IR35 risks: joint and several liability for recruitment agencies

Gemma Stack, ACA Employment tax principal, Ryan. Croner.

Gemma Stack, employment tax principal at Ryan, explains how new PAYE clampdown on umbrella companies means recruiters and employers in the supply chain can be held jointly liable for unpaid tax and national insurance by HMRC.

New umbrella company PAYE rules came into effect in April 2026, introducing joint and several liability (JSL) for unpaid PAYE and National Insurance contributions (NIC). HMRC can now pursue other parties in the labour supply chain for unpaid PAYE and NIC, regardless of where the underlying noncompliance arose.

This sits against the backdrop of a large and complex market. Around 700,000 individuals work through umbrella companies in the UK, according to HMRC estimates. The Office for Budget Responsibility (OBR) projects that the new rules will raise £870m by 2027, reflecting the scale of non-compliance these reforms are designed to address.

For recruitment agencies, this moves PAYE risk from a largely indirect exposure to a direct and potentially immediate liability. The question is no longer whether providers have been checked, but whether agencies can stand behind how every worker in their supply chain is paid.

How joint and several liability operates in practice – a commercial shift

This reform is not simply an additional compliance requirement; it fundamentally changes where PAYE risk sits. Joint and several liability (JSL) brings that risk directly into the agency’s remit.

The legislation enables HMRC to recover unpaid PAYE and NIC from any party in the relevant labour supply chain, without requiring fault or direct involvement in the underlying payroll failure. In practice, several features are important:

• HMRC is not required to pursue the defaulting umbrella company first.

• Liability can be imposed on the agency even where payroll is outsourced.

• The agency may be required to settle the liability in full, with any recovery from other parties uncertain.

This creates a position where agencies can end up bearing the cost of non-compliance that originates elsewhere. Risk therefore moves onto the balance sheet and into core commercial decision-making.

At the same time, client expectations are evolving. End clients are increasingly focused on the integrity of their workforce supply chains. The ability to demonstrate a clear and defensible model is becoming a differentiator.

Agencies have historically relied on umbrella companies to manage payroll and compliance. That model no longer transfers risk in the way many assume. The key question is not who runs payroll, but whether the agency can demonstrate it understands how payroll is being operated in practice. With the new reforms, reduced involvement no longer means reduced exposure.

Key pitfalls for recruitment agencies

Exposure is more likely to arise from weaknesses in execution than from technical misunderstanding.

The following areas are consistently high risk:

• Assumed transfer of risk – Reliance on umbrella providers without verifying how PAYE is operated in practice

• Outdated due diligence frameworks – Processes designed for a pre-reform environment and not revisited to reflect the new risk position

• Mismatch between contractual terms and reality – Agreements that do not reflect actual working practices relied upon for status and IR35 determinations

• Insufficient ongoing monitoring – One-off onboarding checks without continued oversight of provider behaviour and payroll operation

• Lack of clear internal accountability – No defined ownership of labour supply chain risk at a senior level

Each of these represents a control gap that can translate directly into financial liability under the new rules.

Governance expectations and regulatory direction

The reforms should be viewed alongside a broader increase in scrutiny of labour supply chains. The introduction of the Fair Work Agency in April 2026 signals a more coordinated enforcement environment, with oversight extending beyond HMRC.

Governance is now central to managing financial risk and maintaining client relationships. End clients are increasing their focus in this area, and agencies should expect greater challenge on how their supply chains are structured and controlled.

There is also interaction with existing obligations, including Senior Accounting Officer and Corporate Criminal Offence requirements, where demonstrable control frameworks are expected.

What agencies should be doing now

Agencies’ response to these reforms should be both focused and practical. Priority areas include:

• Reassessing the operating model – With the traditional 'hands-off' approach to umbrella companies no longer viable for agencies, it's worth questioning whether umbrella utilisation remains the optimal model.

• Implementing documented control frameworks – Establishing documented processes that provide visibility over the supply chain must be a defined priority. HMRC's appetite for retrospective investigation is increasing, and the new reforms heighten that risk for agencies. Processes must be established, embedded, and actively applied.

• Enhancing due diligence – Agencies must undertake meaningful due diligence that moves beyond reliance on provider assurances to evidence-based testing of how payroll is operated in practice.

• Reviewing contractual arrangements – Contracts need to align with the reality of working practices, not just the intended tax outcome. Agreements drafted on assumptions that no longer hold need to be reviewed and updated. Anyone drawing the distinction between outside and inside IR35 engagements must be able to demonstrate it holds in practice, not just on paper.

• Embedding ongoing monitoring – Oversight needs to be built into day-to-day operations, with clear ownership at the leadership level, regular reviews, and the flexibility to adapt to change.

• Understanding cost implications – With an estimated 30,000 agencies likely to be impacted by these reforms, HMRC predicts that businesses choosing to undertake greater due diligence will incur one-off costs of approximately £9.9 million across agencies and umbrella companies, with ongoing costs averaging £21.7 million annually. This assumes that an agency currently has no active due diligence. These numbers are significant. To stay commercially viable, businesses need to ensure they are considering the additional cost to build proper controls and checks into their model.

The agencies that will come out of this strongest will be those that understand where risk sits, implement proportionate but robust controls, and align governance with commercial decision-making.

This is not about eliminating risk entirely. It’s about managing it with sufficient clarity, evidence, and accountability in an environment where scrutiny will continue to increase.

The direction of travel is accountable flexibility

These reforms are not about reducing contractor use. Contractors remain essential for many businesses—delivering transformational programmes, responding to peaks in demand, and supporting one-off procurement projects. Instead, these reforms ensure it is properly governed.

For recruitment agencies, that means taking a more active role in understanding and overseeing how their supply chains operate in practice. Control can no longer sit at the edges of the business. It needs to be embedded in how commercial decisions are made.

Agencies that align governance with commercial strategy will be better placed to manage risk, retain clients, and ultimately grow in a more scrutinised market.

Those that do not are likely to find that exposure emerges not from the rules themselves, but from an inability to evidence how those rules are being met.

About the author

Gemma Stack, employment tax principal at Ryan