The JSL rules contained in Chapter 11, which are set to apply from April 2026, come with a hidden risk affecting the entire recruitment supply industry. That risk is perception.
The evidence suggests that agencies are already reviewing their umbrella PSLs and considering due diligence steps to minimise the risk of having to pick up the tax bill of an umbrella company that fails to account for its PAYE and NICs (from 6th April). The perception that due diligence solves the problem will be misplaced, as already advised by HMRC. Yet the action in reducing a PSL to only the most trusted umbrellas, with due diligence as part of the assessment, is likely to appeal. In those circumstances the perception will be that risk is reduced so enabling the agency to continue working with umbrella companies on the PSL.
Those umbrellas, probably the largest operators, will likely be the winners with the majority of smaller businesses falling by the wayside. HMRC will slate this as a victory for the taxpayer as seemingly this is what is intended.
However, this is only a small part of this unfolding story. In defining an agency that employs its workers as an umbrella company, hirers will be as liable for the unpaid levels of Taxes run up by that employer agency, in the same way that an agency is liable for the unpaid Taxes of an employer umbrella company. Because of this a conclusion a good number of hirers may reach is that, where they were once protected from employment taxes when using an agency to supply a worker, this will no longer be the case. In these circumstances does anyone think that hirers will simply stand by and do nothing?
Options available to hirers include imposing rules in contracts that prohibit the employment of agency workers. This, if deployed, would give the hirer the perception of reducing risk, but again, as with umbrella companies, how do you know the rules are being followed? Liability is absolute, there is no defence. In any event how would or could an agency, that does employ its workers, respond to such a rule? Lose the business or lay off the workers? Neither is a good outcome, and an attempt to transfer existing employees from employment contract to contract for services is likely to be a direct road to the Employment Tribunal.
Is there another option for hirers? Whilst contractual indemnities may seem to be a solution, they are unlikely to help given that the risk for the hirer only arises if the agency has already failed to pay the Taxes to HMRC.
In the absence of other options, or compelling data that shows that recruitment businesses don’t fail whilst owing PAYE and NICs to HMRC, trust will become the issue. As with the steps that agencies take to reduce risk in dealing with umbrellas, hirers may well do the same. That means only dealing with the larger trusted agencies in favour of smaller or newer ones. Accordingly the multiplicity of smaller newer agencies that drive growth and innovation in the UK will likely be the losers, as will the many agency workers who will lose their employment as a result of this misdirected legislation.
Whether or not at the end of the day Chapter 11 leads to a significant advantage for bigger businesses, the reputation of the agency supply sector will have been sullied. As the saying goes, perception is everything.
For further information and discussion on Chapter 11, book your place at a Lawspeed seminar, sponsored by ARC, on 14th January 2026.
