Purported umbrellas – what they are and why you should care

This is a guest blog by REC business partner, Markel Tax.

The Umbrella legislation took effect on 6 April 2026 and with it comes a great deal of change in how companies engage temporary resource. The joint and several liability (JSL) legislation should be a key consideration for agencies, as they may face PAYE liabilities even when there has been no wrongdoing on the agencies part.

The main issue created by the legislation is agencies and end clients could suddenly find themselves on the hook for PAYE liabilities just because a non-compliant umbrella sits in the supply chain, even if they have done everything right. This undoubtedly has been well discussed, though one area of the legislation – Section 61Z1 – could affect clients of umbrellas in unexpected ways.

What is a purported umbrella?

The legislation defines an umbrella company as an entity in the supply chain which employs the worker, carries on the business of supplying labour and where the worker does not have a material interest in the umbrella. The legislation does not define a “purported umbrella”, but it does give us Cases where the legislation will bite.

Section 61Z1 of the legislation (Chapter 11 ITEPA 2003) covers the area of ‘purported umbrella companies’, meaning instances where the supply chain is not the usual ‘employee –​> umbrella –> agency –> client’ route.

The risk from Section 61Z1 is that this catches circumstances where “it is reasonable to suppose that” the purported umbrella has employed the individuals it supplies, but in reality the individuals are being paid gross.

Section 61Z1 intends to tackle instances where the umbrella company has provided fraudulent or misleading information confirming that the individuals it engages are employed (and therefore subject to PAYE deductions). In this case, using the wording from the legislation itself, it is “reasonable” for the client “to suppose” that the individuals are employed and therefore the purported umbrella provisions would apply. If you are the agency in the chain between the non-compliant umbrella and an end client, unfortunately you would be the party jointly and severally liable for PAYE even where the umbrella provided fraudulent information.

What does “reasonable to suppose” mean?

As there is a level of subjective interpretation in relation to the “reasonable to suppose” aspect, it may be possible for HMRC to use the legislation in instances where there has been no wrongdoing on the umbrella’s part. This is possibly the most unnerving part of the legislation, as it is unclear at this point how this could be used until we see cases go to Tribunal.

Some umbrella businesses operate models where self-employed individuals and limited company contractors are utilised in a legitimate manner. As these individuals are not subject to PAYE, if you engage with umbrellas who operate these types of models, it is absolutely imperative that the end client is clear on how those individuals are engaged so that there is no room for speculation as to whether PAYE should be, or is being, deducted.

Exposure to agencies

More worryingly for agencies, subsection (2) of 61Z1 catches more straightforward supply chains, which agencies may currently view as low risk:

Limited company contractor –> Agency –​> Client

In this scenario, if it is reasonable for the client or the agency to suppose that the individual’s income is subject to income tax deductions by the limited company, then the purported umbrella legislation would apply (the limited company being the purported umbrella) and the agency would be jointly and severally liable for PAYE underpayments. Of course, if the client has complied with their obligations with the IR35 legislation and provided an SDS confirming the status of the engagement this lowers the risk, however if the individual provides evidence (fraudulently or not) of PAYE being deducted or if the agency to limited company contract confirms the individual will be paid subject to PAYE deductions, this scenario could be risky for agencies.

What about s44 (the agency legislation)?

In scenarios where self-employed individuals are engaged by umbrella companies:

Self-employed individual/limited company contractor –> Umbrella –​​​​​​​> Agency –​​​​​​​> Client

The agency in this chain needs to be aware of risks both in relation to S44 (agency legislation) and purported umbrella legislation as the party closest to the client (though the umbrella legislation will take precedence over S44).

There could be several pieces of legislation at play depending on how the umbrella company engages the individuals it supplies. You will still need to consider your position in relation to your usual suspects such as IR35, CIS and S44. As an agency, you must consider the umbrella legislation and how it could affect your operations post 6 April 2026.

What should recruiters do now…

Compliance with the umbrella legislation must start with cooperation and parties’ proactive engagement and understanding of their own obligations. The client must be aware if an umbrella company is being engaged, and even more so, if the umbrella company is engaging self-employed people. A good starting point for agencies wanting to stay compliant is reviewing the supply chain and the contracts between the parties. As mentioned above, it is crucial that contracts do not contradict what is happening in practice, and that contracts are not inadvertently bringing the supply chain within Chapter 11 provisions.

Agencies will need to:

• Ensure that any umbrellas engaged are compliant
• Review which umbrellas in the supply chain engage self-employed individuals (and/or PSCs)
• Ensure contracts are reflective of the working practices
• Confirm with clients their understanding of how workers are being engaged
• Review contracts to make sure they are not inadvertently implying PAYE is being deducted where self-employed individuals are being supplied

If you are unsure about any aspect of Chapter 11 ITEPA 2003, or any other areas mentioned above, it is important you seek professional advice and guidance regarding compliance, as an enquiry could well result in liabilities and penalties. Agencies are likely to be the most exposed party; HMRC themselves confirmed in a webinar that in instances of umbrella PAYE non-compliance they would pursue the agency in the first place. If you would like any more information or would like to speak to one of our experts feel free to contact me or one of our team at contractorsolutions@markel.com

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