Umbrella reforms land UK agencies with joint and several liable for unpaid PAYE

The government has published draft legislation that marks a major shift in the way umbrella companies are regulated. From April 2026, agencies that engage umbrella companies to supply workers will be jointly and severally liable for any unpaid PAYE tax owed by those umbrellas. While reforms have been signalled since the 2023 consultation, many in the sector didn’t expect liability for unpaid PAYE tax to fall so heavily on agencies. It means HMRC will be able to recover the tax directly from the agency, even if it’s the umbrella company that defaults. It’s a significant shift in risk and one that could reshape the way agencies manage their labour supply chains. We’ll speak to a tax expert about that.
 
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 change means that where an umbrella company is involved in supplying workers to a business, the agency that holds the contract with the end client becomes jointly and severally liable for PAYE tax that hasn’t been paid, along with penalties and interest. And if there’s no agency in the chain, the liability shifts to the end client. The draft legislation also gives HMRC power to go straight to the agency for unpaid tax, without first trying to recover it from the umbrella company meaning the financial exposure for agencies could be substantial.

The government’s message is clear: agencies are expected to take far greater responsibility for who they allow into their labour supply chains. As Pinsent Masons’ tax expert Penny Simmons highlights in her article for Out-Law, ‘With less than nine months until the new rules are introduced, recruitment agencies and clients should review their labour supply chains and use of umbrella companies.’ She goes on: ‘Ensuring rigorous onboarding controls and contractual safeguards will be key to managing tax risks effectively.’

So, let’s hear more on that. Earlier Penny joined me by video-link to discuss it. First, her reaction to the draft legislation:

Penny Simmons: “It’s interesting because, well, first of all we didn't know what the legislation was going to look like. There were various different ideas as to how they would - as the Revenue calls it -  make recruitment agencies and employment businesses responsible for their supply chains and responsible for the tax compliance of umbrellas. It's interesting that they've gone with - and I say employment businesses but it's not always employment businesses and we'll talk about that in a minute - but they've gone with the idea that there'll be joint and several liability because actually, when you think about that, that means they're equally liable for the PAYE liabilities, the PAYE debts, of the umbrella companies and that means the Revenue doesn't need to go, if you like, to the umbrella company in the first instance, notwithstanding the umbrella company is the company that's paying these temporary workers so therefore the company, if you like, that's operating PAYE. What the legislation says, in its literal sense, is that they're equally liable so you don't need to go to the umbrella first and then go up the chain to the agency. Actually, we don't know how this will play out operationally, but the Revenue could just choose, strictly, but we don't have the Revenue guidance, so we don't know how this will play out operationally, but they are joint and severally liable so the Revenue could choose to go directly to the recruitment business rather than to the umbrella company.”

Joe Glavina: “As you say, there is still a lot of uncertainty around how this will work operationally. Can we expect more guidance from the Revenue to help with that?”

Penny Simmons: “I would sincerely hope so, Joe. I mean, look, the issue that we have - and it's difficult because we do often see this with tax legislation - although we've had a fairly long lead up, if you like, to knowing that there'll be changes in the umbrella company market, we need draft guidance from the Revenue as soon as possible. At this stage, I think we're unlikely to see that until the autumn, which doesn't really give businesses a huge amount of time to prepare before a start date in April but I would sincerely hope that guidance from the Revenue will explain how operationally these rules will work and what the Revenue would choose to do in the event that PAYE taxes are not paid on time, and how they'd approach the situation with the umbrella company and with the recruitment agency. But, as I said, it's not always the recruitment agency, Joe.”

Joe Glavina: “How do you see these rules changing the agency market overall, Penny? Are we likely to see a drop in the use of umbrellas in your view?”

Penny Simmons: “Yes. I mean, I think change is inevitable in this case. I would expect - I don't have a crystal ball - but I would expect to see the umbrella company market shrink. I think we're likely to see a couple of things happen. First of all, it's not always recruitment businesses that are engaging with umbrella companies. We do see at the moment, scenarios where businesses that need to engage temporary workers will go direct to the umbrella and so they will be engaging workers through umbrella companies. Now, I think that lots of businesses will be - and if they're not already they certainly should be - reviewing their engagement processes with umbrella companies and they will in all likelihood be thinking twice before engaging directly with umbrella companies and will probably make sure that any arrangements with umbrella companies are routed with employment businesses, recruitment agencies, so that it would be the recruitment agency, not the end client, not the business taking in, receiving, the services of the worker, it would be the recruitment business that would be jointly and severally liable for the PAYE liabilities of those workers. So I think we're going to see that. Then for agencies, in all likelihood, we are going to see a shrinking of the umbrella company market because they are going to want to be very careful as to which umbrellas they engage with and make sure that they are engaging with reputable umbrellas that have a solid reputation for paying PAYE debts because they are going to be taking on joint and several liability for those taxes. I think what you're also likely to see is recruitment agencies - they already do due diligence - but increasing the due diligence that they undertake of the umbrella companies that they use prior to engagement. So I would expect a shrinking in the market, I would expect businesses, end clients, to think twice before engaging directly with umbrella companies and engage through recruitment businesses, employment businesses, and I would expect those employment businesses to increase the due diligence, the checking that they do, before they engage with umbrella companies, and I would expect all parties, the end clients and the recruitment businesses, to be carefully reviewing their engagement terms between themselves, as in businesses and recruitment agencies, but also businesses and umbrella companies and recruitment businesses and umbrella companies. I would expect a lot of scrutiny of engagement terms now to make sure that there are appropriate safeguards, contractual safeguards, in place.”

If you’d like to read up on this you can. Penny has written about this in some details in her article for Out-Law which is called ‘UK legislation for new rules combatting tax avoidance by umbrella companies published’ and is available now for viewing from the Out-Law website. We’ve included a link to it in the transcript of this programme for you.

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