New umbrella company rules will impose extra tax risks on users of agency workers

The government is planning to implement new rules to tackle tax avoidance by umbrella companies. This is part of an ongoing trend of legislating to move tax liabilities up the labour supply chain and provide alternative routes for recovery of unpaid tax (like the previous changes to IR35 for the public and private sector). 

Draft legislation was published in July 2025 and the new rules are expected to apply from April 2026.

Key points

Where an “umbrella company” is used to supply staff to a client business (the “end client”), the new rules will shift the risk of unpaid payroll taxes from the umbrella company to the entity that contracts with the umbrella company – which might be a recruitment agency or the end client itself, depending on how the arrangements are structured.  

This will be of particular concern to businesses when engaging the services of recruitment agencies to supply them with temporary staff who are employed directly by that agency (and not by another entity in the supply chain). In these circumstances, the agency would be an “umbrella company” for the purposes of the new rules. The end client will be jointly and severally liable (together with the agency) for PAYE tax and NICs relating to staff supplied by the agency to the end client – meaning that HMRC could pursue the end client, instead of the agency, for any unpaid tax liabilities.

The end client could also be exposed to tax liabilities in certain other circumstances, eg where the agency between the client and umbrella company is offshore, where the umbrella company and the agency are connected or where specific anti-avoidance measures concerning “purported umbrella companies” apply.

Therefore, it’ll be really important for end clients to have robust due diligence processes in place in their labour supply chains to understand how workers are being supplied to them and the potential tax risks – in particular, whether tax liabilities can be passed up the chain to the end client, either contractually or as a consequence of the new legislation.

This tax legislation is separate from measures in the Employment Rights Bill, which seeks to regulate umbrella companies by including them in the legal definition of an “employment business”. Those changes are expected to take effect in 2027 and consultation on the necessary regulations is expected later this year. However, there’s a concern that the tax and employment law regimes may not be very well joined up, meaning that some workers could be “umbrella workers” for the purposes of employment legislation, but not tax legislation (or vice versa). 

How will the new measures work?

Where an umbrella company is used in the supply of a worker to an end client, the “relevant party”, ie the entity that contracts with the umbrella company (which may be an agency or the end client, as explained further below) will be jointly and severally liable with the umbrella company for PAYE on payments to the worker. 

This means that if the umbrella company fails to account properly for any payroll taxes in relation to the supply of a particular worker, HMRC can pursue the ”relevant party” for the unpaid taxes. It puts the onus on the agency or end client to ensure that PAYE is operated correctly when engaging workers through umbrella companies.

Joint and several liability applies even where the agency or end client (as applicable) has undertaken all reasonable tax compliance checks, or where the umbrella company has misled the end client/agency (eg paid workers off-payroll when it said that it would pay them through PAYE). 

What is an “umbrella company”?

An umbrella company is defined as a third person who:

• carries on a business of supplying labour
• isn’t a personal service company (ie the worker doesn’t have a material interest in it)
• receives consideration for the services of its employees under or in consequence of a contract between either (i) the end client and the umbrella company or (ii) the end client and an agency

This wide definition is likely to catch not only those companies that describe or market themselves as ‘umbrella companies’, but also:

• employment agencies or intermediaries who directly employ the workers that they supply to end clients
• employers of record and professional employer organisations
• some organisations who supply employed staff to clients on a secondment or loan basis

Who is the “relevant party”?

Where the end client does not contract directly with the umbrella company for the provision of the worker’s services, the “relevant party” will usually be the agency that contracts with the client (ie the “top agency” in the chain, if there are multiple agencies).

However, the client will be a “relevant party” if:

• the client contracts directly with the umbrella company; or
• the “top agency” is:
  • not UK-resident; or
  • connected with the umbrella company (as defined in the relevant tax legislation

Anti-avoidance – “purported umbrella companies”

The new rules also include specific anti-avoidance provisions that catch arrangements involving “purported umbrella companies”. Broadly, these provisions come into play when it’s reasonable to assume that one or more parties in the contractual chain believed the “purported umbrella company” employed the worker or was treating payments as earnings, when in fact it did not. In these circumstances, the worker will be deemed an employee of the purported umbrella company for tax purposes, and the end client or agency (as applicable) will be jointly and severally liable for any unpaid payroll taxes.  

Commentary on the draft legislation suggests that these anti-avoidance provisions are designed to catch mini umbrella companies and fraudulent arrangements, to close compliance loopholes.  

Conclusion

End clients and suppliers of agency workers will need to factor in these additional tax risks when assessing the mix of directly engaged and agency workers which best suits their organisation.

Organisations will be aware that, as well is its measures on umbrella companies mentioned earlier, the Employment Rights Bill also contains complex provisions which will significantly enhance the employment rights of agency workers. These measures are likely to come into effect in 2027.