New tax rules to shift liability from umbrellas to agencies and end users

The government has set out further details of its plans to regulate the umbrella company market. They build 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 two key reforms. First, a very significant tax changes which will shift PAYE and NICs responsibility from umbrella companies to recruitment agencies or, where no agency is involved, directly to the end client. Secondly, amendments to the Employment Rights Bill will bring umbrella companies under regulatory oversight, ensuring they operate as employment businesses providing workers with stronger protections such as clearer pay structures and safeguards against withheld holiday pay. We’ll speak to a tax lawyer about the first of those, the tax changes, which will take effect in April 2026. 

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.

The aim of the new rules is to prevent tax avoidance and ensure PAYE is properly deducted at source. As tax expert Penny Simmons explained in her Out-Law article after the Autumn Budget, the change will mean end users will need to conduct thorough review of their supply chain to avoid the risk of inheriting tax liabilities. This includes confirming who is responsible for PAYE and NICs, auditing payroll arrangements for compliance, and avoiding disguised remuneration schemes. She says without proper due diligence businesses risk unexpected tax bills and HMRC enforcement.

The latest news on the new rules came in the government’s response to its consultation ‘Tackling non-compliance in the umbrella company market’ which was published on 4 March 2025 and provides confirmation of this shift of responsibility away from umbrellas. Clearly this is very significant change which end users will need to understand and prepare for, so let’s hear more about it. Earlier Penny Simmons joined me by video-link to discuss it:

Penny Simmons: “So this is very key from an employment perspective and obviously the announcements with the response document were new from an employment perspective but they're not so new from a tax perspective, Joe, and that's because we already had the announcements at the Autumn Budget in October telling us exactly how the government intended to manage non-compliance in the umbrella market, and that was by shifting responsibility for PAYE taxes from the umbrella to the agency that was engaging the umbrella, and if there isn't an agency involved, then to the end client directly. So it's very important, but the announcements that were included in the response document are not necessarily new announcements, they are simply confirming what we already knew.”

Joe Glavina: “Last time we spoke about this Penny was in January when you were emphasising the importance of end users conducting thorough due diligence of their supply chain. That remains the case and it’s critical that end users do that isn’t it?”

Penny Simmons: “Absolutely. We are seeing time and time again, and we've done a number of interviews on this, and not just about umbrellas, Joe, about how the Revenue and the Treasury are expecting businesses to take responsibility of their supply chain and to really make sure that those that they do business with are tax compliant and one of the ways to do that is to simply shift responsibility for tax risk, or for non-payment of taxes, to the businesses that are engaging other parties and in this case, we are talking about the use of non-compliant umbrellas. We know that there is non-compliance in the market, the Revenue has been very, very clear about that, and this is that way of managing compliance by saying, okay, look, we’ve tried to get control of the umbrella market, we've tried to encourage compliance, we haven't managed to do that so what's the best way to manage compliance? Actually, it’s to shift the tax risk up the supply chain to the business that's engaging with that umbrella, Now, in many cases that is going to be the agency so this. So in many respects this is about agencies taking responsibility for their supply chain - recruitment agencies I mean by that. So employment businesses that use umbrella companies - they might use umbrella companies as a payroll function or they might use umbrella companies in another function for engaging workers - and this is making those recruitment agencies take responsibility for those agreements, for their supply chain, and for tax compliance across that supply chain, and making sure that umbrellas pay taxes that are due but,  like I said, where there isn't an agency involved, the end client, the business that ultimately is using the services of those workers but using an umbrella to engage those workers, that end client will become responsible. So managing supply chain tax risks, managing compliance across your supply chain, is going to become more and more key for recruitment agencies, but also for businesses If they choose not to use a recruitment agency.”

Joe Glavina: “I guess there’s a risk that if you don’t check the supply chain carefully you might assume there’s no umbrella in it when in fact, unbeknown to you, there is one, or there might be one,  which the agency didn’t tell you about it?”

Penny Simmons: “So you just hit the nail on the head when you said they assume, they don't know, they think they might. You need to get that information, you need to find out, and that's all about first of all putting provisions in your agreements with agencies or, where an end client is engaging directly with an umbrella, putting provisions in the agreement with the umbrella themselves. So actually making sure that you know, particularly with recruitment agencies, does the recruitment agency intend to use umbrellas when providing workers? Is the recruitment agency going to be constrained to using specific umbrellas? There’s going to be a definition of umbrella companies now, it's going to be legislated for, and they're going to be more heavily regulated and so you need to make sure that you have that information as to how your workers are being engaged when umbrellas are involved and commitments that taxes will be paid. Like I said, if the end client is using a recruitment agency then the tax risk is unlikely to fall on the end client but, nonetheless, they still want to be making sure that recruitment agencies are doing what they need to do from a tax compliance and a tax risk perspective.”

Joe Glavina: “In terms of recruitment, the onboarding process, that’s very much HR’s domain but these are changes to the tax rules which are going to be issues for Procurement and Legal to be alive to as well. So what is HR’s role exactly? Should HR be taking the lead?”

Penny Simmons: “Again, great question, Joe, and from where I sit as a tax lawyer I think that there's no clear answer to that and the reason I say there's no clear answer to that is because, in my experience of working with businesses, it really depends how the business is organised internally and who takes responsibility for that broad term of ‘off-payroll’ workers. Sometimes it is HR, okay, sometimes it's very, very clearly, HR and HR will take responsibility for all personnel, all people, all labour, that are engaged by the business whether they are on payroll off payroll, whether they're directly as employees or whether they’re indirectly through recruitment agencies as temporary workers, but in other in other cases, it is not HR. It might be Procurement or, depending on how the business is organised, it could be different divisions even engaging different agencies, different recruitment agencies that have different policies. So I think really and HR can and should play a very key role in this. It is taking a step back and looking at where in the business are off-payroll temporary workers engaged? How are they engaged? Who is responsible? What agreements does he business have in place? Are these agreements centralised if you like? You've got a precedent agreement that the business generally uses, and different versions of that template, if you like, are used for different agencies. How does it work? If it's not centrally coordinated then I think HR, because of their communication links with the rest of the business, have a very key role there to take a step back and find out who's responsible and how it is working and, if somebody isn't responsible, to be talking to Legal and Compliance and saying, look, somebody needs to take responsibility for this and in many respects, many cases, HR will be a good solution and they will be the right people to take responsibility for this. But like I said, Joe, that's not a definitive yes, 100%, this should be HR because businesses are organised internally very differently and for some businesses it will be Procurement, and for others it will be it will be Legal. So it will depend.”

The government’s response to its consultation ‘Tackling non-compliance in the umbrella company market’ was published on 4 March and is available from the government’s website. We’ve included a link to it in the transcript of this programme.

- Link to government’s response to its consultation ‘Tackling non-compliance in the umbrella company market’