Who is liable for PAYE and NIC when supplying workers?

Impending legislative changes will make recruitment agencies jointly and severally liable for any amount payable under pay as you earn (PAYE) and national insurance contributions (NICs) when they supply workers via umbrella companies. In some circumstances, the joint and several liability will apply to the client.

The draft legislation was published over the summer. It is included in the Finance Bill 2025-26 and is set to have effect in relation to payments made to umbrella company workers on or after 6 April 2026.

What is the aim of the legislation?

The legislation aims to:

• reduce the tax losses arising from fraudulent activities by umbrella companies,
• prevent workers facing large and/or unexpected bills for income tax and NICs which have not be paid by umbrella companies, and
• stop fraudulent operators in the labour supply market from undercutting compliant businesses.

Those operating in labour supply chains really do need to get to grips with the new regime and review their operations, ideally before the legislation comes into effect next year.

What companies fall under the legislation?

A particular concern seems to be that the way certain terms are defined could catch out some business that might not expect to fall within these provisions. Perhaps the legislation will be tightened up during the passage of the Finance Bill, but at present it seems that any arrangements where the services of an individual (the “worker”) are provided to another person (the “client”) and the worker is employed by a third person (the “umbrella company”) are within the scope of the legislation (provided that the worker has no “material interest” in the umbrella company). It seems that any third-party employer could find themselves caught by the legislation, beyond what might ordinarily be regarded as umbrella companies.

Once an arrangement is caught by the legislation, then any “relevant party” is jointly and severally liable, along with the umbrella company, for any amount due under the PAYE regime and NICs due to HMRC:

• Where the client contracts directly with the umbrella company, the client is a relevant party.
• Where the client contacts with a third party that is connected with the umbrella company or the third party is non-UK resident, the client is a relevant party.
• Where the client does not contract directly with the umbrella company, the third party who contracts with the client is a relevant party.
• Where both the client and the third party with whom it contracts are non-UK resident and the provision of the services or payment/consideration is the consequence of a series of contracts, then the UK resident person (if there is one) which is closest to the client in the series of contacts is the relevant party.

Importantly, all these terms are defined within the legislation and, in addition to potential ambiguity in those definitions, some who may not consider themselves to be umbrella companies or to have them in their labour supply chains could find themselves caught by the legislation (at least in HMRC’s view) and at risk of joint and several liability.

Third-party labour suppliers (whether or not they currently regard themselves as umbrella companies) can expect to face additional scrutiny from those who may face joint and several liability.

HMRC has recently published guidance on this new legislation.

Those who operate in labour supply chains should review them to establish whether they are at risk of being deemed jointly and severally liable and take appropriate steps to ensure PAYE compliance and otherwise to mitigate the risks for themselves.

Find more information about VAT fraud in supply chains here.

If you have questions or concerns about VAT fraud in supply chains or any issues raised in this Keynote, please contact tax lawyer Matheu Smith.