Umbrella company legislative change – a new era of joint and several liability

As part of Legislation Day (L-Day), the government published its anticipated draft legislation in response to tackling non-compliance in the umbrella company market. The new legislation will result in a fundamental shift in the risk dynamic within labour supply chains. This follows a trend of government using legislation in recent times to move obligations up the labour supply chain, including to end clients (i.e. the ultimate users of the worker’s services).

Under the proposed legislation, where an umbrella company is engaged in the supply of a worker, a new concept of joint and several liability will be imposed on the umbrella company and other “relevant parties”. The “relevant party” will typically be the employment agency who contracts with the end client, or the end client itself if there is no employment agency in the supply chain. Per HMRC’s policy paper, HMRC will pursue the relevant party in the first instance for the settlement of any income tax, National Insurance Contributions (“NICs”) and Apprenticeship Levy (“AL”) debt in the event of any non-compliance with the Pay As You Earn (“PAYE”) regulations.

These legislative provisions will have effect in relation to payments made to umbrella company workers on or after 6 April 2026. The new risk profile for employment agencies/end clients will enhance the need for elevated governance of the labour supply chain. This article explains the key background to the legislative change, the implications for parties within the labour supply chain and how we expect the market to evolve.  

Background – what is an umbrella company and how did we get here? 

An umbrella company is an intermediary which is utilised within a labour supply chain to employ and pay temporary workers who are supplied to end client users of their services. Umbrella companies are contracted via a recruitment business/agency in the majority of cases, but sometimes directly with the end client. An umbrella company holds legal responsibility for administering employment rights, as well as responsibility for correctly accounting for PAYE income tax, NICs and AL (“PAYE Liabilities”) to HMRC in line with the PAYE regulations. 

The use of umbrella companies increased considerably following the reform of the off-payroll (“IR35”) rules in the private sector from 2021. Many end clients transitioned to engaging individuals via umbrella companies as an alternative resourcing option, enabling those clients to fall outside of the scope of the IR35 rules (as the individuals are employed by the umbrella company), whilst facilitating continued temporary labour resourcing.  

In October 2024, HMRC published a policy paper Tackling non-compliance in the umbrella company market and estimated that 700,000 workers were engaged by umbrella companies in 2022/23. Whilst the Policy Paper suggests that the majority of workers were engaged by compliant businesses, HMRC estimated over a third of the workers were engaged by non-compliant umbrella companies, at an annual tax cost of at least £500 million to the Exchequer. The announcement signalled the intention to impose new legislation from April 2026 to change who has responsibility to account for and make payment of PAYE liabilities where an umbrella company is used in a labour supply chain. 

The draft legislation confirms information shared by HMRC in recent stakeholder meetings that the initial announcement was slightly misleading, in that the umbrella will now remain the PAYE employer under the new rules, alongside the introduction of the joint and several liability relating to PAYE non-compliance.

This change will precede the wider and distinct regulation of umbrella companies from 6 April 2027 as part of the Employment Rights Bill, which is expected to fall into the remit of the Fair Work Agency, once established, to enhance worker protections. 

Draft legislation – what is in the detail? 

The legislation will be introduced in Finance Bill 2025-26 to amend Part 2 of Income Tax (Earnings and Pensions) Act (ITEPA) 2003. The legislation will introduce a new Chapter 11 into Part 2. 

Umbrella company definition 

An umbrella company is defined within section 61Y ITEPA 2003 of the draft legislation: “the worker is employed by a third person (“the umbrella company”) who carries on a business (whether or not with a view to profit and whether or not in conjunction with any other business) of supplying labour”. This definition is reasonably broad and is intended to cover traditional umbrella companies, professional employment organisations (an alternative model of pay delivery used by many umbrella companies) and employers of record.

However, the definition casts a wider net and is also capable of capturing other non-umbrella company arrangements pertaining to the provision of labour, for example organisations who may supply employed staff to clients on a secondment or loan basis. 

Joint and several liability

In terms of the liability itself, it extends to any amount payable in accordance with the PAYE Regulations,  but is limited to payments made relating to the worker’s employment, with reference to work for the particular end client.  Whilst the draft legislation does not explicitly cover how joint and several liability will work in practice, the policy paper states HMRC will pursue any tax debt via the relevant party in priority (i.e. the agency in a typical supply chain) through the issuing of a Regulation 80 determination (under the PAYE Regulations). 

Under the proposed legislation, this liability is absolute, and a relevant party cannot discharge the liability through a reasonable excuse or care taken in prevention.  This can be contrasted with equivalent charging provisions, such as Chapter 10 (i.e. IR35), which allow liabilities to move through the supply chain based on reasonable care being taken, and with protections in the event decisions have been made based on the provision of fraudulent documentation by a third party. 

Anti-avoidance provisions 

There are various aspects in the draft legislation which prevent potential ‘tax avoidance planning’ to escape the legislative provision within Chapter 11, for example through use of offshore vehicles and purport employers (e.g. mini umbrellas and fraudulent arrangements). This will help enforce the new legislative change in scenarios whereby participants in the supply chain have reasonably assumed that the purported umbrella company has employed the worker but in fact has not done so, and instead engaged through a different mechanism, for example as a self-employed individual or scenarios where a worker has a material interest in the employing entity (i.e. a Personal Service Company).  

Deloitte’s view – who is impacted and how will the industry respond? 

Managed Service Providers (“MSPs”) and recruitment agencies are most impacted from the announcement, due their placement below an end client in the supply chain. MSPs also have a more extensive challenge due to their downward contracting with extensive second-tier agency supply chains (making visibility and control over those supply chains, and the umbrella companies within, challenging). Understanding and maintaining control over those supply chains will be critical in minimising risk for MSPs. 

