With 6th April just around the corner it’s worth looking at what labour supply businesses should have in place to reduce the risk of HMRC claims under the new tax rules for umbrella company payments.
To be clear, under the new joint and several liability rules, liability arises where a business contracts with an umbrella company and a payment is made to the worker. The payment gives rise to tax sums due to HMRC for PAYE and NICs based on that payment. This requires steps to be taken to reduce risk.
Liability for the taxes occurs from the moment that a payment is due to HMRC. The liability for this falls on both the umbrella company and the other liable party at the same time. So technically the amount the umbrella has to pay to HMRC is an amount that the other liable party also owes to HMRC, even though the other liable party is not reporting to HMRC. This primary coexisting liability cannot ever be avoided, but the risk of HMRC relying on it can be managed and reduced.
Realistically although it has the power to call for payment from the other liable party, in practice HMRC will only do so if the umbrella company fails to correctly account for the correct amount of taxes. It is worth noting that, despite indicating that it will identify umbrella businesses that are non compliant, HMRC is under no obligation to do so and no one should sensibly rely on a warning from HMRC from the outset.
With no guaranteed heads up from HMRC in place, businesses should consider security measures that minimise the potential of loss should the umbrella fail to make the full and proper primary payment.
It is important to recognise that JSL risk only arises if the umbrella company employs the worker, as distinct from engages the worker on a contract for services. This doesn’t mean there is no tax risk if an umbrella engages a worker other than as an employee, simply that there is no JSL risk if there is no employment. There is other tax legislation that applies on a different basis where the worker is otherwise engaged.
Employment businesses (supply agencies) that employ (as opposed to engage on a contract for services) their own supplied workers fall within the definition of an umbrella company and so are treated as such. This is an extraordinary outcome, given that such companies do not otherwise work as payroll providers in the way that umbrella companies in a general sense do. The legislation makes no distinction.
Businesses exposed to risk of an HMRC claim under the JSL rules are
Employment businesses (supply agencies) that supply workers who are employed by an umbrella company
Hirers who contract directly with umbrella companies falling within the definition (see who is an umbrella company)
RPOs, where there is an umbrella company in the chain even though the RPO does not contract with the umbrella
A hirer is liable if it contracts with (a) a recruitment business that employs its own workers or (b) an employer umbrella business, as both fall to be defined as umbrella companies. Accordingly, hirers are likely to take steps to limit risk of HMRC claims under JSL by including provisions in their contract terms. These could include suitable tax indemnities. Where dealing with employer recruitment businesses, hirers could also extend terms to include warranties and undertakings that preclude the supply of employed workers, which if complied with would result in avoiding JSL risk.
RPOs are primarily liable as they are the party contracting with the hirer. From what we have seen, hirers, fearing risk which in fact may not apply to them, are not only imposing additional tax indemnities if the contract provisions do not already include them, but also may be requiring RPOs to only use specific umbrella companies. In any event, RPOs are using their own initiative to impose conditions on use of specific umbrella companies, and will pass the criteria down the chain of supply, imposing similar requirements on 2nd tier agencies in the operating contracts.
This will either force 2nd tier agencies to adopt their own PAYE solution, or work with the chosen umbrella companies, in either case limiting choice not only for the agency concerned but also the involved workers.
When using umbrella companies, criteria may include working with specific due diligence providers. Under the JSL rules a 2nd tier agency will not be a primarily liable party in these circumstances but the indemnity clauses imposed by the RPO is likely to put the 2nd tier agency in a position of liability. Thus a 2nd tier should always ensure that it puts itself in a position of minimum risk by checking the contractual requirements and ensuring that any arrangements with umbrellas are suitable to minimise that risk.
Hirers and regular supply agencies, namely employment businesses that do not employ their supplied workers but use umbrella companies. In these circumstances hirers are not liable unless the agency is connected to the umbrella company; the agency is liable under the JSL rules along with the employing umbrella company. However hirers may perceive risk and may impose indemnities and/or requirements to use specific umbrella companies. Agencies in any case should always ensure that that any arrangements with umbrellas are suitable to minimise that risk.
Much has been spoken about due diligence, and there are a number of due diligence providers (‘DDPs’) with security offerings. These all differ slightly in nature but the principle offered by each is the same. Most promise to vet documents used by the umbrella company and check payslips on a regular basis. Also to ensure that the RTI return is submitted correctly by the umbrella to HMRC and payment is made correctly in accordance with the RTI submission, or similar.
The point is that the JSL liable party requiring due diligence will be secure in the knowledge that the umbrella company is correctly accounting for PAYE and NICs to HMRC such that the JSL party has minimal exposure to JSL risk. This means that, relying on the promises by the DDP, the JSL liable party feels able to contract with the umbrella company. The quality of the DDP promises should be challenged before being accepted, and there are certain measures that can be taken to capture promises that are being relied upon.
