The government has released a policy paper and draft legislation addressing non-compliance in the umbrella company market, introducing joint and several liability for PAYE compliance for agencies and, in some cases, end clients. This follows the government’s ongoing efforts to address non-compliance, which you can read about in our previous blog here. We explain what employers need to know about the draft legislation and how you can prepare if there are umbrella companies in your labour supply chain.
What are umbrella companies?
Umbrella companies are essentially employment intermediaries – companies that employ workers on behalf of employment agencies and end clients. Whilst many umbrella companies are legitimate businesses that operate within the law, the government is concerned about the minority that evade tax and do not respect employment rights. In particular, organised crime groups commit mini umbrella company fraud i.e. they break down one umbrella company into multiple, small, limited companies. Each company only employs a few workers. This enables them to claim small business incentives and tax reliefs, and to build up tax debts/fail to send returns to HMRC before closing the business. Workers can find that the umbrella company has not passed on their PAYE deductions to HMRC, leaving them with a large tax bill.
What does the government hope to achieve?
The objective of the policy is to help close the tax gap and make the system fairer by preventing temporary workers from being blindsided with large tax bills. The government also hopes that it will help prevent fraudulent activities in some umbrella companies and prevent non-compliant businesses undercutting those that operate within the rules. It has indicated that it plans to introduce additional legislation empowering HMRC to impose similar provisions regarding National Insurance contributions.
How does the draft legislation plan to do this?
If it becomes law as proposed on 6 April 2026, the draft legislation (part of the Finance Bill) would affect recruitment agencies that supply workers to umbrella companies, which then process pay on their behalf. It would make agencies jointly and severally responsible for the PAYE (Pay As You Earn) liabilities owed by the umbrella companies. If there is no agency in the labour supply chain, or if the agency is connected to the umbrella company, this responsibility will shift to the end client, provided it is resident in the UK. Where more than one agency is involved, the agency that has a direct contract with the end client will assume joint and several liability.
In practice, this will mean that HMRC will be able to pursue the agency or end client for any payroll taxes that the umbrella company fails to pay. Agencies and end clients may continue to engage umbrella companies, but they will be required to exercise increased due diligence. The draft legislation proposes measures to prevent umbrella companies from avoiding the new measures.
The government expects that, in light of these changes, some agencies will choose to take control of their own payrolls instead of involving umbrella companies. For workers moved on to an agency’s payroll, this may mean a change in their employment status from employee (of the umbrella company) to limb (b) worker engaged by the agency.
A technical consultation on the draft legislation will be open until 15 September 2025. You can provide comments on the government’s proposals by email to umbrellacompanyevidence@hmtreasury.gov.uk.
How can employers prepare?
With significant changes on the horizon for the umbrella company market, it is essential for HR professionals and in-house legal teams to act now rather than wait for the legislation to take effect in April 2026. Proactive preparation will help mitigate potential financial and reputational risks arising from non-compliance.
There are several actions to consider:
- conduct regular and robust audits of umbrella companies’ compliance with their PAYE obligations to identify and address any issues early;
- review and update your contractual arrangements with any umbrella companies to ensure they include appropriate warranties and indemnities;
- carry out careful due diligence on any new umbrella companies before engagement, looking closely at their operational practices;
- provide comprehensive training to the staff who manage your labour supply chains to ensure they understand the new responsibilities and risks; and
- stay up to date with the proposed legislative changes and outcome of the consultation.
We will continue to bring you updates on our blog and, if you require assistance with your preparations for these changes, please get in touch with your usual Dentons contact.
