Rogue umbrella companies have become a major headache for HMRC in recent years. Many of the tax cases currently going through the courts relate to avoidance schemes by these businesses, which act as employment and payroll service providers in the temporary labour market. Unscrupulous players not only negatively impact workers and drain the economy, but undercut compliant firms, which find themselves disadvantaged for doing the right thing.

Now HMRC is fighting back, with draft legislation due to take effect on 6 April 2026. It will make employment agencies jointly and severally liable for pay as you earn (PAYE) and Class 1 National Insurance (NIC) on payments made to workers engaged by umbrella companies. Where there is no agency, this responsibility will fall to the end client business.

This means that where umbrella companies fail to fulfil their PAYE obligations, other parties in the labour supply chain will be equally liable for the tax.

What is the definition of an umbrella company?

The proposed legislation, which was published in July 2025 and was subject to consultation until 15 September, includes a widely drafted definition of an umbrella company based on two main circumstances:

• A worker engaged to provide services to an end client is employed by a third person who carries on a business of supplying labour regardless of profit. This could bring structures such as employer of record (EOR) within the definition.
• An agency or end client reasonably believes that a worker is an employee of an umbrella company. This could create an issue where workers are engaged and paid under the Construction Industry Scheme, for example.

Under the proposed legislation, responsibility for unpaid PAYE liabilities in umbrella company arrangements may be shared between the umbrella company and another party, referred to as the ‘relevant party’, typically meaning.

• The recruitment agency that has a direct contractual relationship with the end client.

• The end client itself, in cases where it contracts directly with:

  • A non-UK agency
  • An agency that is affiliated with the umbrella company
  • The umbrella company directly.

If neither the agency contracting with the end client nor the end client is based in the UK, then the UK-resident agency that is closest to the end client will be jointly and severally liable alongside the umbrella company.

Additionally, the draft legislation includes anti-avoidance provisions aimed at preventing the use of artificial arrangements to circumvent these rules.

VAT fraud risks in umbrella company arrangements

As part of the proposed changes, the government has potentially missed an opportunity to address other types of tax fraud. VAT fraud perpetrated by umbrellas is a growing problem, for example, with hundreds of millions of tax revenues lost each year. Its noticeable absence from the proposals may signal that HMRC is considering a new VAT reverse charge on temporary labour. This means intermediaries or end clients will become directly responsible for reporting umbrella VAT charges on their own tax returns on behalf of umbrella organisations. In our view, this would be a sensible protective provision, but no such proposals have yet been publicised.

Next steps for employers: preparing for umbrella company tax changes

In advance of these changes, businesses need to review:

• Their labour supply chains, identifying whether or not they would be potentially liable for the PAYE and NIC liabilities of deemed umbrella companies in that chain.
• Processes and controls – to ensure that appropriate due diligence is carried out in respect of both existing and any potentially new labour suppliers, including umbrella companies.
• HMRC’s guidance on best practice, and keep an eye on future developments.

For more information, please contact our specialists below, or reach out to your usual RSM contact.

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