HMRC is reviewing labour supply chain liability

The new Chapter 11 (draft Finance Bill 2025/26) looks like it's going to collide with Chapter 7, to make life even more difficult for both individuals and companies to understand.

Labour Supply Chain: PAYE Liability – Chapter 7 vs Chapter 11 of ITEPA 2003

Since the introduction of Chapter 11 (draft Finance Bill 2025/26), there’s been confusion around PAYE liability in labour supply chains, particularly involving umbrella companies. Whether Chapter 7 or Chapter 11 applies depends on how the worker is engaged.

Chapter 7 – Agency Rules (ss44–47 ITEPA 2003)

• Applies to workers who personally provide services and are under supervision, direction or control (SDC).

• Treats workers as employed by the agency for PAYE if:

  • There’s a contract with a third party.

  • The income isn’t already treated as employment income.

  • The SDC test is satisfied.

• Designed to ensure PAYE is operated by the “top agency” or managed service provider (MSP).

• No joint and several liability built in, but:

  • Directors may be personally liable via PAYE Regs (regs 97ZB–97ZK).

  • HMRC JSLNs (Finance Act 2020) apply where evasion/avoidance is suspected.

Chapter 11 – Umbrella Company Liability (Draft)

• Applies to workers employed by umbrella companies.

• Introduces joint and several liability for unpaid PAYE by umbrellas, falling on:

  • The top agency, or

  • The client, if no agency is involved.

• Only applies where workers are engaged on a contract of employment (not contracts for services or limb (b) workers).

• If umbrella arrangements (per s61Y(1)) are met, liability shifts up the chain.

If the agency employs the worker and contracts directly with the client, the client can become liable.

Key Definitions and Interactions

• Employment (tax law): Defined in s4 ITEPA as employment under a contract of service, apprenticeship, or Crown employment.

• Employment business (regulations): Defined under Conduct Regs 2007, unrelated to tax or PAYE liability.

• Umbrella companies may be treated as agencies and vice versa under the broad definitions in s61Y.

Fraud Protection and Worker Rights

• Chapter 11 doesn’t override Chapter 7–10 deeming rules. Fraud provisions prevent misuse of bogus umbrella claims to avoid PAYE.

• Manipulating worker contracts to shift chapters could raise employment rights issues under wider employment law.

Summary: Which Chapter Applies?

Engagement Type	Relevant Chapter
Contract of employment (service)	Chapter 11
Contract for services / limb (b)	Chapter 7

Conclusion

Chapter 7 and Chapter 11 aim to close PAYE loopholes in the labour supply chain. Chapter 11 extends liability to agencies or clients when umbrellas fail to operate PAYE. The upcoming Umbrella Regulations are expected to further tighten oversight and create a more compliant labour market.