New umbrella tax legislation: “HMRC can choose at their discretion which party to go after”
Dave Chaplin of IR35 Shield
Just when the contractor sector thought IR35 risk was going to be a thing of the past, industry commentators are warning the new umbrella tax legislation, which takes effect from April 2026, will create a “liability trap for the supply chain.”
“The introduction of the new umbrella rules will again shift the risk landscape in the contracting sector,” said Dave Chaplin, CEO of IR35 compliance firm IR35 Shield.
Where umbrellas were once a model which removed risk from agencies and firms, the position will “change overnight”, said Chaplin, to one where “liability is pushed into the supply chain.”
That is, he said, unless the risk is eliminated or effectively controlled and managed, it will not be tolerated by businesses.
Umbrellas will no longer shield clients and agencies from IR35 risk, but instead introduce a risk far greater, while creating a liability trap for the supply chain.
–Dave Chaplin, IR35 Shield
Lessons from IR35 reforms
Chaplin is warning contractors, recruitment agencies, umbrella companies and end clients to heed the lessons from the IR35 reforms, in preparation for the new umbrella tax legislation due to take effect from April 2026.
According to Chaplin, the fundamental shift in risk means umbrellas will “no longer shield clients and agencies from IR35 risk, but instead introduce a risk far greater, while creating a liability trap for the supply chain.”
Joint and Several Liability (JSL): Who’s accountable?
Chaplin believes the introduction of Joint and Several Liability (JSL) is the heart of the issue.
He said,
The only viable way to remove the new risk created by JSL is for the first party in the JSL chain to pay the tax due. The approach would then ensure that risk is managed at the source, rather than relinquishing control and pushing the monies downstream.
He likened the implications of the new umbrella tax legislation to IR35 reforms, where risk management must occur upfront, with clients retaining complete oversight and accountability. He suggests effective risk management is about prevention, rather than scrambling later to prove compliance.
“When it comes to measuring whether tax legislation is effective, the question is whether it achieved the purpose for which it was designed. If it overreaches and inadvertently eliminates some compliant operators, the government will still claim success,” he said.
Who foots the tax bill if the umbrella company doesn’t pay up or goes belly up?
According to Chaplin, “The statute tells us which ‘relevant parties’ are in the JSL group. It’s the umbrella and agency below the client and possibly the client too. All of them will simultaneously hold the liability for the tax once the payroll is run and the workers are paid, by the umbrella.”
He continued,” The tax deadline is the 22nd of the month after the payroll is run. If the gross monies were passed from the client and agency to the umbrella, and the umbrella does not pay, the other parties are liable and HMRC can choose at their discretion which party to go after.”
The contractor industry commenator, added that if the agency/client does not wish to be left in liability limbo, they can simply pay the tax direct to HMRC and give net monies to the umbrella.
“It seems to be the only way to avoid the risk that the umbrella might default, leaving the agency with a massive debt,” he said. “It’s no different to a person paying their own self-assessment tax direct to HMRC, as opposed to giving it to someone else to pay.”
Are verification reports false assurances?
Crawford Temple of Professional Passport, a company that verifies umbrella company compliance, warns recruiters not to be misled by industry experts peddling false assurances.
Temple has warned recruitment agencies and end hirers that monthly verification reports will “not protect them from liability under the government’s new Joint and Several Liability (JSL) rules.”
According to Temple, “Despite suggestions from some commentators, monthly verifications simply cannot prevent businesses from being exposed to significant PAYE liabilities if an umbrella company fails.”
He provides an example to back up his point. “A Payroll cycle where it has a weekly PAYE liability of £20,000 will involve rolling PAYE liabilities of between £60,000 and £160,000. If an umbrella collapses mid-cycle, those liabilities remain unpaid – and verification reports merely confirm the problem after it has already occurred.”
He continued, “By that stage, agencies and end clients could already be facing six-figure exposures, with no recourse to recover funds. Far from offering protection, monthly verifications create a rolling liability cycle that leaves businesses dangerously vulnerable.”
He suggests that paying PAYE liabilities directly to HMRC is the only way to strip out the catastrophic risk of JSL exposure.
Payroll errors such as minor tax code discrepancies will always occur, but these represent negligible sums and are unlikely to attract HMRC intervention. The true risk lies in total PAYE liabilities being demanded again – an outcome that could be financially damaging for agencies and end clients.
–Crawford Temple, Professional Passport
Crawford said verification tools can play a “supporting role, but they cannot and will not remove liability.”
“The sector deserves transparency, honesty, and solutions that genuinely eliminate risk and anything less undermines confidence in the entire supply chain. With April 2026 fast approaching, businesses need clarity, not spin,” said Temple.