Overview
Who is liable under the new rules?
HMRC guidance confirms the following hierarchy of liability depending on the supply chain:
- Where there is a recruitment agency contracting with the end client that supplies workers via an umbrella company, HMRC can pursue the agency.
- If there is no agency in the supply chain, or it is based overseas, liability will instead transfer to the end client.
What are the implications for businesses?
The introduction of these rules could have significant implications for businesses that use umbrella companies, as HMRC aim to recover the reported £1 billion per annum lost in this sector.
Businesses will need to invest more time and resources into conducting due diligence on their supply chains. This would include verifying the tax compliance of umbrella companies and ensuring that all parties involved in the supply chain are operating within the law.
Under the new rules, however, there is no defence mechanism to remove the risk from the agency, or the end client if the umbrella company fails to pay. HMRC have also confirmed in webinars on the subject that they would pursue the agency in the first instance (rather than the umbrella company) to make good any shortfall.
As well as the financial implications for agencies and end clients, the new rules could also result in a damage to their reputation. As a result, businesses may need to reconsider their relationships with umbrella companies and/or employment intermediaries to mitigate these risks.
How do you prepare for the changes?
To prepare for the implementation of the joint and several liability rules, businesses should take proactive steps to ensure compliance prior to April 2026. This includes:
- reviewing existing contracts and agreements with umbrella companies and employment intermediaries to identify potential risks;
- establishing robust due diligence processes to verify the tax compliance of all parties in the supply chain; and
- make alternative arrangements for engaging contractors, where it is identified that there is an umbrella company in the supply chain and/or if there could be uncertainties around the tax compliance of that umbrella company.
If you have any queries on how the above changes may impact you, or your business, please get in touch with your usual tax contact.