Crawford Temple, CEO and founder of Professional Passport, describes how the shift from Option 2 to Option 3 has reshaped the umbrella market.
For those working within the umbrella company market, the journey to the Joint and Several Liability (JSL) legislation coming into effect in April 2026 did not begin with the Autumn Budget of 2024. In reality, the roots of this reform stretch back several years, through consultations, industry debate and a series of assumptions that ultimately proved incorrect.
Understanding how we arrived at this point is essential for the sector. The legislation itself is significant, but the bigger lesson lies in how the industry interpreted the signals coming from government – and how preparation for one outcome has had to evolve quickly to address another.
The story begins in November 2021, when the government issued a call for evidence on compliance in the umbrella company market. Concerns about tax avoidance, worker exploitation and complex supply chains had been growing for some time. The call for evidence was intended to better understand the scale of the problem and identify potential solutions.
That process led to a formal consultation launched in June 2023 when three possible approaches were proposed to tackle tax non-compliance in the umbrella sector:
Option 1 focused on mandating due diligence within labour supply chains. The idea was that agencies and end clients would be required to carry out checks on umbrella companies to ensure compliance.
Option 2 proposed the transfer of tax debt where it could not be collected from an umbrella company, allowing HMRC to pursue other parties in the supply chain.
Option 3 was the most dramatic option. It would deem the employment business supplying the worker to be the employer for tax purposes when an umbrella company was involved, shifting responsibility for PAYE away from the umbrella.
Across the industry, the general expectation was that the final policy would reflect a combination of Options 1 and 2. Option 2 would form the backbone of the eventual solution, combined with enhanced due diligence requirements under Option 1, creating a system where businesses could demonstrate reasonable checks and thereby limit their exposure to transferred tax debt.
As a result, the market mobilised around Option 2
The limits of Option 2 thinking
The focus on Option 2 drove significant investment in due diligence frameworks. New platforms were created to check umbrella companies, verify documentation and monitor compliance indicators across supply chains.
The industry began to recognise that greater transparency and oversight were essential. However, Option 2 always had a fundamental limitation: it remained largely reactive.
Under a debt transfer model, HMRC would still need to identify non-compliance after it had occurred and then pursue other parties for recovery. The liability would move around the supply chain, but the system still relied heavily on retrospective checks.
In practice, that approach carried several risks.
First, it created uncertainty about where liability would ultimately fall. Even with due diligence, supply chain participants could still find themselves exposed if another party failed.
Second, it left space for bad actors to continue operating within complex structures designed to delay or obscure accountability.
And third, it risked perpetuating a culture where compliance was assessed through documentation rather than embedded through operational responsibility.
Put simply, Option 2 aimed to manage the consequences of non-compliance rather than address the structural weaknesses that allowed it to happen in the first place.
Option 3, the scenario many referred to as the “nuclear option”, was widely viewed as unlikely.
The shift to Option 3
Then came the Autumn Budget on 30 October 2024, when Rachel Reeves announced:
‘We will clamp down on those umbrella companies who exploit workers… and go after promoters of tax avoidance schemes.
These measures to reduce the tax gap raise £6.5bn by the end of the forecast… ‘
The documents released after the speech revealed that the nuclear button had been hit:
‘5.26 Tackling tax non-compliance in the umbrella company market – To tackle the significant levels of tax avoidance and fraud in the umbrella company market, the government will make recruitment agencies responsible for accounting for PAYE on payments made to workers that are supplied via umbrella companies.
Where there is no agency, this responsibility will fall to the end client business.
This will take effect from April 2026. The measure will protect workers from large, unexpected tax bills caused by unscrupulous behaviour from non-compliant umbrella companies. The government is publishing a policy paper alongside the Budget that provides further information on this measure.’
In confirming measures to tackle tax avoidance and fraud in the umbrella company market, the government made clear that recruitment agencies would become responsible for accounting for PAYE on payments to workers supplied through umbrella companies. Where no agency is involved, that responsibility will fall to the end client.
So, option 3 it was.
At first, the industry reaction was one of shock. After years of preparing systems built around Option 2, businesses suddenly faced a model that required a very different way of thinking about compliance and accountability. But beefing up a system designed to address Option 2 to address Option 3 was never going to cut it.
Extensive engagement with HMRC followed, seeking to remove the responsibility for operating PAYE from the agency and keeping the umbrella in control. This resulted in proposals for Joint and Several Liability between Umbrella and agency/end client, which were adopted as the new basis for option 3.
Yet, as the implications have become clearer, the logic behind this approach is increasingly evident.
Why Option 3 creates Stronger Accountability
Option 3 changes the dynamic of compliance in a fundamental way.
This shift creates a much stronger incentive for robust oversight across the entire supply chain. Recruitment businesses and end clients must now take a more active role in understanding how workers are engaged and paid.
The new rules create a ‘strict liability’ with no excuses. Due diligence, payslip checks, payment verifications may help manage risks, but do not remove liabilities in the new JSL world.
From a regulatory perspective, this also simplifies enforcement.
HMRC no longer needs to navigate complex corporate structures or pursue entities that may disappear before liabilities can be recovered. Instead, responsibility is anchored to parties that are already central to the engagement of the worker.
For workers themselves, the benefits are equally important. One of the major risks within the umbrella market has been individuals unknowingly entering arrangements that later generate unexpected tax bills. By strengthening the accountability of those closest to the engagement, the likelihood of such outcomes is reduced.
Adapting to a new compliance landscape
For the umbrella sector, the key lesson from the past few years is that compliance cannot rely solely on checks, assurances and documentation.
The reality is that Joint and Several Liability introduces a fundamentally different risk dynamic. Liability can be triggered by events outside the control of individual participants within the supply chain. Even where a business has carried out extensive checks, exposure can still arise if tax liabilities remain unpaid elsewhere in the chain.
The harsh reality is that unless the liability is settled directly with HMRC by the relevant party, the complexities within the legislation can leave you exposed in several ways. Many of these risks are outside your control and could be triggered by the actions of others.
It has also become clear that many organisations in the umbrella market rely on HMRC funds to support their cash flow and the commercial terms they offer. In a Joint and Several Liability (JSL) environment, this creates a particularly risky position, where even a minor event could set off a chain of consequences that may prove very costly.
The only way to neutralise JSL is to pay PAYE directly to HMRC. If you control the payment, you control the liability and control the risk.
April 2026 will mark the formal start of the new regime. But the real shift is already underway. The move from Option 2 thinking to Option 3 accountability represents more than a regulatory adjustment – it is a transformation in how the sector approaches responsibility, transparency and trust.
If you know how much is due to HMRC, why would you not settle this directly and neutralise the risk rather than relying on another party?
