Draft tax legislation signals the start of a new era for umbrella companies | PayStream

As announced at Autumn Budget 2024, the Government has published draft legislation to tackle non-compliance in the umbrella company market.

The measures contained within the Finance Bill 2026 are an initial step towards regulating what the Government saw as a troublesome part of the temporary labour market.  It follows extensive and drawn-out consultation by HMRC with the many stakeholders who make up this dynamic employment sector.

Recruitment agencies, end clients, umbrella companies and contractors will all be affected; but ultimately, this is aimed at driving down non-compliance to protect such parties. Those that work with compliant umbrella companies will be unaffected.  

What are the implications of the proposed framework?

Below, we explore the scope and implications of the proposed compliance framework contained in the draft Bill, highlighting the key proposals, obligations and HMRC’s relevant enforcement powers that will impact upon those businesses in the sector from April 2026 onwards.

In our blog on 24th June we speculated that, following meetings with HMRC and the Treasury, the future operation of payroll could remain with umbrella companies. This meant that umbrella companies could continue to deduct and remit to HMRC, PAYE tax and National Insurance (NI) deductions under their own employer reference number. 

We reported that HMRC’s intention to introduce “joint and several liability” (JSL) approach was a clear commitment to safeguard revenue. We explained that in the context of an agency (or end client) and umbrella relationship it means that all the parties jointly promise to properly account for PAYE/NI deductions and separately promise too. The JSL approach allows HMRC to pursue any unpaid liability from either the umbrella company or agency. It also envisioned a “strict liability” basis meaning that any unpaid debt of the umbrella company would be recoverable, no “ifs or buts,” from the agency nearest to the end client in the supply chain, or the end client if no agency was involved.

The draft legislation has mirrored these expectations and contains carefully crafted amendments to home in on unscrupulous organisations trying to sidestep the intention of paying the correct PAYE and NI due on umbrella earnings.

What are the key highlights?

There are a number of important proposed amendments or additions to the existing Income Tax (Employment & Pensions) Act 2003 (“ITEPA”) and associated Social Security Contributions and Benefits Act 1992; the key highlights are:

• Where PAYE has not been operated correctly, liability will fall on the umbrella, and agency holding the contract with the end client for the supply of the worker (ie the top tier agency, or Managed Service Provider).

• If there is no agency in the supply chain, the liability will fall on the end client.  

• Where neither the client nor most direct agency having a contract with a client is UK resident, the closest UK agency in the supply chain will be the relevant liable party for any unpaid debt of the umbrella company.

Further technical highlights include: 

• The term “Umbrella companies” formally drafted into legislation for the first time, describing it broadly as a company that carries on a business of employing workers to personally provide their labour to end clients. Furthermore, the worker does not have a material interest in the umbrella company and the “umbrella company arrangements” conditions must be met.

• The umbrella company arrangements conditions describe the contractual set-up of the supply chain: for example; umbrella company direct to end client; or umbrella company to an agency. 

• Each “relevant party” is, along with the umbrella company, jointly and severally liable to pay any tax shortfall.

• The identity of the relevant party is set out in section 61Z, but essentially targets the agency that holds the contract with the client, or where there is no agency, the client directly.

• The concept of a “purported” umbrella company is introduced to prevent the sidestepping of the JSL in certain circumstances. It extends to defining the remuneration that will be treated as earnings from the deemed employment with a “purported” umbrella.

• HMRC’s powers to require the preservation and provision of information from employment intermediaries are extended. The familiar Regulation 80 Determination on an employer to account for PAYE/NI will also be extended to enable HMRC to bring determinations on jointly and severally liable third parties in the event of default by the umbrella company.

HMRC reiterate their intentions

In the detailed notes accompanying the draft proposals, HMRC have reiterated that the drivers behind the changes are:

• Helping to close the tax gap by eliminating tax loss through non-compliant umbrella companies.

• Making the tax system fairer.

• Protecting temporary workers from large, unexpected tax bills caused by the behaviour of unscrupulous, non-compliant umbrella companies.

• Ensuring that the temporary labour market operates on a level playing field. 

Crucially, compliant Umbrella companies can continue to operate as they do now, however, agencies should only work with umbrella companies that they have scrutinised carefully via due diligence and on-going assurance activities to ensure the legitimacy of their partners.

Preparation is key

As we pointed out in our blog on 24th June, we recommend that agencies start to prepare now for April 2026, focusing their efforts on the following: 

• Reviewing and mapping supply chains.

• Reviewing and continually monitoring due diligence processes and procedures.

• Consolidating your Preferred Supplier List (PSL) to closely vetted, trusted and stable umbrella partners.

• Reviewing contractual indemnities weighed against the financial strength of your PSL partners.

PayStream will be conducting a deep dive into the draft legislation as it makes its way through Parliament. Although there may be minor technical changes, we expect to see these compliance measures remain intact as the Bill becomes the Finance Act later in the year, with an operational date of April 2026.

Please contact your Key Account Director if you would like any further explanations or specific advice on how the proposals may affect you.