As of 6 April 2026, new powers under the Finance Act 2026 enable HMRC to pursue employment agencies (or, in some cases, the end users they supply) to recover PAYE liabilities missing from umbrella company arrangements.
The new rules expose such businesses to the risk of incurring tax liabilities.
Contributor(s): Clive Day, Cory Doran, and Jim Wright.
In a nutshell, umbrella companies are employers of convenience: they employ workers for other people – typically in the recruitment, construction, logistics and healthcare sectors.
The government has long been concerned about the risk of businesses using umbrella companies to avoid payroll taxes and commit tax fraud. In particular, given the thin margins in the umbrella industry, it believes that bad actors may be incentivised to find ways to avoid making Pay-As-You-Earn (PAYE) contributions by using complex structures.
How are umbrella company tax rules changing?
New provisions ushered in by the Finance Act 2026 give HMRC the power to look directly to the suppliers and users of labour for any missing payroll taxes.
HMRC have justified the new legislation with the view that if users and suppliers of labour choose to engage workers via an umbrella arrangement, they should bear legal responsibility for missing employment taxes.
What does this mean for you?
In essence, the changes bring together umbrella companies, agencies, and end users as potential targets for unpaid employment taxes. If an umbrella company defaults on its PAYE contributions, liability will initially fall on the employment agency or, where there is no independent UK agency, the user of the worker(s). Such parties will potentially be made ‘jointly and severally’ liable for PAYE liabilities, alongside the umbrella company that engages the worker.
This approach presents regular users of agency workers with an obvious problem: as they do not usually determine the structures through which employment agencies provide them with workers, they often remain unaware of the hiring arrangements. As such, users may not even know whether the so-called ‘labour supply chain’ includes an umbrella company in the first place.
Worse still, while the new legislation appears to make any employment agencies that are involved in supply the party that is primarily liable, that won’t be the case where such an agency is ‘connected’ to the umbrella company (a legal test around ownership) or based overseas. In that case, it is the user of labour (the ‘end user’) who is at risk. What’s more, the definition of an ‘umbrella company’ is a broad one – and as such, it could cover any intermediary in the labour supply chain (including Employers of Record).
What can you do to protect yourself against tax liability?
In the absence of any protections such as thresholds to determine when liability applies, and without any ‘reasonable steps’ or ‘best endeavours’ defences to fall back on, HMRC has recommended that parties should conduct their own due diligence on umbrella arrangements.
Some additional steps you can take to safeguard your business include:
- Performing risk assessments and verifying your umbrella suppliers’ legal compliance, including their membership of appropriate trade bodies.
- Ensuring you understand the complete labour supply chain back to the worker(s) concerned, making sure you know which legal entity provides the worker, and keeping these factors under review.
- Checking whether the real hourly cost of labour supply makes sense.
- Ensuring your terms with labour suppliers are sophisticated, offer protections, and provide for audits of, and rights of access to, pay records.
- Reviewing, and keeping records of, sample payslips and Real Time Information.
- Taking great care when working with umbrella companies that are offshore or incentivise you to use their services.
- Checking HMRC’s list of named tax avoidance schemes, and sharing information on tax avoidance schemes with your workers.
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Please be advised that this is an update which we think may be of general interest to our wider client base. The insights are not intended to be exhaustive or targeted at specific sectors as such, and whilst we naturally take every care in putting our articles together, they should not be considered a substitute for obtaining proper legal advice on key issues which your business may face.