Following the introduction of off-payroll working rules for medium and large private sector end user clients, the umbrella company model has become increasingly common in the labour supply chain. Under this model individuals are employed by an umbrella company which makes them available to an employment agency, which in turn, makes them available to the end user.
This model places the PAYE exposure on the umbrella company, taking away PAYE obligations from both the agency and the end user. (References to PAYE should be read as including NIC.) A consultation launched by the last government highlighted concerns about tax and employment law compliance by some umbrella company operators.
Two legislative changes have been proposed. First, certain participants in the labour supply chain will be jointly and severally liable with the umbrella company for PAYE. See the Finance (No.2) Bill 2025 provisions slated for 6 April 2026. Second, the new Employment Rights Act expands the definition of “employment businesses” to include umbrella companies bringing them within the Employment Agencies Act.
How do the rules work? Why should end users be concerned?
Broadly speaking, the draft legislation makes a relevant party jointly and severally liable with the umbrella company for PAYE. If the end user contracted directly with the umbrella company, it would be the relevant party. However, if the end user contracted with an agency, then the agency would generally be the relevant party.
At first blush, it appears that if the end user contracted with the agency, then the end user would have de-risked itself because the agency is the relevant party. However, this provision is overridden, and the end user is treated as the relevant party in two circumstances. First, where the agency and the umbrella company are connected under section 993 ITA. Second, where the agency is non-UK resident. (A non-UK incorporated corporate trading in the UK through a permanent establishment may still be non-UK resident potentially making end users relevant parties.)
Further, the statutory definition of an umbrella company is broader than that which is generally regarded as an umbrella company under industry practice. The definition treats as an umbrella company any person which carries on a business of supplying labour whether with a view to profit and whether carried out with any other business. So, informal secondments of staff could activate the rules and there does not appear to be any exemption for arrangements between connected persons.
Joint and several liability is an onerous obligation. The PAYE can be recovered from any person who is jointly and severally liable, and the draft manual guidance suggests that HMRC will seek to recover the PAYE from the relevant party if the umbrella company defaults.
Even if the end user were satisfied that the relevant party who runs the joint and several PAYE risk is the agency, this is not journey’s end. The end user would need to consider its Criminal Finances Act 2017 responsibilities to make sure that its agency counterparty had reasonable procedures in place to prevent the facilitation of tax evasion by any umbrella companies which the agency was using.
Purported umbrella companies
The draft legislation extends the umbrella company definition in three cases beyond the standard definition via the purported umbrella company concept. These extended definitions will need careful scrutiny.
Normally, for the umbrella company definition to apply, the worker must be an employee of the umbrella company. Under Case 1 a person is treated as a purported umbrella company in certain circumstances including where it is reasonable to suppose that the relevant company is the individual’s employer, even if this is not objectively the case.
Case 2 modifies the rules for agency workers. Generally, agencies who place individual workers with clients are treated as the PAYE employers where the remuneration receivable by such individual workers is not otherwise treated as PAYE income. Without more, the PAYE risk would stay with the agency.
Under Case 2, the standard agency worker rules can be “switched off” in some circumstances, turning the agency into a purported umbrella company with the consequence that an end user client could assume joint and several liability for the agency’s PAYE defaults.
A company cannot be treated as an umbrella company if the worker has more than a 5% stake in it. Case 3 modifies this rule. It treats a person which would not otherwise be an umbrella company (due to the 5+% stake test) as a purported umbrella company in certain circumstances, including it being reasonable to suppose that a substantial proportion of the amounts paid to the person will be paid to the worker as earnings.