Why the proposed scheme could be a disaster

HMRC’s latest proposal on umbrella companies still misses the mark

As pressure mounts around tax avoidance and payroll compliance in the umbrella company sector, HMRC has proposed a new plan that could have wide-reaching consequences for recruitment agencies. While the initial idea of making agencies run PAYE for umbrella workers sparked outcry, the latest evolution – a joint and several liability (JSL) model – isn’t much better.

In short, agencies may no longer be expected to process PAYE directly, but they could still be financially on the hook if an umbrella fails to pay what’s owed.

Is this a workable compromise, or just the same risk in a new wrapper?

Background: The alternative Lawspeed and ARC proposed

Back in 2023, Lawspeed and the Association of Recruitment Consultancies (ARC) put forward a pragmatic, effective alternative:

A government-run umbrella registration scheme, funded by umbrellas and overseen by independent, conflict-free professionals.

The proposal included:

Clear compliance entry criteria
Government oversight (not commercial self-regulation)
The ability to strike off non-compliant umbrellas
Option to prohibit agencies from using unregistered umbrellas

The result: Agencies could work only with pre-vetted umbrellas, and HMRC could track compliance without dragging agencies into the firing line.

This solution received overwhelming support during a seminar attended by agencies, HMRC, and BEIS; and was submitted formally in response to the consultation.

But instead, we now face a JSL regime. So, let’s talk about the real-world consequences.

What joint and several liability means in practice

If adopted, this model means HMRC can pursue agencies for umbrella tax debt, whether or not the umbrella has failed, even at the earliest sign of non-compliance.

Let’s break this down:

Agencies may stop paying umbrellas immediately at the first whiff of risk
This could lead to termination of terms, supply chain collapse, and worker disruption
Contractors may lose employment rights, and umbrellas may fold
Agencies could face unexpected six-figure tax liabilities for money they’ve already paid out
And ironically, HMRC may still not recover the tax if both parties go bust

It’s hard to see how this model protects anyone! Least of all the recruiters HMRC relies on to keep the labour market functioning.

The fundamental issue is this: under JSL, agencies may be forced to pay tax a second time, after already passing the funds to the umbrella company.

That’s not just bad law. It’s bad economics, bad policy, and a deterrent to industry growth.

Due diligence alone won’t save you

Some will argue for preferred supplier list (PSL) vetting, or stricter due diligence. But history (and the Managed Service Company legislation of 2007) tells us that these aren’t enough.

Due diligence can only go so far when the liability sits with the agency, not the umbrella, not the compliance provider, and certainly not HMRC.

There’s still a better way: A national umbrella register

We stand by our original recommendation: a national registration scheme, monitored independently, with clear entry/exit rules and built-in government oversight.

This approach:

Creates accountability without overreach
Retains worker employment rights
Minimises agency disruption
Helps HMRC collect the right tax, from the right source
Offers hirers and workers clarity and protection

The only parties who lose out? Umbrella compliance operators with vested interests in a confused, unenforced market.

Recruitment agencies deserve better

Recruitment agencies are not tax collectors. They’re already navigating complex compliance, rising costs, and market volatility. Adding umbrella tax liability to their burden – without the ability to prevent it – is both unfair and unnecessary.

We urge policymakers to revisit the sensible solution already on the table — and we encourage agencies to challenge the JSL narrative before it becomes law.