Key role for HR ahead of UK’s new umbrella company tax rules

New rules are on the way to combat umbrella company tax avoidance and HR has a key role to play. As Chancellor Rachel Reeves announced in the Autumn Budget, with effect from April 2026 new legislation will be introduced to change who has responsibility for accounting for PAYE and NICs where an umbrella company is used in a labour supply chain to engage a worker. It’s all part of the government’s aim to recover £500 million in tax revenues which are lost to tax avoidance schemes. We’ll speak to a tax expert about HR’s role in helping businesses prepare for the changes.

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 Penny explains in her Out-Law article, the new rules will shift the risk of unpaid taxes, penalties, and interest from the umbrella company to the agency engaging the umbrella. According to a policy paper published by HMRC, where a business engages directly with an umbrella company rather than involving an agency, the business will be legally responsible for operating PAYE and the tax risks of non-compliance will sit directly with the business. She says: ‘This will likely create a powerful incentive for businesses to review their labour supply chains and route dealings with umbrella companies through recruitment agencies and employment businesses.’

So, let’s get a view on this. Earlier I caught up with Penny Simmons who joined me by video-link to discuss it. So what are the key changes? 

Penny Simmons: “So key changes? That's a good question because at the moment we have to remind ourselves that we're talking about these new rules as though we know exactly what's going to be in them but, actually, all we've had so far is a policy paper telling us what the new rules will look like in terms of what the end result is going to be. So we know that responsibility for PAYE is going to shift for operating PAYE and employment taxes and national insurance contributions from the umbrella companies to the agencies, or to the end clients, depending on who's actually engaging with those umbrellas, but we don't know how exactly those rules are going to operate. So we don't know the mechanisms yet so it's difficult to advise precisely as to what businesses should be doing. Now, what I do think is that businesses, if they haven't already, because I'd expect them to already have in place, on boarding processes before they're engaging with agency workers, off-payroll workers, if you remember all our conversations about IR35 and the onboarding processes when identifying workers through personal service companies. So I would expect businesses to be reviewing their supply chains and reviewing how they are engaging with off-payroll workers and determining how, and where, they are engaging with umbrella companies. Now as far as we know in terms of what's proposed, we know that where there is an agency in between the end client business and the worker, that the tax risks should sit with the agency. So we know that that's what's proposed, but we also know that we have situations where lots of businesses don't engage through agencies, they will engage directly with umbrella companies. So they’ve found a worker themselves, and that worker doesn't engage on their own basis, they engage through an umbrella company. We know that that happens and in those cases, in terms of where the rules are heading at the moment, the business would assume the tax risks for operating payroll correctly and for any underpaid taxes and national insurance contributions. So businesses now need to start thinking about reviewing their supply chains and looking at where they are engaging with umbrellas directly, what are the terms on which they engage with umbrellas? Do they have standard terms, or do they accept the terms that the umbrellas use? Do they have in place due diligence processes to check that the umbrellas will be complying with their tax obligations, and if they're not, does the business have a route to disengage with those umbrella companies? So those are the kinds of things I'd expect businesses to be doing now in preparation for 2026, Joe.”

Joe Glavina: “You mention the onboarding process, and that’s very much HR’s domain, but these are changes to the tax rules which I’d imagine are issues for procurement and legal. So what is HR’s role exactly?”

Penny Simmons: “A great question, Joe. So in terms of now, it’s really about starting the conversation and raising awareness that these new rules are coming into place. I am working with some businesses that are already in the process of reviewing how they engage with off-payroll workers and how they engage with agencies and updating their template agreements. So we're already sort of thinking about, well, should we put in some provisions now about not using umbrellas and some contractual protections and indemnities, etcetera. So that's kind of where we are now. I'd expect in the next 12 months, significantly more work in terms of businesses reviewing their engagement processes with umbrellas and reviewing their template agreements. In terms of HR, it's a really good question and it touches on lots of the interviews we've done in the past for your programmes, Joe, where we have talked about what is the role of HR in this and I've responded saying it kind of depends, and I appreciate that's not necessarily a helpful answer, but it depends on what HR role is within the business and how agencies and off-payroll workers are being engaged. So in some businesses, it's procurement that deals with any engagement with agencies, umbrella companies, and off-payroll workers, and in other organisations those engagement processes will sit directly with HR. But what we do know is that often when the Revenue raises inquiries, those inquiries go directly to HR. They don't go to procurement, they go directly to HR. So I think that HR has a really important role in being the communicator, the conduit, if you like, for communication across the organisation and making sure that, if it's not already being done, procurement and legal and risk are all communicating with each other as to how they're going to review their supply chain engagement processes and who is going to be responsible for working on reviewing contracts and working on the communication that's going to be needed both with business partners, so agencies and umbrellas, but also with existing workers if you want to change the fact that they're already rooted through an umbrella and you want to change that, and you want to kind of cease working with an umbrella and engage directly. I think that will be a significant role for HR, being that communication piece.”

HMRC has published a policy paper setting out in general terms how the new rules will operate when they come into force in April 2026 and at some point we expect the Revenue to publish detailed guidance on the precise mechanisms – and when that happens we’ll come back to this. Meanwhile, if this is an issue you would like help with please do contact Penny Simmons – her details are on the screen – or alternatively you can contact your usual Pinsent Masons adviser.