UK government publishes draft legislation to tackle non-compliance in the umbrella company market

Why should I read this?

In line with the UK government’s announcement at Autumn Budget 2024, draft legislation has now been published, for inclusion in Finance Bill 2025-26, to make end clients or agencies liable to Pay As You Earn (PAYE) / National Insurance Contributions (NIC) where a non-compliant umbrella company is used in a labour supply chain.

If enacted, the legislation will come into effect on 6 April 2026.

The term “umbrella company” here refers to a third party employment intermediary that is used to employ workers on behalf of employment businesses (commonly referred to as agencies) and/or end clients in certain labour supply chains.

Under the draft legislation, both the umbrella company and the “relevant party” are jointly and severally liable for the PAYE / NIC arising from the umbrella company’s employment of the worker. The “relevant party” will be either:

• the end client, if the end client directly contracts with the umbrella company or an entity which is connected with the umbrella company; or
• the agency with which the end client contracts

The draft legislation deals specifically with supply chains where end clients and/or agencies are not based in the UK. Essentially:

• if the end client is based in the UK and its agency counterparty is not, liability for PAYE / NIC is shifted to the end client; and
• where neither the end client nor their agency counterparty are based in the UK, liability for PAYE / NIC is shifted to the closest party in the contractual chain to the end client which is based in the UK (if any)

The draft legislation also contains provisions to counter avoidance of these measures through artificial structures, using the concept of “purported umbrella companies”.

What should I do?

Before the legislation comes into force in April 2026, end clients (and agencies) should:

• diligence their labour supply chains to identify the involvement of any umbrella companies; and
• review the standing of any such umbrella companies. This should include considering the reputability and reliability of the umbrella companies and identifying whether they are members of, or accredited by, leading industry bodies

Following this diligence process, a full assessment as to the impact of the new regime can be undertaken.

In particular, those parties which will become jointly and severally liable for PAYE / NIC under the new regime will need to consider how that risk is managed. Key questions / points of action include the following:

• if the umbrella company is expected to continue to account for PAYE / NIC, what additional safeguards will be sufficient to ensure that happens? End clients and agencies may wish to augment their review and audit practices and build these into their contractual arrangements
• template contracts should be reviewed to ensure the end client or agency has the maximum protection available. (However, in some circumstances a contract is of limited use – with this in mind, the financial covenant of the umbrella company and the potential reputational risk for the end client or agency should also be considered.)
• Would it be preferrable to move the worker onto their own payroll to ensure PAYE / NIC compliance (which would likely create additional employment law risks, noting the Employment Rights Bill includes ‘day one’ unfair dismissal rights for employees)?
• Given the wider changes to the contingent labour supply chain under the Employment Rights Bill reforms (including a suite of rights for zero/low hours workers, including agency workers, and a commitment to moving to a ‘single status’ of worker with statutory protections), should the new legislation prompt a holistic review of engagement models?

What else do I need to know about the new legislation?

Since the private sector off-payroll reforms (known as IR35) in April 2021, umbrella companies have been used as a way of ‘de-risking’ labour supply chains.

Faced with potential PAYE / NIC obligations and liabilities under IR35, end clients (and agencies) have increasingly insisted on workers ceasing their personal service company engagement model, requiring them instead to become direct employees of umbrella companies when delivering their services. As the employer entity, the umbrella company took on all of the PAYE / NIC obligations and liabilities resulting from the employment of the worker, with the end clients (and agencies) comfortable that they would have no such obligations and liabilities.

HMRC have long been concerned that too many umbrella companies are used to facilitate non-compliance, including tax avoidance and tax fraud, with such practices resulting in losses of tax revenue. While many umbrella companies and their clients were fully compliant, questionable practices by disreputable agencies led to PAYE / NIC not being accounted for workers not being paid their entitlements, and the compliant wider labour supply chain being undermined. The significant changes proposed by the new draft legislation are intended to deal with these risks.

The impact of this new regime will be widely felt and will mean that the inclusion of umbrella companies within contractual chains will no longer act as a shield to potential PAYE / NIC liabilities for many end clients and agencies. This will further increase the importance of a full understanding (and diligence) of the contractual chains underpinning the supply of labour.

Further reading

• Preparing UK employers for workplace changes
• The UK Employment Rights Bill: day-one rights, including unfair dismissal and SSP
• The UK Employment Rights Bill: zero hours and low hours contract provisions

For more information on the new legislation

To discuss the new legislation and how it may affect your business, please do not hesitate to contact any of the Eversheds Sutherland contacts listed below.