THIS ARTICLE HAS BEEN UPDATED.
In this article, we cover the recruitment agency v. contractor perspectives that explain which party ultimately pays the contractor’s PAYE tax obligations when an umbrella company fails to do so. At the outset, it appears as if it’s all on the recruitment agency’s shoulders and contractors can rest easy, but one recruitment advisor and compliance expert warns not to be fooled. He says the clue will be in the agency’s contract agreement.
However, new expert commentary has come through to The Freelance Informer, challenging this compliance expert’s claims about what can legally be put into a contract about contractor liability.
Sean Moran, recruitment compliance expert and founder of Orara, attended this week’s HMRC webinar on Joint and Several Liability (JSL) for umbrella company PAYE “failures”. He, like many others serving the recruitment and contractor sector, has found the new rules’ implications for agencies risky and significant. But what about contractors and freelancers? How will they be affected?
First, as a freelancer, it’s important to learn what is changing in the UK contractor recruitment sector before going on to explain why contractors, despite these new rules, won’t be able to rest easy.
The recruitment agency’s perspective on JSL
Moran has suggested in a LinkedIn post that agencies must decide how they want their contractor candidates’ PAYE obligations paid, directly by them or by an umbrella company. Either way, Moran urges agencies to make a decision and act far in advance of the 6 April 2026 implementation date.
Moran explained, “Umbrella companies get the first opportunity to operate PAYE correctly. JSL applies when they fail. HMRC stated: ‘Where PAYE is not properly remitted to HMRC, HMRC will seek payment from the agency that provides the worker to the end client.””
Why pursue the agency when the umbrella fails?
In HMRC’s eyes, “Seeking the liability from the agency in the first instance will help achieve the Policy objective as agencies can decide which businesses enter the labour supply chains and can therefore prevent illegitimate operators from entering the market.”
During the Q&A webinar session, Moran said one attendee asked: “No matter what checks you carry out, when there is an issue with a payment of PAYE, HMRC will ultimately go after the agency? So, the agency carries all the risk?”
HMRC’s answer: “Yes.”
When asked whether checks could provide an excuse against JSL: “There is no statutory excuse that will apply to remove the liability.” More concerning is “If our umbrella has provided proof to us that the PAYE was paid and then a liability arises, would we still be liable?”
HMRC: “Yes.
“The reason for the shortfall is immaterial. Fraud, incompetence, or honest mistake – the agency (in this scenario, the Relevant Party) remains liable,” explained Moran.
Umbrella due diligence: why should agencies bother?
HMRC explained in the webinar it helps “mitigate any risks to their businesses.”
Therefore, due diligence is not a defence, but rather a tool for risk mitigation that helps you identify and exclude non-compliant operators before they enter your supply chain. But even when honest mistakes are made by the umbrella companies, the onus will be on the agencies to remedy.
He suggests agencies do this through “rigorous vetting” and to review HMRC’s GfC12 guidance. That would include checking VAT registration, scrutinising payslips scrutiny, verifying PAYE operation, and examining Companies House filings.
He warned agencies and contractors alike to watch for possible warning signs, like high take-home pay promises, untaxed payments, and mini umbrella structures.
What about connected parties?
Moran said it is best to understand the role of connected parties, i.e. if your agency and umbrella share ownership/control (s993 ITA 2007), therefore the end client now becomes jointly liable.
Dave Chaplin, CEO of IR35Shield and Contractor Calculator, who also attended the webinar, said,
There was one Q&A which summed it all up: So, being a simpleton, in simple terms, no matter what checks you carry out, when there is an issue with a payment of PAYE, HMRC will ultimately go after the agency? So, the agency carries all the risk?
HMRC’s response? ‘Yes.’”
Dave Chaplin, CEO of IR35Shield and Contractor Calculator
Questions agencies must ask about umbrella companies
Agencies must ask themselves:
- Does using umbrella suppliers justify the risk versus operating your own payroll?
- Or does the cost of running your own payroll encourage you to use Umbrella Co’s?
“The bottom line to all of this is HMRC’s objective…. Agencies must act as gatekeepers. JSL places that responsibility on your balance sheet. The question isn’t how to defend against liability. It’s how to prevent it arising at all,” said Moran.
The Finance Bill follows the Budget on 26 November, which should provide more guidance, but in the meantime, he suggested that recruitment firms start reviewing their umbrella relationships now or if they can’t to get professional independent advisors to do it for them.
So, I asked Moran, What about freelancer/contractor liability? If they are told by their umbrella company that their taxes have been paid, but find out, oops, that was not the case. Does the agency, by default, pay all the contractor’s missing PAYE contributions, and the contractor can breathe easy?
Here was his response:
That’s a great question, one which gets to the heart of the knock-on effects of these new rules.
The short answer is yes, under JSL, if your umbrella company fails to pay PAYE/NICs, HMRC will pursue the recruitment agency (or end client), NOT you directly. This is a fundamental worker protection built into the legislation.
However, and this is the critical bit, agencies will almost certainly (one hopes) include contractual indemnity clauses requiring you to pay them if they’re forced to pay HMRC on your behalf.
So, while you won’t face direct HMRC enforcement, Moran said you could face contractual recovery action from the agency if you:
- Use a non-compliant umbrella
- Ignore agency-approved umbrella lists
- Contractually agree to indemnify the agency
“For contractors using compliant umbrellas, the JSL rules are genuinely protective,” said Moran.
He concluded, “Hopefully, everyone can now see the enormous squeeze being put on the recruitment sector. Agencies face absolute liability with no reasonable care defence, forcing them to become de facto regulators of the umbrella market.”
Legal debate on the matter?
However, Chaplin has since offered this commentary, debunking Moran’s suggestion that contractors will legally be liable to pay unpaid PAYE tax. So, after years of uncertainty can umbrella and agency contractors truly rest easy?
Chaplin told The Freelance Informer:
The JSL tax liability is triggered after the contractor has been paid, and only extinguished when HMRC gets the money. There are no provisions that enable redirection of the liability to the worker, and an indemnity clause that seeks to override an act of Parliament would be unenforceable.
The JSL provisions are brutal, because they make innocent parties pay for others mistakes. There is no defence, no excuse, no wriggling out. The only way an agency can guarantee they will not have liability from JSL, is to pay the tax on behalf of the umbrella, directly to HMRC.
