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The introduction of new rules governing the umbrella industry marks a significant step toward improving compliance across the market.
Forming part of The Finance Act 2026, the legislation brings the new Chapter 11 of the Income Tax (Earnings and Pensions) Act rules into force.
The key feature of the changes is joint and several liability (JSL), due to take effect from April 6, 2026. This measure is designed to tackle tax avoidance in labour supply chains by strengthening accountability across the parties involved.
The changes have raised questions from recruitment agencies and end-clients, with many confused around the new JSL rules and existing IR35 legislation.
Before we look at its relationship with IR35, it is worth reminding ourselves what the new rules are.
Under Chapter 11 of the Income Tax (Earnings and Pensions) Act recruitment agencies (including MSPs) or end-clients (depending on the supply chain structure) will be joint and severally liable with an umbrella company for PAYE workers engaged through that umbrella.
The legislation provides that a ‘relevant party’ in the labour supply chain, alongside the umbrella, can be held liable where PAYE and NICs have not been correctly accounted for. In practical terms, this means that a recruitment agency or where there is no agency involved, the end client, can be pursued for the employment taxes where an umbrella company fails to meet its obligations.
JSL imposes strict liability on the relevant party and the umbrella company for any shortfall in PAYE of NICs. The regime operates on a strict liability basis, meaning responsibility does not depend on involvement in, or awareness of, the non-compliance, and there is no statutory defence based on having carried out due diligence or taken reasonable care. HMRC may pursue either party for the full amount.
The new rules represent a clear shift away from reliance on due diligence alone, towards a requirement for robust and ongoing compliance monitoring of umbrella arrangements.
A growing misconception is emerging in the market that JSL requires a reassessment of worker status under IR35. We are seeing recruitment agencies and end-clients question whether contractors engaged via umbrella companies need to be reviewed for IR35 status.
To be clear, this is not required.
The confusion stems, in part, from how umbrella companies have come to be used in practice following the introduction of the off-payroll working rules in 2021. For many organisations, umbrella engagements have become the default approach for workers who would otherwise be considered ‘inside IR35’, or where businesses have adopted policies to avoid IR35 risk altogether. As a result, umbrella working and IR35 have become closely associated in practice but often for the wrong reasons.
This has been compounded by pockets of misinformation in the market. We have seen JSL incorrectly framed as a change to, or extension of, the IR35 regime, alongside a growing volume of queries from end-clients, recruitment agencies, and workers questioning whether umbrella engagements now require IR35 reassessment.
In reality, workers engaged via an umbrella company are employees of that umbrella. They are paid via PAYE, with tax and NICs accounted for at source, and the off-payroll working rules do not apply. There is therefore no requirement for an end-client or recruitment agency to assess IR35 status in these arrangements.
JSL does not change this position. It is not related to employment status and is not part of IR35 legislation.
Typical labour supply chain structures may take one of the following forms:
Under these structures, the JSL risk sits with the MSP in example one and the recruitment agency in example two “relevant party”, alongside the umbrella company.
There is no requirement to assess contractor IR35 status in these arrangements, as the worker is employed by the umbrella company and paid via PAYE.
That said, JSL may influence how organisations choose to structure their supply chains. Some end-clients and recruitment businesses may consider moving away from umbrella engagements in order to mitigate potential tax liability exposure.
However, some of these alternative approaches can introduce new risks. For example, where a recruitment agency directly employs workers, it falls within the definition of an umbrella company under the legislation. In this scenario, the agency is treated as the umbrella, and the end-client becomes the “relevant party” creating the same JSL exposure as a direct umbrella engagement.
While some businesses may consider moving away from umbrella engagements, a more fundamental shift would involve reviewing their broader contingent labour engagement strategy. This could include reconsidering the use of personal service companies (PSCs) as part of the supply chain and assessing the appropriate status of those engagements under the off-payroll working rules.
Such an approach may reduce exposure to JSL, but it introduces employment status risk and would require careful consideration. It is also a significant exercise, and while there is currently limited evidence of widespread change in the market, it is an area organisations may look to explore over time as part of a wider review of their operating models, market conditions, and approach to IR35 compliance.
Given the complexity of these interactions and the potential for unintended tax risk, it is important that businesses take specialist advice before making changes to their engagement models.
Organisations should ensure they are relying on accurate, reliable sources and working with advisors who understand both the legislation and its practical application.
Qdos specialises in IR35 and employment status and can provide support in understanding how these rules apply in practice.
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