There is some debate as to whether or not contractors working through umbrella companies may themselves incur risk under the proposed Joint and Several Liability (JSL) legislation.
The debate appears to have been sparked by an attendee of an HMRC webinar on JSL, which I also joined, writes Roger Sinclair, legal consultant at Egos.
'Agencies will use JSL indemnity clauses to make contractors pay HMRC'
The attendee, after participating in the October 7th session, reportedly stated:
"Agencies will almost certainly…include contractual indemnity clauses requiring you [the workers, i.e. contractors] to pay them if they're forced to pay HMRC on your behalf."
Well, for a start, agencies would not be forced to pay HMRC on the contractor's behalf — where an umbrella is involved, paying HMRC is the umbrella's responsibility, not the contractor's!
First, let me make clear that I do not see the proposed JSL legislation as making any changes directly affecting the liability of contractors to HMRC for tax on what is, after all, their income.
Let's start with three scenarios of agency liability under JSL
If we use as an example a typical Client-Agency-Umbrella supply chain, it seems to me that there are three scenarios in which JSL might arise for the agency:
- Scenario 1: Umbrella correctly calculates and deducts tax, and correctly reports it to HMRC, but fails to pay, perhaps because it enters an insolvency procedure.
- Scenario 2: Umbrella correctly calculates and deducts tax, but fails to report it correctly to HMRC, and fails to pay.
- Scenario 3: Umbrella fails to correctly calculate and deduct tax, and therefore fails to report it to HMRC, and fails to pay.
In which of these supply chain JSL liability scenarios could HMRC pursue contractors?
In each of the above three JSL liability scenarios, the agency would have JSL, and, therefore, would find HMRC knocking on its door.
But look again at Scenario 3.
In those circumstances ('Umbrella fails to correctly calculate and deduct tax, and therefore fails to report and pay HMRC'), HMRC might already have some rights to go directly for the contractor.
Why the taxman doesn't need JSL to pursue contractors
That's because under existing legislation (Income Tax (Pay As You Earn) Regulations 2003/2682 reg 81), it seems to me that HMRC already has the power to recover unpaid PAYE from an individual, in circumstances where it believes that either:
- the individual knew that the employer had 'wilfully failed' to deduct the PAYE, or
- the PAYE was due in relation to a 'notional payment' to the individual (possibly such as might arise under some types of 'disguised remuneration' arrangement).
'Wilfully failed'
If HMRC could show it reasonably believed that the individual knew that the umbrella company had 'wilfully failed' to deduct tax, then HMRC might also be able to pursue the individual — they wouldn't need the JSL legislation to do that.
And, in a scenario which might well arise where both the individual and the umbrella were participating in tax avoidance arrangements, HMRC might well be able to show that the umbrella had 'wilfully failed' to deduct PAYE.
But I think that's it, so far as HMRC are concerned.
I find it hard to imagine a scenario where the honest and innocent contractor might have exposure to HMRC as a result of the proposed JSL legislation.
What about contractors being exposed to others ?
However, might there be any basis on which the agency (in any of the above three scenarios), having been called on by HMRC to pay what the umbrella (with whom it had chosen to contract) had failed to pay, could have any recourse against the contractor?
In Scenario 1, this recourse would be tantamount to requiring the individual to pay all over again what the individual had already suffered deductions on the sum they had received from the insolvent umbrella company!
Or, worse, from what the individual had not received from an insolvent umbrella, in the instance that the umbrella had gone into insolvency before paying the individual!
What about JSL contractual indemnity clauses?
This brings me to those suggestions (I even saw it expressed somewhere as 'a hope') that some agencies might try to include contractual indemnity clauses, with the effect of requiring the individual to pay them if they were forced to pay HMRC.
Into which contract, I wonder, would such contractual indemnity clauses be inserted? For starters, a contract requires 'consideration.' Well, what, I also wonder, would be the consideration given in return for such an indemnity? Provision of work-finding services?
In a Client-Agency-Umbrella scenario, there would not normally be anything contractual between the agency and the worker, beyond the 'Candidate Terms' that the agency is required to provide under the Conduct Regulations. And crucially, the Employment Agencies Act 1973 under which those regulations were made makes it an offence for an agency ('employment business', in the language of the legislation) in most circumstances to receive payment in return for providing work-finding services.
Will contractors need to forensically search for JSL indemnifiers?
However, what if an agency did try to slip such a 'JSL indemnity clause' into their terms of business? Bury it halfway down page 2, in Arial 7, and hope it's not noticed?
Well, such sleight of hand might be necessary because I doubt most contractors would agree to give such an indemnity if they knew it was there!
But there's a catch: Most contracts — and most terms in contracts — don't need to be signed, and indeed don't need to be in writing, if there is sufficient other evidence as to their essential terms.
But there are some exceptions. Here's one:
In contract law, what is the Red Hand rule?
One exception is known as the 'Red Hand' rule. This is the doctrine of the 'unusual and onerous clause'.
It's so-called, following an English contract law judgment in 1956, in which Lord Denning said: "Some clauses which I have seen would need to be printed in red ink on the face of the document with a red hand pointing to it before the notice could be held to be sufficient."
This was the basis on which a certain Mr Bates won a case against the Post Office in 2019!
The 'must, must, must-not' test will protect contractors
The essence of the rule is that the term must be unusual, it must be onerous, and it must not be contained in a document signed by the party against whom it is intended to use it.
The bottom line, therefore, is that such a term — including a sneakily hidden 'JSL indemnity clause' — would only be enforceable in an unsigned document if the other party could show that the term had been fairly brought to that party's attention.
To my mind, an attempt by an agency to make an individual liable for tax someone else was under an obligation to calculate, deduct, and pay could well fall foul of the 'Red Hand' rule, in circumstances where the tax had in fact been deducted from what the worker received. And all the more so if not only HMRC but also the worker themselves were unpaid.
TLDR: Joint and Several Liability indemnities; a goer, or not?
Sorry in advance to all those (mainly agencies, reportedly) out there readying a 'JSL indemnity clause' to try to offload any April 2026 HMRC liability to contractors. I find it hard to see circumstances in which attempts to incorporate contractual indemnities against workers in their terms of business would stand up. It all smells to me like a bit of a PR disaster waiting to happen for any agency trying that on, and may even come with a word in their ear from an unhappy taxman about them wrongly trying to circumvent rules that parliament is right now intending and will be on the statute book from April 6th 2026.