It is one thing to view the offering by the DDP to see if it meets your criteria. Assuming it gets past this first post, the promises should be secured with a contract. There should always therefore be a contract between the DDP and the agency because it is the agency that is relying on the due diligence being undertaken, not the umbrella company. To be clear the umbrella company only needs the DDP to be involved in order to win business from an agency, it does not need hand holding by the DDP.
It is not clear that all current DDPs are offering contract terms with agencies, and so the agency or other party relying on a DDP should insist on a contract or consider not dealing with the DDP and umbrella company concerned.
The steps that the DDP says it will carry out should be clearly set out as contractual obligations. The DDP should also accept liability for its own failures and negligence including the negligence of any third party it uses to undertake specific tasks. Some services by a DDP may be outsourced to third parties such as contract form checking and so contract clauses should be comprehensive. If services are outsourced to a law firm for example, the contract should ideally cover liability of the law firm if it has been negligent such that a claim is made consequent on the negligent work.
The contract should also address the DDP actions in checking travel and subsistence claims, as this is an area that HMRC is particularly sensitive about given that claims have historically arisen from abuse of the tax relief rules in this area.
The JSL liable party should understand what is being done to check such claims, and either accept that the DDP system covers them, or doesn’t cover them, and in any event whether travel and subsistence claims should be permitted or not. This will enable the JSL liable party to enter into arrangements with their eyes open.
The absence of a suitable contract with a DDP will mean that the JSL liable party enters into the arrangement with an umbrella based on the credentials of the umbrella company alone. Promises made by the DPP to the umbrella will provide no benefit to the JSL liable party. Umbrellas working this way are likely to be regarded as high risk in many cases.
On the assumption there is a contract with the DDP, the DDP should have insurance cover for its negligence and other risks that are capable of being covered. We have our own PI cover as you would expect and we accept liability for our own negligence in advising our clients. This should be standard for any business that provides advice that is being relied upon. Because on the face of it the due diligence is being undertaken for the umbrella company it could be argued that there is no need for insurance. However it is the JSL liable party that will need the cover if there is a claim and so insurance cover should be provided alongside the contract. The absence of suitable PI cover for a DDP should be a red flag for anyone considering working with it.
Some DDPs may offer tax expenses insurance as an additional assurance alongside their due diligence service. Any cover offered should be carefully checked to ensure it does cater for the situation where a claim is made by HMRC where an umbrella company checked by the DDP has failed to make proper payment.
Attention should be applied to terms that allow cover to be avoided. In particular insurance policies only offer protection if they run continuously, so premature termination of such a policy before a claim is made may result in zero benefit. Other criteria may negate the proposed benefit resulting in minimal as opposed to maximum security. Care should be taken to ensure that cover cannot simply lapse at the end of an annual policy or if an approved umbrella fails to meet criteria at any point. Such provisions could render the policy worthless.
Risk extends to VAT even though the JSL rules do not impose liability for an umbrella company’s VAT sums due. This is because recent tax cases have shown that umbrella companies may fail because of non payment of VAT, so resulting in closure of the company and non payment of PAYE and NICs, for which the JSL party is liable.
The JSL party should also have a comprehensive contract with the umbrella company amongst other things requiring it to comply with the chosen criteria which may include working with and/or being accredited by, a specific DDP. Lawspeed has long advised that this may include a directors guarantee, particularly if the umbrella company is relatively small or new on the block. Use of a directors guarantee is also recommended by the Department of Business and Trade.
Always consider the scenario in which the umbrella company owners decide to cease trading, what security do you have to ensure that there will not be a consequential JSL tax debt.
Cash flow is also relevant. Once payment is made to an umbrella company on its invoice the umbrella company may have 6 weeks or more before having to account to HMRC for the tax elements. Delay in payment of that tax amount to a date when it is due may reduce risk of the money being used for other non compliant purposes, and indeed could help the agency’s own cashflow. There is no reason why a contract could not allow for such arrangements.
Umbrella companies often want agencies and hirer to agree the umbrella’s own terms of business. In this case those terms should be carefully checked against the required criteria. Ideally a review of all documents should be undertaken.
What about cost? DDP’s do not come free of charge, nor do ancillary insurance policies. Whether the cost is paid by the JSL liable party or the umbrella company, the actual cost will inevitably end up as a deduction from the gross payment to the worker unless it is addressed in the contract with the umbrella and the DDP.
If all the above has been followed any JSL liable party should feel as secure as possible, both in terms of deterring risk and then recovering loss. Anything less should be left to the brave or the reckless!
For more advice, to review documents, contract terms, processes or insurance policies or for a comprehensive set of terms for working with umbrella companies, call Lawspeed on 01273 236236 or email info@lawspeed.com quoting “umbrella support”.
For more about umbrella companies and the future of the Agency Conduct Regulations book a place at our upcoming seminar on the 15th April 2026.
