End users should ‘review contracts’ before change to UK’s umbrella company tax rules

As we reported last week, the government has set out further details of its plans to regulate the umbrella company market building on the policy announced by Rachel Reeves in the Autumn Budget in response to concerns over worker exploitation, tax avoidance, and supply chain non-compliance. There are a number of proposed reforms but the standout change is the shift of PAYE and NICs responsibility from umbrella companies to recruitment agencies or, where no agency is involved, directly to the end client with effect from April 2026. We covered this last week in our programme ‘New tax rules to shift liability from umbrellas to agencies and end users’ with tax lawyer Penny Simmons explaining the significance of the change. We’ll more from Penny shortly on what clients can do now to help themselves before April next year. 

A reminder. The term 'umbrella company' describes an arrangement under which contractors and temporary workers are supplied by an umbrella company to a recruitment agency, which then supplies the workers to a business – the client – that receives the services of the workers. The client is invoiced for the work that those workers undertake. The workers are then paid as employees or self-employed contractors by the umbrella company. 

As a result of the response to its consultation ‘Tackling non-compliance in the umbrella company market’ which was published on 4 March 2025 we now know these changes will be coming, so what should end users be doing now to be ready for them? Penny Simmons again: 

Penny Simmons: “We often say, and I've probably said this so many times when we've had conversations Joe about new legislation that's been coming in over the years, the devil will be in the detail. We don't have the draft legislation yet and we're not 100% sure how this is going to be introduced and we need to see how the Revenue is going to respond, we need to see draft guidance from the Revenue and that all absolutely applies right now. We know that we don't have draft legislation yet, so we've got the broad idea of what's going to happen, we know tax risks are going to be passed up to the agency, and the end clients where there isn't an agency involved, but we don't exactly know how that's going to look like, we don't know exactly what mechanisms are going to be involved but we do know it's coming and I think that's the key here. We know it's coming, and we know that businesses are regularly entering into new agreements with recruitment agencies and with umbrellas with regard to the supply of workers and what I would be saying is, if you are a business and you are entering into a new agreement with either a recruitment agency, or directly with an umbrella, you need to be thinking about the fact that rules are going to be introduced that are going to take effect from April 2026, or at least that’s what we think at the moment, and you need to plan ahead for those rules. So basically making sure that you have contractual protections in place, and contractual provisions in place, so that you manage your own tax risk, so you are effectively protected, but also that you are able to get information about how workers are being engaged and where an umbrella is going to be involved and if you don't have the resources to do that internally, then I absolutely think that is something that you should be seeking external advice on before you enter into those agreements. So, if you're negotiating agreements now you need to be thinking ahead to the fact that new rules will come into force about umbrellas, and tax compliance with regard to umbrellas, that are going to take effect in April 2026. So, they will be enforced, in all likelihood, in relation to these new supply of labour agreements that you may well be negotiating now.”

Joe Glavina: “So in light of the changes, is it a case of reviewing agreements now to make sure you have the right protection in place? So for example looking at indemnity clauses and right-to-audit provisions.”

Penny Simmons: “It could be both those things but, again, it depends. It depends what we're talking about. It depends whether we're coming at this from the perspective of being the recruitment agency, so the recruitment agency that's engaging the umbrella, they're going to want different protections, if you like, and they may well be looking for indemnities and information provisions and audit provisions to a business that's engaging with the recruitment agency that's engaging with an umbrella. Now, as we said, in that scenario under the new rules the end client themselves wouldn't have the tax risk because the recruitment agency would be responsible, but there are still contractual provisions that they may well want to put in in order to ensure that the protections for them are as robust as they can, and should, be and equally that there's that third scenario where you've got a business that is engaging directly with an umbrella. Now that's a different risk profile entirely, and the end client there may want similar provisions that the recruitment agency would want when they are engaging directly with an umbrella but it also may be that the end clients need to take a step back and think actually, let's look at our supply chain, let’s look at our engagement model for temporary workers, do we want to be engaging temporary workers through umbrellas without using a recruitment agency, i.e. actually is the better approach to route all engagement with umbrella companies through recruitment agencies so we don't, under these new rules, carry the PAYE risk,  the risk of non-payment of taxes. Now, again, that's not a straightforward answer, that will depend on the nature of the business, how they engage with recruitment agencies, umbrellas, suppliers for temporary workers, and what the reliance is of that business on the temporary workers themselves. So, lots to think about there, lots to unpick and, really, as we’ve talked about so much in the past, Joe, this is about taking a step back, look at your supply chain, look at it from a commercial strategic perspective with an eye on where am I exposed to tax risks, and kind of managing those tax risks in a strategic and commercial way.”

Joe Glavina: “If end user clients get this wrong and they fail to do the necessary due diligence of their supply chain and they get caught out, how costly might that be? How big might the liability be, potentially?”

Penny Simmons: “When you say how big I can't quantify it because I don't know how many workers are involved but look, big, okay. If we're talking about significant numbers of workers, so significant amounts of PAYE taxes that are being theoretically paid by the umbrella, and they're not paid – that’s where the risk is, it’s the non-payment of tax by the umbrella – then the risks here are huge, really, really, huge. If you're talking about a business that's engaging a very small number of workers who work on a temporary basis and we're not talking about significant amounts of fees and therefore significant amounts of PAYE taxes then less. This could be very significant, particularly for recruitment agencies that are using multiple different umbrellas, engaging huge numbers of workers through those umbrellas, the tax risk exposure could be huge. For other businesses, and recruitment agencies, they'll say, actually, this isn't such a big deal for us because we just don't use a large number of umbrellas, or we don’t route lots of workers through them, and we're just not exposed to the same amount of taxes. So as with so many employment tax related provisions, the extent of the risk will really depend on the extent of reliance of the specific engagement model, which is being looked at and, in this case, it's about the engagement model of using umbrellas.”

If you’d like to watch the rest of that interview with Penny where she explains the significance of that shift in PAYE and NICs responsibility away from umbrellas and up the supply chain you can. That’s: ‘New tax rules to shift liability from umbrellas to agencies and end users’ and is available for viewing now from the Out-Law website.

- Link to HRNews programme: ‘New tax rules to shift liability from umbrellas to agencies and end users’