Recent developments will see Umbrella Companies coming within the same compliance regime as agencies under the Employment Rights Bill, and a shift in PAYE and NIC obligations for umbrella company workers as of April 2026.
Recruitment businesses will have very little time to get to grips with the changes, now is the time to understand what’s coming and to prepare accordingly.
The REC will provide members with clear, practical information on the latest policy changes and announcements as more details emerge.
We are keen to hear your views on how you will respond to the umbrella company announcements to inform how we best support you. Contact campaigns@rec.uk.com to discuss.
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There is an increasing emphasis on the need to carry out due diligence
The changes to PAYE obligations will mean that the agency that supplies an agency worker to the end client will be legally responsible for operating PAYE on the worker’s pay and will be liable for any shortfall, whether they operated their payroll themselves or used the umbrella company to run payroll for them by April 2026.
Umbrella Companies will fall within the legal definition of an Employment Business. This will mean that umbrella companies will bear some of the burden of ensuring that they are acting compliantly, however this doesn’t negate the need for recruitment businesses engaging with Umbrella Companies to conduct due diligence on Umbrella Companies they use.
Recruitment businesses should be cautious when exploring alternatives umbrella companies. We strongly advise against entering into risky arrangements such as the joint employment model, which is likely to create compliance risks under the Conduct Regulations and is incompatible with the REC Audit Criteria. We explore the risks and opportunities available to recruitment businesses as a result of the announcements.
An Umbrella Company is a business entity that has a contract with an agency for the supply of workers it employs to the agency’s clients. The Umbrella Company employs the workers supplied to the clients under contracts of employment and is responsible for their employment rights, payroll and for ensuring that the correct tax and National Insurance Contributions are paid on their earnings.
This arrangement means that agencies do not currently bear the responsibility of employing the workers they supply to clients, this is particularly helpful to agencies that, for example, do not have the capacity to process payroll for agency workers.
In a typical Umbrella Company arrangement, the end-user client contracts a recruitment agency to supply temporary workers. The recruitment agency, in turn, enters into a commercial agreement with an Umbrella Company, which formally employs the worker.
The worker then signs an employment contract with the Umbrella Company but carries out assignments for the agency's end-user client. The end-user client pays the agency, which then pays the Umbrella Company. The Umbrella Company handles payroll, deducts taxes and National Insurance, and pays the worker. In this arrangement the Umbrella Company acts as an intermediary regardless of how the arrangement is labelled.
Some unethical variations, like Mini Umbrella Companies (MUCs), exploit tax loopholes by engaging workers through small, short-lived companies to avoid full tax obligations and to exploit tax reliefs available to small companies. These companies shut before they grow large enough to no longer be entitled to the tax relief before setting up new companies, never informing the workers that they supply that there has been a change in the legal identity of their employer.
Working with Umbrella Companies can expose organisations to several legal risks. Under the Criminal Finances Act 2017, businesses may be held criminally liable if they fail to prevent the facilitation of UK tax evasion (Section 45) or overseas tax evasion that is also a criminal offence under local law (Section 46).
Additionally, the Economic Crime and Corporate Transparency Act 2023 introduces liability for large organisations that fail to prevent fraud committed by associated persons.
Companies involved with non-compliant Umbrella Companies may also face debarment or exclusion from public sector contracts under the Procurement Act 2023, particularly if tax evasion or fraudulent activity is linked to their supply chain.
This section of our Umbrella Company hub brings together resources that will assist you when engaging with umbrella companies.
In June, HMRC held a meeting with a number of stakeholders to provide an update on the proposed legislative changes due in force in April 2023 regarding PAYE liability for employment businesses when working with umbrella companies. Following the Tackling non-compliance in the umbrella company market consultation, HMRC had previously planned to go ahead to implement Option 3 of the proposals to tackle loss of tax income resulting from non-compliant activities by umbrella companies. This would have made the agency the employer for PAYE purposes, responsible for accounting for PAYE payments for their temporary workers/contractors (or a client where there is no agency in the supply chain). In the June meeting, HMRC confirmed that (subject to ministerial sign off) they will instead bring forward legislation that will allow the umbrella company to continue to be the employer for tax purposes, but that will hold both the agency and the umbrella company jointly and severally liable for any underpayment of tax. The agency will be first in the firing line.
On the 8th of April 2025, HMRC published new guidance on best practice for Umbrella Companies in the temporary labour market. The guidance:
The outcome of the Umbrella Company consultation was published. The amendments announced the government’s plan to legislate to define Umbrella Companies, allowing for their regulation and to bring them within the scope of the Employment Agencies Act 1973, meaning that they will be subject to regulation by the Employment Agencies Standard Inspectorate (EAS), which is due to become part of the ‘Fair Work Agency’.
Under this new Act, the exclusion regime has been extended to cover not only prime contractors but also entities within their supply chain. This means that if a non-compliant Umbrella Company is found to be in the supply chain of a recruitment business, the contracting authority may be required to exclude the recruitment business from the procurement process entirely.
HMRC published a tool aimed at providing guidance on carrying out compliance checks on companies within an agency’s labour supply chain, including intermediaries such as Umbrella Companies and personal service companies.
04 December 2024: Ducas Ltd Interim Freezing Order
The High Court issued an interim freezing order against Ducas Ltd, preventing the business from removing assets from the UK. HMRC took these steps due to alleged fraud relating to non-payment of employer national insurance contributions. Members can find further information on what action should be taken in response to that here.
30 October 2024: Autumn Budget 2024
In the 2024 Autumn Budget, it was announced that from April 2026 recruitment businesses will be made responsible for ensuring that Pay as You Earn (PAYE) tax is correctly applied to payments made to workers they supplying to clients via Umbrella Companies.
18 April 2024: Government plans for new statutory due diligence regime for employment businesses that use Umbrella Companies
The government provided an update that they are “…minded to” introduce a statutory due diligence regime for businesses that use Umbrella Companies and will continue to engage with the recruitment industry and other key stakeholders on the details of this.
30 November 2023: HMRC Guidance on ‘Responsibilities for employment businesses working with Umbrella Companies’
HMRC published guidance on how to protect your employment business, and the workers you supply, from non-compliant businesses in your supply chain.
06 June 2023 Consultation: Tackling non-compliance in the Umbrella Company market
The consultation was published in response to the Call for Evidence that closed on 22 February 2022. The consultation was seeking views from stakeholders on proposals to regulate umbrella companies, as well as views on options to tackle tax non-compliance in the Umbrella Company market.
30 November 2021: Call for Evidence: Umbrella Company market
The government’s call for evidence invited views from stakeholders on the role that Umbrella Companies play in the labour market, and how they interact with the tax and employment rights systems. It sets out concerns raised to tackle non-compliance and improve protection for workers.
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