‘In-sourcing payroll’ versus ‘the umbrella company model’

Whilst there is an option for recruitment agencies to operate an agency worker in-source payroll and be fully in control of their own risk (with PAYE operated by the agency as required by s.44 ITEPA 2003), our initial market sensing suggests that this is unlikely to become the predominant option. This is because of the potential negative competitive impact. The commercial imperative for an agency is to retain talent, for which many workers are familiar with umbrella companies and have a preference to manage their work for multiple end clients through a preferred umbrella company. As a consequence, we expect most MSPs/recruitment agencies to do more in order to mitigate risk, rather than to in-source payroll activity. This will inevitably lead to a re-focus on their preferred umbrella company supplier lists (“PSLs”) to ensure that they are only working with the most reputable umbrella companies in the market.

The response to in-source payroll may be more viable for end clients with more bargaining power to dictate engagement models with their talent. This of course will come with an increased administrative burden, but may be a more tenable option in order to attain control over their own PAYE risk and reduce marked up costs through the umbrella margin.  To do so, we may see those with greatest scale seeking to form their own new employing entities to ringfence temporary worker populations, with appropriate and well governed outsourcing arrangements being put in place to manage tax and legal compliance requirements. 

Consolidation of the umbrella company market

We therefore expect larger PSLs to reduce in order to manage the increased PAYE risk and resource demands of ensuring due diligence procedures are sufficiently robust.  A choice will need to be made on how far to accommodate worker preferences towards umbrella companies which sit outside of PSLs, and what an exceptions basis for risk accepting that practice should look like. 

In the past, MSPs have often relied on unregulated third-party accreditation to manage compliance in their supply chains. HMRC have recognised the efforts that those accreditations have made to increase standards, but are also clear that they have not prevented non-compliance. 

Accordingly, we can foresee consolidation in the umbrella company market, with those umbrella companies able to evidence high levels of compliance, with stringent processes and controls able to differentiate themselves from their competitors and secure a greater proportion of the market. The more established and reputable umbrella companies have been able to talk knowledgeably about the changes since the Autumn Budget, preparing in a flexible way to allow a pivot depending on the content of the draft law. We expect to see those umbrella companies offer to support their clients with a range of steps to support compliance. 

Conversely, we positively anticipate that bad actors in the industry (for example, those deliberately committing fraud, offering unrealistically high take-home pay) and/or those who are unable to adequately demonstrate a transparent and compliant offering to the market, will have greater difficulty in retaining their agency and end client customers. 

What will greater risk mitigation steps look like for MSPs, agencies and end clients?     

Primarily, we expect this risk mitigation to take the form of enhanced due diligence throughout the supply chain. Third-party accreditations will no doubt continue to play a role, but going forward, such memberships are unlikely to be sufficient in isolation to appropriately mitigate risk. 

As such, existing accreditations will need to be supplemented by umbrella companies having robust controls in place to evidence the correct and timely remittance of income tax, NICs and AL to HMRC. Such controls will need to extend beyond periodic light touch sampling of payslips and should look at wider operational payroll processes, the extent of transparency with workers, an ongoing validation of payslips and filings in real time, and referencing with remittances to HMRC. The extent of the response to the legislative change will of course need to be proportionate to the scale and volume of workers received by the agency/end client.

For many, this ongoing diligence is likely to diverge from the existing review infrastructure in place through industry bodies/accreditations, which typically perform a higher-level evaluation of compliance on an infrequent basis, into more tailored programmes of diligence tailored to their organisational needs and capable of going into greater levels of detail on a continuous basis.  

Processes will also be required to demonstrate that reasonable prevention procedures are in place to address potential liabilities under the corporate offences for Failure to Prevent Fraud (“FTP”) and Failure to Prevent the Facilitation of Tax Evasion (“CCO”).  Further, agencies and end clients within the Senior Accounting Officer (“SAO”) regime will need to update their documented processes and controls to ensure that these are sufficient as part of their annual self-certification.

In addition to this, agencies and end clients may wish to review contractual terms with their umbrella companies to ensure they remain appropriate with relevant indemnities, service level agreements, terms covering the provision of data sources to validate compliance, use of insurance protections, etc. 

Particular considerations for end clients

End clients without typical direct engagements with umbrella companies may at first glance appear reasonably unaffected by the pending legislative change.  However, caution should be exercised in this view.  End clients would be wise to assess their supply chains to validate that PAYE Liabilities for non-compliance cannot be passed up the chain, whether contractually or as a consequence of Chapter 11. For example, end clients will want assurance that the agencies they contract with are UK resident, and are not using any umbrella companies connected with the agency, since both scenarios could lead to a joint liability for any PAYE liabilities for the end client. Similarly, if any of the workers are employees of the agency, this could also create a joint and several liability for the end client. End clients should therefore look to connect with their agencies and MSPs to understand their response to the legislation with a view of de-risking through robust diligence processes and where appropriate, setting parameters for their resourcing partners to operate within (particularly with a view of safeguarding that engagement models are not being utilised in the supply chain resulting in PAYE liabilities potentially being transferred further up the chain). It may be an option for end clients who do bear risk to consider alternate forms of engagement, e.g. direct fixed term contract models, which would have the benefit of reducing intermediary margins whilst accepting a greater administrative responsibility. The optimum response is likely to differ depending on each client’s existing setup, the scale of the workforce operating through umbrella company models and the complexity of the supply chain.

There is also of course the pre-existing reputational risk for end clients who are unintentionally caught within a non-compliant arrangement which will now be heightened. Ultimately, the extent of stress testing, due diligence and validation will invariably need to go beyond current industry practices and align with the principles set within existing HMRC guidance, which has been in place for a number of years and will surely become more prescriptive as we draw closer to 6 April 2026.