And then could ask your business to pay the unpaid tax depending on the supply chain.

If you don’t know how your umbrella companies are set up — and who really owns them — it’s time to find out.

5. What’s at Stake: Legal, Financial, and Reputational Risks

The new umbrella company legislation doesn’t just introduce new definitions. It introduces strict, enforceable liability — and it does so regardless of intent or awareness.

According to the draft legislation and explanatory notes, agencies, MSPs or end clients can now be made jointly and severally liable for PAYE tax debts originally owed by an umbrella company — simply because they are part of the labour supply chain.

Here’s what that means in practical, legal terms — and why the consequences are significant.

Ignorance Is No Defence

Section 61Y(2) of the Income Tax (Earnings and Pensions) Act 2003 (as amended) states that relevant parties are jointly and severally liable with the umbrella company for PAYE debts arising from qualifying payments to workers.

The law does not require HMRC to show that you:

● Knew the umbrella had failed to pay;
● Intended to avoid tax; or
● Were negligent in your due diligence.

It only requires that:

● You are a relevant party under Section 61Z; and
● The conditions in Section 61Y(1) and (4) are met.

In short: if you’re in the chain, you can be liable — even if you didn’t know anything was wrong.

Due Diligence Is Not a Shield

The HMRC policy paper (21 July 2025) and explanatory note (M7132) both make clear that:
“Liability will not be dependent on culpability or negligence… making those who can control labour supply chains legally responsible for ensuring that PAYE is properly accounted for will improve compliance in the market.”

This means:
● Even if your agency performs regular audits or vetting
● Even if you used an umbrella with an accreditation
● Even if the umbrella showed you ‘compliant’ payslips
● Even if you get real time information from the Umbrella Company

You can still be made liable for any unpaid PAYE tax if the umbrella fails to meet its obligations and the supply chain conditions are satisfied.

HMRC Can Issue Regulation 80

The draft legislation also mention Regulation 80 of the PAYE Regulations 2003. This allows HMRC to:

“Issue a determination to a jointly and severally liable relevant party under regulation 80 and make corresponding changes to associated regulations.”

This means HMRC can:
● Determine the amount of unpaid PAYE themselves;
● Issue a formal demand (a Regulation 80 determination) directly to an agency, MSP or client;
● Enforce that debt as if it were your own PAYE liability.

The Consequences You Face

The consequences of becoming liable under this regime are real and potentially severe:

Unexpected PAYE Debts
If a non-compliant umbrella fails to remit the correct amount of tax, your business could face a demand from HMRC for the full amount — even if you were never involved in payroll.

Retrospective Exposure
These rules apply to payments made on or after 6 April 2026 — but liabilities could emerge months or years later, following an investigation or compliance check.

Reputational Fallout
If your business is held liable for tax non-compliance linked to an umbrella company:
● It may raise red flags with clients, framework partners, and regulators.
● You may be removed from preferred supplier lists.
● You may face scrutiny from internal governance teams or investors.

This Is Not a Theoretical Risk

The government's own policy paper puts it plainly:

“This policy has three main objectives: to close the tax gap… to prevent workers facing large, unexpected bills… and to ensure the temporary labour market operates on a level playing field.”

In pursuit of those goals, the legislation gives HMRC the tools to assign real and immediate financial responsibility — to the agency or client who enabled the umbrella company to operate in the first place.

If you're part of that chain, you are part of the liability — no matter how far removed you think you are.

Final Thoughts: Act Now, Not Later

This legislation marks a turning point for compliance in the temporary labour market. From 6 April 2026, ignorance and good intentions will no longer protect agencies, MSPs or clients from the financial fallout of a non-compliant umbrella.

HMRC now has the power to enforce liability upstream — and it will use it. Whether you’re directly contracting with an umbrella or one step removed, if the structure meets the legal test, you could be on the hook.

Now is the time to act — not after the first determination lands. Start mapping your supply chain, reviewing your umbrella partnerships, and asking the right questions.
Because if you don’t know how your umbrella companies operate, HMRC will assume you didn’t care — and make you pay the price.

Guide to Joint and Several Liability — Deep Dive into the Draft Legislation