Umbrella companies – draft UK legislation introduces joint and several liability for PAYE to tackle non-compliance

Introduction

Following the publication of a consultation on proposals for tackling non-compliance in the umbrella company market at Autumn Budget 2024 (and the subsequent publication of the government’s response to that consultation on 4 March 2025), the government published draft umbrella company legislation on 21 July 2025 (alongside a policy paper and explanatory notes). The legislation is intended to take effect from 6 April 2026.

 

Background

The draft legislation should be understood in the context of the government’s stated policy objective of tackling non-compliance in the umbrella company market and in so doing closing the tax gap, preventing individual workers being confronted with large unexpected employment tax liabilities and enforcement action from HMRC and eliminating distortion in labour market competition.

The draft umbrella company legislation can be seen as a component part of the prevailing trend of HMRC ‘outsourcing’ compliance assurance and enforcement in the context of labour supply chains to business (which was foreshadowed by the off-payroll working regime changes) with such policy being informed by a ‘gatekeeping’ concept whereby the parties to labour supply chains which ultimately control access to those chains (i.e. the recruitment agencies and end-client) are incentivised to exclude ‘bad actors’ by placing them under a responsibility and obligation to de facto ensure PAYE compliance in the labour supply chains in which they participate.

 

Key aspects of the draft umbrella company legislation

Broadly, the legislation will be engaged where an individual provides their personal service to an end-client but is employed by a third person who carries on a business of supplying labour (and in which the individual does not hold a ‘material interest’) (such third party being for this purpose the ‘umbrella company’) and certain conditions are satisfied. The conditions generally require a contract between the umbrella company and the end-client or for there to be a series of contracts under or in consequence of which the services in question are provided or payment is provided for the services.

The key aspect of the design of the draft legislation is that where it is engaged it renders ‘relevant parties’ jointly and severally liable for any PAYE income tax liabilities arising in respect of the arrangements along with the employing umbrella company. The ‘relevant parties’ for these purposes will be the agency with the contractual relationship with the end-client (in circumstances where the umbrella company does not contract directly with the end-client) or the end-client (in circumstances where the umbrella company contracts directly with the umbrella company or the agency closest to the end-client is connected with the umbrella company or is non-UK resident).

This particular feature of the legislation distinguishes it from other tax legislation which can apply in the context of labour supply chains which respectively create a statutory fiction of deemed employment (for example, the agency and off-payroll working legislation) or permit the transfer of the tax debt to other persons (for example, the managed service company legislation).

Notwithstanding the joint and several liability basis, it is clear that HMRC’s intention is for the legislation to enable it to pursue the agency or end-client in the first instance for any tax liability with there being no indication that HMRC will only do so where recovery against the umbrella company is not otherwise achievable as is the case in other contexts.

Ultimately, it is expected that the adoption of the joint and several liability mechanism should achieve the broader policy objective of assuring compliance throughout labour supply chains (and the winnowing out of non-compliant businesses) as agencies and end-clients will only continue to use umbrella companies in labour supply chains where they are comfortable such umbrella companies will comply with their PAYE obligations in respect of employees (and if this state of affairs comes to pass the government will indeed view the legislation as being successful). This will likely result in ever greater reliance on membership and accreditation bodies for identifying compliant umbrella companies as part of the assurance and diligence protocols for businesses (and indeed we understand that some such accreditation bodies intend to address the issue of whether or not an agency is connected with an umbrella company for the purpose of imposing joint and several liability on end-clients).

Another key aspect of the draft legislation is the provisions relating to ‘purported umbrella companies’, which broadly will result in joint and several liability even in the absence of the individual being employed by the what would otherwise be the umbrella company where it is reasonable to suppose that another participant in the labour supply chain would assume the individual was employed by the umbrella company. Joint and several liability will also be imposed in respect of a ‘purported umbrella company’ even where a material interest is held by the individual in certain circumstances.

In the absence of a statutory defence or rebuttable statutory presumption in the draft legislation applying where an end-client has appropriate and risk-calibrated labour supply chain assurance procedures which it has applied to the arrangements, the ‘purported umbrella company’ provisions introduce considerable uncertainty as to the application of the legislation (and arguably expands its scope). Guidance on the intended application of these provisions in practice will therefore be eagerly awaited from HMRC.

 

Practical implications

The prevailing trend of effectively rendering the ‘gatekeepers’ of labour supply chains liable for driving compliance through the chain (of which the draft umbrella company legislation represents the latest development) requires businesses to think strategically about their labour provision and recruitment.

The imposition of joint and several liability pursuant to the umbrella company legislation (and the direct and active role in supply chain compliance that it necessitates from businesses) means that the robustness of internal labour supply chain assurance and due diligence protocols is paramount for mitigating compliance risk.

In advance of the April 2026 commencement, businesses should consider taking the following steps to mitigate risks in respect of the umbrella company legislation:

• training and upskilling tax and HR employees (and other key decision makers on labour supply matters) to understand the application of the umbrella company legislation and the impact on their business;
• undertaking strategic reviews of labour supply chains and resource pools;
• auditing, upgrading and stress testing existing labour supply chain assurance and due diligence protocols; and
• reviewing contractual provisions governing labour supply chain arrangements including adequacy of contractual protection, extent and scope of information request and assistance provisions and consideration of the covenant strength of contractual counterparties.

Should you wish to discuss how your business can better prepare for the implementation of the umbrella company legislation, please contact David Smith or Andrew Carr.