From April 2026, significant changes to umbrella company legislation have come into force across the UK contracting market. The new Joint and Several Liability (JSL) rules are designed to tackle tax non-compliance in labour supply chains, but they also create new responsibilities for recruitment agencies, end clients, and contractors themselves. For businesses that engage contractors, understanding these reforms is essential.
What is Joint and Several Liability (JSL)?
Under the new rules, if an umbrella company fails to pay the correct PAYE tax or National Insurance contributions to HMRC, liability for those unpaid amounts can now pass up the supply chain. This means that in some cases end clients may become responsible for the full tax debt, even if they were not directly involved in the non-compliance.
Previously, liability generally stopped with the umbrella company itself. However, HMRC identified widespread issues where non-compliant umbrella companies accumulated tax debts before closing down or disappearing entirely. The new legislation is intended to reduce that risk and improve accountability across the sector.
Why does this matter?
The reforms represent one of the biggest changes to the contractor market since the private sector IR35 reforms in 2021. For agencies and businesses, the key issue is that there is effectively no “reasonable care” defence under the new rules. Even businesses carrying out robust due diligence could still inherit liability if an umbrella company fails to meet its tax obligations. As a result, many organisations are reviewing their contractor engagement models and reassessing which umbrella companies they are willing to work with.
What does this mean for contractors?
For contractors operating through umbrella companies, the immediate impact is likely to be increased scrutiny and reduced choice. Many agencies are expected to tighten their preferred supplier lists and work only with umbrella providers that pass enhanced compliance checks. Contractors may therefore be asked to switch umbrella companies if their current provider does not meet an agency’s updated standards.
However, there may also be some positives. Industry commentators suggest the reforms could encourage a return to more outside IR35 engagements as businesses look to reduce reliance on umbrella company arrangements altogether. Online contractor discussions already indicate growing optimism that some organisations may become more open to properly structured outside IR35 contracts.
What should businesses do now?
Businesses that engage contractors should review their labour supply chains carefully and ensure appropriate due diligence procedures are in place. The rules are complex, and every organisation’s position will differ depending on how contractors are engaged.
Key actions may include:
- Reviewing existing umbrella company relationships
- Strengthening compliance checks and onboarding processes
- Updating contracts with agencies and suppliers
- Assessing alternative engagement models where appropriate
- Seeking specialist tax and employment status advice
The introduction of JSL marks a major shift in how HMRC approaches umbrella company compliance. While the aim is to reduce tax avoidance and improve transparency, the reforms also increase financial and operational risk for agencies and end clients. For contractors and businesses alike, proactive planning and professional advice will be essential in navigating the new landscape confidently and compliantly. Contact one of our accountants today for support.