Chapter 11: clearing up confusion for recruitment businesses

The new Chapter 11 of the Income Tax (Earnings and Pensions Act) 2003 aims to close loopholes around workers employed by umbrella companies. 

In some ways, the new legislation is quite straightforward. The important bit for recruitment agencies is that Chapter 11 introduces the concept of “joint and several liability (JSL)” for unpaid tax. In other words, if an umbrella business in your supply chain fails to pay what it owes to HMRC, you could be on the hook. 

But that simple concept masks a lot of uncertainty. In a recent webinar, HMRC tried to clear some of the confusion. While the information was helpful, we’re still some way from complete clarity on Chapter 11 and its implications. 

In this article, we’ll do our best to blow away some of the fog. We’ll look at what we know about Chapter 11 now, how that impacts recruitment businesses and umbrellas, and what they can do to prepare.  

Recruitment agencies in the firing line 

First the bad news – the new rules place responsibility for paying workers’ tax firmly on the shoulders of recruitment agencies (where applicable). If HMRC thinks not enough tax has been paid by employees of umbrella companies in your labour supply chain, they’ll knock on your door first. 

In other words, you’re on the hook for the failure of umbrella companies to pay the tax they owe. There are a number of reasons why that might happen: 

• ‘Bad actors’ – the umbrella industry is far from perfect. In some parts of the market, ‘bad actors’ deliberately evade the tax they owe. 

• Insolvency – the industry operates on fine margins. One bad deal or cancelled contract can put labour supply chain businesses into financial distress. 

• Cashflow – often, non-payment is a cashflow issue rather than a criminal one, with end clients’ 90-day invoice terms and payment delays creating issues right along the labour supply chain. 

• Miscellaneous issues – there are lots of operational challenges that might make umbrella companies miss tax payments to HMRC, from human error to cyberattack. 

The problem for recruitment agencies is that, as far as your liability is concerned, none of this really matters. There’s no middle ground here and no legal defence. If not enough tax has been paid for workers in a labour supply chain, HMRC will pursue the liable party. 

In pretty much all instances, that means the agency. 

The labour chain and tax 

In other words, Chapter 11 is HMRC’s way of telling recruitment businesses to police their own supply chains.  

A typical chain might involve an end client, an umbrella company and multiple recruitment agencies, as well as workers. HMRC thinks the best way to ensure tax and NI is fully paid is to make multiple parties jointly and severally liable. 

What happens if there’s more than one agency in the chain? In the webinar, HMRC confirmed that, in the case of multiple agencies, the agency holding the contract with the end client would be liable.  

So it’s not out of the question that the agency at the top of the chain could end up being liable for risks created by other agencies. In fact, the main agency might have no direct contact with umbrella companies in the chain at all, making oversight that much harder. 

If there’s no agency in the chain, the end client would share responsibility with the umbrella company. What that’s likely to mean in practice is that more end clients will insert a recruitment agency into the chain to shield themselves from liability for unpaid tax.  

Umbrellas await the downpour 

At first glance, all of this looks pretty straightforward for umbrella companies. All Chapter 11 means for them is that if they can’t or won’t pay the tax they owe, the responsibility is held jointly and severally with the recruitment agency. 

The problem for umbrellas is that recruitment agencies will become a lot more wary of working with them. Umbrellas will have to work much harder to prove their compliance. That could lead to two important consequences, one good, one not so good: 

1. The good – one positive result could be that ‘bad actors’ will be forced out of the sector, which is clearly part of HMRC’s plan. By definition, ‘bad actors’ are unlikely to be able to provide the evidence of payments and tax compliance that recruitment agencies will increasingly want to see. Only those umbrellas on preferred supplier or (more stringent) assured supplier lists are likely to survive the cull. 

2. The not so good – the flipside is that small but compliant umbrellas will be forced out of business too, reducing choice in the market. That could include niche operators who bring valuable specialist knowledge to their sectors. With sustainability built on the finest of margins, many of these law-abiding businesses might find the extra level of bureaucracy required to prove compliance one straw too many. 

How will recruitment agencies react? 

Many recruitment companies aren’t sure how to react to Chapter 11. Some are better prepared than others, but at this stage very few are 100% certain of what to do. 

That’s because there are almost as many potential responses to Chapter 11 as there are recruiters. Most agencies will deal with Chapter 11 in a way that aligns with their own risk appetite.  

What does that mean in practice? Here are four examples of the kind of approach recruiters might take, based on a sliding scale of risk appetite (from the most risk averse to the least). 

1. Abandon umbrellas altogether. This probably won’t be common, but it will certainly happen. Risk averse agencies will simply conclude that working with umbrellas isn’t worth it, even if it means bringing payroll and other functions in house. 

2. Pay HMRC directly. A slightly more relaxed approach might be to continue working with well vetted umbrellas, but pay the tax owed to HMRC directly. Payments to the umbrella would be net of tax, which the recruiter would pay to HMRC using the umbrella’s PAYE reference number. 

3. Introduce more checks. The recruitment agency would continue working with the umbrella, but introduce new checks to ensure compliance. These might include payslip checkers and real time information (RTI) checkers. However, this doesn’t make the relationship risk free and won’t absolve recruiters of responsibility in the eyes of HMRC. 

4. Increase collaboration.  Increased collaboration between recruiters and umbrellas will have to happen anyway, but novel ideas being floated at the moment include sharing access to bank accounts and government gateways. That would allow complete transparency around what is being paid to whom. But not all businesses want to share this kind of information, which may be commercially sensitive. There may also be data protection risks.  

In short, there are lots of potential ways forward, and none of them are perfect. As a recruiter, how you react will depend on a range of factors, including size, the sophistication of your internal processes and your risk appetite.  

Preparation starts now 

The most important thing to remember is that April is fast approaching. It’s very unlikely that much will change in terms of the thrust of legislation between now and then. So come spring 2026, you could be on the hook for any tax and NI missteps of businesses lower down your labour supply chain. 

Some of the legislation’s small print is still not clear. For example, if multiple agencies have paid an umbrella company that fails before paying appropriate tax and NI to HMRC, will the main agency end up paying the tax twice? Will all the agencies? As yet, we’re just not sure. 

Nevertheless, it’s important to start preparing for Chapter 11 now. Work out your risk appetite as a business and start planning your strategy accordingly. After that, talk to your supply chain and use that information to start refining preferred supplier lists.  

There are lots of potential ways forward, so the key is to start thinking through your own approach to Chapter 11 as soon as possible. Change is coming. Those that fail to prepare may be in for a nasty surprise.  

Getting support with legislation 

Navigating legislation and ensuring compliance can be challenging for umbrella companies, end clients and contractors alike. The best thing you can do is speak to your supply chain, understand your risks and then you’re in a better place to navigate your responsibilities. 

If you’re still unsure or are looking for an expert to talk to, we offer tailored support, including expert guidance on compliance strategies, and risk mitigation. 

You can email partners@kingsbridgeinsurance.co.uk directly with your questions – they’ll be more than happy to help.