The government will introduce legislation to change who has responsibility for tax and national insurance liabilities when an employee uses an umbrella company.
In today’s Autumn budget, chancellor Rachel Reeves pledged to clamp down on umbrella companies that “exploit” workers by failing to comply with IR35 off-payroll obligations.
However, a briefing document released by HM Revenue and Customs today indicates that the government will go a step further, bringing forward legislation that will change who has responsibility for Pay As You Earn (PAYE) where an umbrella company is used. This legislation will come into effect from April 2026.
The proposed legislation would make agencies that use umbrella companies responsible for ensuring that the correct income tax and National Insurance contributions are deducted and paid to HMRC. Where there is no agency involved, the responsibility would be placed on the end client, in other words, the employer.
An umbrella company is an employment intermediary that employs workers on behalf of recruitment agencies and their end clients. Contractors often use them because they offer convenience and administrative benefits.
Umbrella companies
However, according to HMRC analysis, at least 275,000 workers who were engaged with umbrella companies in the 2022-23 tax year were engaged with umbrellas that failed to comply with their tax obligations.
It estimates that around £500 million was lost to “disguised remuneration tax avoidance schemes” over that period, all facilitated by umbrella companies.
Under the new rules, either the agency or the employer would therefore be legally liable for any shortfall, whether they operated the payroll themselves or used the umbrella company to run the payroll for them.
This makes the tax position for workers employed by umbrella companies the same as for “any other agency workers”, the government said.
“One of the reasons that the umbrella company model has become more popular is because they are used to sidestep the obligations arising from this legislation,” the document explains.
“By making the same agency responsible for PAYE when an umbrella company is used, this measure will make PAYE obligations consistent for agency workers regardless of how they are engaged.”
The government said it would set out more details of how the new rules will operate in the coming months, with draft legislation expected ahead of its introduction in the Finance Bill 2025.
In the interim, HMRC will engage with stakeholders to gain feedback on the measures and to gauge their impact. Technical guidance will also be published in due course.
Last year, the Conservative government published a response to a call for evidence on umbrella companies, proposing new ways of defining them, mandating better due diligence on compliance, and more regulation.
Crawford Temple, CEO of Professional Passport, said the latest move would “change the shape of the market” and ramp up the need for “robust enforcement measures” in the run-up to the new legislation being introduced.
He said: “The next 18 months will undoubtedly witness a drive by the architects of tax avoidance schemes to make as much money as they can.
“So the message is clear, visible and targeted enforcement is imperative to drive up standards and drive out the cowboys giving our industry a bad name. We need action and enforcement, not pledges and promises.”
Neil Carberry, chief executive of the Recruitment and Employment Confederation, said: “The chancellor is right to tackle issues around umbrella company compliance – but has chosen the wrong tool.
“Employment businesses are already some of the more heavily regulated businesses in the country, and responsibility for supply chain compliance will stretch them. Yet umbrella companies themselves are not regulated. This is long overdue and would deliver a much more level playing field.”
Matt Fryer, managing director of Brookson Group, said: “We welcome today’s announcement that the new Government will progress with plans to tackle non-compliance in the umbrella company market. Rather than root-and-branch reform, though, it feels like a rehash of proposals made in the last government’s consultation.
“The movement is in the right direction, seeking to shut down dodgy umbrellas and to drive hirers, agencies and workers towards compliant providers. But it appears that the treasury is still of the mindset that agencies or end-hirers should be ultimately responsible for calculating PAYE. This will result in any liabilities for non-compliance passing to agencies or end hirers if there is no agency in the supply chain.”
He said the mechanics of how this is proposed to work appeared to be a “little confused” at this stage.
“To avoid the pitfalls of tax liabilities and fines from an enforcement clampdown, we advise hirers to ensure that they or their supply chains have a compliant preferred supplier list of umbrella companies in place, to conduct due diligence and to work with established and trusted providers. It is also advisable to review IR35 policies to ensure that no contracts fall unnecessarily inside the off-payroll rules, and that all independent contractors are compliantly engaged outside.”
HMRC said it will also “shortly” publish an online tool that will help workers to understand pay from umbrella companies.
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