Under JSL, agencies are ‘umbrella companies’ if no brollies are present

It’s officially open until September 15th 2025 for umbrella company contractors to comment on, as part of the Finance Bill 2025-26 consultation.

But it appears that both end-users and agencies have more grounds than workers to speak up about the new ‘umbrella company’ Joint and Several Liability (JSL) legislation, writes legal consultant Roger Sinclair, founder of egos.

JSL rules will generally result in clients sharing Joint & Several liability for workers’ PAYE

That’s because, while its wording may change before it is due to pass into law on April 6th 2026, the JSL legislation will generally result in clients sharing joint and several liability for workers’ PAYE and NIC debts (including employer NIC), unless an umbrella independent of the agency is involved in the supply chain.

From what I’ve heard since the draft JSL legislation was unveiled on July 21st 2025, there is an assumption among labour supply chain parties that the April 2026 framework will not apply in the case of agency workers engaged directly by an agency (i.e. with no independent umbrella company in the chain), and where those workers are provided to an end-client.

It's dangerous to assume JSL doesn’t apply if agency workers are direct-to-client 

Based on my current reading of the JSL legislation, assuming that there is no applicability to direct-to-client agency workers where no umbrella is involved is a dangerous assumption.

Added to that, it looks to me likely that an agency engaging such workers would fall within the definition of an ‘umbrella company’ for the purposes of the JSL legislation.

What’s the result of recruitment agencies being deemed umbrellas under JSL?

And the consequence for the agency being deemed an umbrella would be that the client would have joint and several liability for the agency’s PAYE liabilities to such workers -- even where there is no actual umbrella company (as the term is generally understood) in the chain.

‘Oh’ -- I hear you say -- ‘but agency workers don’t generally have an actual employment contract with the agency, and instead are caught by Chapter 7 ITEPA 2003 (often referred to as ‘section 44’, or the ‘false employment’ legislation), and the JSL legislation expressly excludes Chapter 7 workers.’

‘JSL excludes Chapter 7 workers.’ If only it were that straightforward…

Well, again, I don’t think it’s quite as simple as that!

In the JSL legislation, the definition of an ‘umbrella company’ requires that:

‘the worker is employed by a third person (“the umbrella company” (i) who carries on a business … of supplying labour, …’) (section 61Y(1)(b)).

The part that excludes Chapter 7 states:

‘“employed”, in relation to an individual, does not include the individual being treated as employed as a result of any of—

(a)      Chapters 7 to 10 of this Part (deemed employment by intermediaries), …’

Please note, the emphasis above is mine.

To sum up, if an agency worker were only treated as employed because of Chapter 7, then, indeed, that would not amount to ‘employment’ for the purposes of the JSL legislation’s ‘umbrella company’ definition.

But I don’t think that’s the case. 

Why most agency workers’ contracts are likely to constitute employment for tax purposes

Rather, it seems to me that most agency workers’ contracts are likely to constitute employment for tax purposes in their own right, regardless of Chapter 7 -- and therefore such workers would be ‘employed by a third person’ -- the agency -- in which case, the agency would be caught by the JSL legislation’s definition of ‘umbrella company.’

Employment for tax purposes is not the same thing as employment for employment law purposes. 

An overview for 2025-26 of employment for employment law purposes

As a reminder, the categories for employment law purposes (i.e. where services are actually provided personally) may be overviewed as:

(a)  Employee;

(b)  Worker (often called a ‘limb (b) worker’);

(c)  An intermediate category, often referred to as  ‘hybrid’ or ‘EDM,’ and;

(d)  Self-employed.

What about employed for tax purposes?

For tax purposes, in many ways, it’s simpler; there are but two categories – either

1. Employed for tax purposes (‘employment’ includes in particular ‘a contract of service,’ or;
2. Not.

Then there are some ‘bolt-ons’, such as Chapter 7, which may nevertheless ‘deem’ a person to be employed for tax purposes, even when they are not.

No need to go as far as Chapter 7 deeming provision

Under the April 2026 JSL legislation, most agency workers appear to me to be likely to actually be ‘employed for tax purposes’, without the need to resort to the ‘deeming’ provisions of  Chapter 7.

To address the question of whether a contract counts as employment for tax purposes will generally require a look at the ever-increasing mountain of case law.

Three key tests to determine employment for tax purposes

For this article, that can be summarised as determined by three tests:

□  Mutuality of Obligation: services provided personally (i.e. no right of substitution), in return for payment;

□ Control: A sufficient degree of control to create a relationship with at least some degree of subservience;

□  Not In-Business: No other characteristics fundamentally inconsistent with employment – e.g. not ‘In Business On Own Account.’

Agency worker contracts likely to tick all three ‘employment’ boxes

While agency workers’ contracts (i.e. workers engaged directly by the agency) are not generally employment contracts, not one of those that I have reviewed in the last 30 years contained a right of substitution, let alone a genuinely unfettered right of substitution.

Now, it’s my assessment that such agency workers’ contracts are likely to tick all three of the above boxes -- in which case they would be ‘limb (b) worker’ contracts, and would therefore generally fall into the ‘employed for tax purposes’ category, regardless of Chapter 7.

Under JSL, here’s when ‘recruitment agencies’ become ‘umbrella companies’

It follows that where agency workers fall into the category of ‘limb (b) workers’ (as I suggest will generally be the case), they will actually be ‘employed for tax purposes’, regardless of Chapter 7.

And this will result in the agency falling within the definition of ‘umbrella company’-- thereby making the client jointly and severally liable for the agency’s PAYE and National Insurance bill to HMRC, where there is no actual independent umbrella company in the chain.

JSL legislation: Can an agency avoid putting an end-client on the hook?

A consequence of this appears to be that the only way a recruitment agency could avoid putting the client on the JSL hook would be for an actual independent umbrella to become involved, in which case, the agency would be jointly and severally liable with the umbrella, but the client would not.

‘Umbrella’ JSL rules: who’s liable to HMRC and when, from April 2026

The joint and several liability to HMRC for the most common labour supply chains seems to me to be:

• Client-Agency: both will have Joint & Several Liability (JSL);
• Client-Agency-Agency’s Own Umbrella Company: all will have JSL;
• Client-Agency-Umbrella (independent): Agency and Umbrella will have JSL, but not the Client;
• Client-MSP-Agency: Managed Service Provider (MSP) and Agency will have JSL, but not the Client;
• Client-MSP-Agency-Umbrella: MSP and Umbrella will have JSL, but not the Client or the Agency.

Finally, the future (includes clients insisting on an independent umbrella company)

To my mind, clients are likely to want to avoid sharing JSL for a range of reasons. Insisting on the use of an umbrella company independent of the agency seems to me to be the most obvious way to achieve this. And it’s hard to imagine a persuasive argument as to why the government should change this course.