Since April 2026 is fast approaching, we continue to tackle questions arising from the draft tax legislation that shifts accountability for an umbrella companies’ tax liability to agencies and, in some cases, clients. This time we answer: ‘What’s the difference between JSL and debt transfer, and why does it matter?’
Put simply, joint and several liability allows HMRC to collect unpaid taxes from several businesses because they are all responsible for the same debt. Whereas debt transfer enables HMRC to assign the tax debt to another business in the supply chain.
However, before we explain the significance of these two tax recovery tools, it’s helpful to understand their origins.
The problem
HM Revenue & Customs (HMRC), are constantly grappling with the recurring problem of the ‘tax gap’ which put simply, is the difference between the tax which is payable by individuals and businesses, and the tax which is actually collected by HMRC. For the 2023/4 tax year, this was thought to be running at 5.3% of the theoretical tax liabilities. This doesn’t sound much, but when you consider that the expected tax take for that year was £876 billion, that’s a whopping £46.8 billion owed to the Treasury.
HMRC’s tax penalty and interest regime is constantly evolving and linked to the amounts of tax lost. The financial hit of interest and penalties can be considerable and serve as a significant deterrent to potential tax evaders. However, it is of little or no value if the tax evader has disappeared, legally or physically.
For many years HMRC has been frustrated in its duty of tax collection by the liquidation of companies and the disappearance of their directors, owing many thousands of pounds in PAYE, National Insurance Contributions and VAT. These companies and their directors frequently reappear under a different guise and repeat the same activities in what is commonly known as ‘phoenixing’.
The temporary labour supply industry has seen its fair share of errant businesses taking advantage of sometimes opaque supply chains and a less than rigorous approach to due diligence. This weakness has not gone unnoticed by HMRC who have been on the receiving end of some material VAT frauds involving bogus and vanishing umbrella companies and payroll providers over recent years.
HMRC’s tax recovery tools
HMRC has a number of tools to tackle the more egregious cases of fraud or default. They are not all new tools, but their application is being widened, and the labour supply industry can expect more to be deployed.
In certain circumstances, faced by the failure by a person, individual or entity, to pay its taxes, HMRC’s debt recovery process can take a different route to attempt to pull in the tax or duty owed to the Exchequer. It can look to the laws which can make others “jointly and severally liable” for a tax debt or they can look to a “debt transfer” to another party to recover the tax due but unpaid.
Contractors, agencies, umbrella companies and end clients alike will probably have heard of these terms although there is often confusion over their meaning. They may appear on first examination to be one and the same thing but there is a legal and practical distinction between the two.
The use of joint and several liability
The term ‘jointly and severally liable’ will be familiar to anyone who is or has been in, a general business partnership. In law, partners are each individually responsible for the full amount of partnership debts. This applies to taxes and so HMRC can pursue any one of the liable partners for the whole debt, be it income tax, VAT or PAYE.
The same concept of joint and severally liable applies in the corporate world too and can be found, for example, if a group of connected companies form a VAT group. Each company in that group is jointly and severally liable for the group’s total VAT liability. This condition is applied by the VAT Act and has been around for many years.
Since the Finance Act 2020, HMRC have been able to formally apply the joint and severally liable approach to company directors who have or may be planning to deliberately liquidate their company leaving unpaid tax liabilities and subsequently forming a ‘phoenix’ entity. HMRC do this by the issue of a formal “JSL” notice making the director(s) jointly and severally liable for the company’s tax debts. This approach is often used by HMRC against serial offenders.
Debt transfer and it’s use by HMRC
The other weapon in HMRC’s armoury for enforcing tax collection is debt transfer and the difference between that and joint and several liability is significant.
Sometimes known as ‘transfer of liability,’ it is used when a tax debt originally owed by one person or entity (business, company etc) is legally assigned to another. After the transfer, the new person becomes solely responsible for paying it. The liability has been moved, not shared.
Again, a simple example of this form of debt recovery can be seen when HMRC fail to recover outstanding PAYE/NIC from a limited company. They can issue what is known as a Regulation 97 Notice which transfers the debt to the director of the company. At that point it ceases to be a company debt, and becomes a liability of the director.
The existing legislation permits HMRC to use the debt transfer route if a Managed Service Company (or it’s director) fails to pay over PAYE/NICs. In this instance it can be legally assigned to the Managed Service Company Provider and, if necessary to the directors of that entity.
We can see the same use of debt transfer by HMRC in off-payroll cases (IR35). Here, if the person responsible for operating PAYE fails to account for the correct amount of tax, the debt can be transferred to another party in the chain such as the agency or end-client.
The impact of joint and several liability from April 2026
Following the Government’s consultation ‘’Tackling Non-Compliance in the Umbrella Company Marketplace’, the Chancellor announced that a joint and severally liable approach would be taken where an umbrella company was part of a labour supply chain. The measure, which is included in the Finance Act 2026, is currently going through Parliament and will be effective from April 2026.
This is an important development for the industry. Although umbrella companies can still be used, the agency nearest the umbrella will be legally accountable for the PAYE/NIC. The joint and severally liable rules contained in the proposed legislation will, however, enable HMRC to recover any default from agencies, and in some cases, end clients.
Moving forwards
Under joint and several liability (JSL), HMRC doesn’t care who pays, and any dispute between the parties as to the division of the payment is of no interest to them!
Our advice to agencies to ensure they are prepared for the introduction of JSL in April 2026, is to focus their efforts on the following:
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Reviewing and mapping supply chains.
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Reviewing and continually monitoring due diligence processes and procedures.
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Consolidating your Preferred Supplier List (PSL) to closely vetted, trusted and stable umbrella partners.
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Reviewing contractual indemnities weighed against the financial strength of your PSL partners.
If you would like any further information regarding the umbrella reforms and how best to prepare, please don’t hesitate to contact your Key Account Director.
