UK’s umbrella company reforms bring new responsibilities for HR

The government has published draft legislation that will have significant implications for organisations using umbrella workers and HR teams who need to help lead the response. From April 2026, businesses and recruitment agencies that engage umbrella companies will face joint and several liability for any unpaid PAYE tax. In practical terms, that means HMRC will be able to pursue the agency, or the end client if no agency is involved, to recover the tax even if the umbrella company is at fault. We’ll speak to a tax expert about HR’s role.

The new rules are designed to tackle tax avoidance in the umbrella company market, where some operators fail to pay the correct amounts of tax and National Insurance to HMRC. The key legal change is that whoever contracts with the umbrella company - whether that’s a recruitment agency or the end client - becomes jointly and severally liable for PAYE tax, penalties, and interest if things go wrong. And that’s a major policy shift which HR teams need to be alive to. In many cases, when HMRC investigates unpaid tax liabilities, it’s HR who they contact first, not Tax, Legal, or Procurement.

Last week tax expert Penny Simmons talked to this programme about the new legislation, the significance of joint and several liability and her hope that the Revenue will publish further guidance to help us all understand how the new rules will work operationally. She has also written a piece for Out-Law urging agencies and clients to review their labour supply chains and their use of umbrella companies. She says: “Ensuring rigorous onboarding controls and contractual safeguards will be key to managing tax risks effectively.”

So, from an HR perspective, what are the key risks that client businesses now need to consider when engaging umbrella workers, especially where there’s no agency in the chain? It’s a question I put to Penny:

Penny Simmons: “The key risk from an HR perspective? It’s a good question. HR and Tax, I appreciate they're different, but the key risk is that if a business is engaging with workers through an umbrella company directly, then that business is going to be joint and severally liable for the PAYE taxes, the employment taxes, of those workers. Well, that could be a significant issue, a significant risk, for the HR team because we know, Joe, that in a number of cases when the Revenue first looks into unpaid PAYE debts they actually go to the HR team, or the HR contact, rather than to Tax or Procurement or Legal. So this directly affects HR professionals and if the Revenue is going to look into unpaid debts, it is very possible that the first port of call, the first point of communication that the Revenue has with the business, is through the HR lead so it's a live risk for HR directors at businesses.”

Joe Glavina: “These changes will be coming into force in April 2026. What do HR teams need to be doing now to get ready given that’s not too far away?”

Penny Simmons: “Great question. So yes, we don't have a huge amount of time, but we do have time, I think is what I would be saying. It’s the same with all the changes to employment taxes that we've talked about, particularly obviously IR35 in the past, in the last few years. The first thing to do, really, is that the HR teams need to communicate with Legal and Tax, and Procurement because often temporary workers are actually engaged by Procurement, and to have that conversation as to I hear there's changes to tax rules involving umbrella companies. What do we do about that as a business? How do we engage with umbrella companies? Do our recruitment agencies engage with umbrella companies? So start having that conversation now. Exactly the same with recruitment businesses. I'd expect them to be having those conversations as to where do we engage umbrella companies? Which umbrella companies do we engage with? One businesses have looked at where they're engaging with umbrella companies, directly or indirectly, I would then expect that they consider, and I strongly recommend this, that they consider reviewing their engagement terms. So they need to review their engagement terms where they're engaging directly with umbrella companies and actually consider, do they want to continue to engage directly with umbrella companies from next April? They also need to be reviewing their engagement terms with agencies and make sure that there are appropriate safeguards, but also that they're making sure that their agencies are doing appropriate due diligence of umbrella companies where umbrella companies might be in the chain because even if they are engaging indirectly through a recruitment business the reality is, from a reputational perspective, businesses want to be engaging, and need to be engaging, and should be engaging, with reputable suppliers that are tax compliant and pay their taxes and are ethical and do the right thing. So the reality is businesses need to have a good oversight, and that's where due diligence comes in, as to who they're engaging with in their supply chains and I think if it hasn't been done already this is another very good opportunity, and the right time, to be reviewing engagement terms and engagement processes with recruitment businesses and with umbrella companies.”

Last week Penny talked to this programme about the new legislation and in particular the significance of joint and several liability. That’s ‘Umbrella reforms land UK agencies with joint and several liability for unpaid PAYE’ and it’s available for viewing now from the Out-Law website. We’ve included a link to that programme, and Penny’s article, in the transcript of this programme for you.

- Link to HRNews programme: ‘Umbrella reforms land UK agencies with joint and several liability for unpaid PAYE’

- Link to Out-Law article: ‘UK legislation for new rules combatting tax avoidance by umbrella companies published’