Update: Government Confirms Umbrella Company Reforms

Following the Autumn 2024 Budget announcement of significant reforms to tackle umbrella company tax avoidance (which we discussed here), the government published draft legislation on 21 July 2025 introducing joint and several liability for PAYE compliance. Guidance on the new legislation and how it is intended to operate was subsequently published by HMRC in September. It should be noted that the legislation will take effect from 6 April 2026, meaning businesses now have fewer than six months to prepare.

The government’s objective is to close the tax gap and eliminate distortion in labour market competition by making “gatekeepers” accountable for compliance. To achieve that, HMRC has made clear it will take an assertive approach, pursuing agencies or end-clients without first exhausting recovery options against the umbrella company.

What the Draft Legislation Says

The legislation introduces a new chapter in Part 2 of the Income Tax (Earnings and Pensions) Act 2003, with equivalent National Insurance Contributions (NICs) provisions expected to follow. Its core feature is the imposition of joint and several liability for unpaid PAYE income tax and Class 1 NICs where workers are employed through umbrella companies or similar intermediaries. Joint and several liability is imposed on the recruitment agency that has the direct contractual relationship with the end client or, if the contract is between the umbrella company and the end client, the end client itself (known as the “relevant party”).

The scope? Deliberately broad. In short, it is not confined to traditional umbrella arrangements but also reaches “purported umbrella companies”, in other words, structures that appear to be PAYE-compliant but, in substance, remunerate workers gross or through personal services companies (PSCs), or (where the worker holds a material interest in the umbrella company) otherwise divert payment of earnings to avoid PAYE and NICs obligations. The government hopes that, in doing so, avoidance structures that blur the boundary between umbrellas and PSCs will gradually be phased out. Additionally, it is worth noting that the definition of “umbrella company” itself is also broad and could capture entities that are not traditional umbrella companies (e.g., the recruitment agency itself) without the need to trigger the purported umbrella company rules.

The regime operates on a strict liability basis, with no statutory defence. Combined with joint and several liability, this gives HMRC discretion to recover unpaid PAYE and NICs from any relevant party in the chain - whether the umbrella company, the top agency or the end-client - regardless of fault or the steps taken to ensure compliance. Although accreditation schemes, due diligence processes and compliance checks can provide comfort and reduce the likelihood of engaging a non-compliant umbrella company, they do not affect the statutory position. 

Importantly, liability under the new regime is automatic and cannot be displaced by demonstrating that reasonable steps were taken. These measures may help manage reputational and operational risk and could influence HMRC’s approach in practice, but they offer no legal defence against joint and several liability. The design reflects a deliberate policy choice to prioritise certainty of collection over questions of culpability and to ensure that PAYE risk rests squarely with those who control the labour supply chain.

Cross-border structures make the liability framework more complex. If the contracting agency is outside the UK, responsibility moves up to the UK end-client. Where neither the agency nor the end-client is UK-based, liability falls to the closest UK entity in the chain. For businesses with cross-border operations, mapping these arrangements carefully will be critical to determine where liability ultimately sits.

HMRC has yet to publish details of its intended operational approach for collecting the income tax and NICs from relevant parties, although this is expected to be published in advance of April 2026.

What does this mean for business? 

The practical implications are significant. Managed service providers may need to restructure or exit labour supply chains, and end-clients should anticipate changes in engagement models and cost profiles. Businesses continuing to outsource payroll operation to umbrella companies will need to take steps to ensure that payroll obligations are correctly met on their behalf, such as enhanced due diligence and ongoing compliance checks. Accreditation and insurance products are emerging as risk mitigators, but they do not provide immunity under the new law. 

With less than six months to go, businesses should act now to review contractual protections, strengthen compliance processes and train procurement teams on the absence of a statutory defence.