After months of speculation, HMRC has indicated how they intend to tackle non-compliance in the Umbrella company industry.
In March 2025, Government responded to the “Tackling non-compliance in the umbrella company market consultation” whereby they indicated they were moving forwards with option three, which deemed the employment business which supplies the worker to the hirer as the employer for tax purposes. This proposal left the sector with many unanswered questions, the most pressing being: who will operate the PAYE obligations?
Joint and several liability (“JSL”)
Spokespeople within the industry have, following a meeting with HMRC and HMT, released news that the operation of payroll will remain with the Umbrella company. This means that Umbrellas will continue to deduct and remit to HMRC tax and national insurance (NI) under their own employer reference number.
Although this is very positive news for compliant businesses within the industry, it is yet to be approved by the Treasury and we are waiting on legislation, expected July 2025.
As we understand, the agency closest to the end client in the supply chain will be liable for any tax shortfall, should it occur, but that a joint and several approach to liability would be adopted. If there is no agency in the chain, liability falls on the end client.
What is JSL?
To those unfamiliar with joint and several liability, “several” is a very old word which essentially means “separate.” It arises when two or more persons jointly promise to do the same thing, and also severally make separate promises to do the same thing. Therefore, in our scenario, the Umbrella and top tier agency/client jointly promise to properly account for PAYE tax/NI; and separately they promise too.
Essentially, this allows HMRC to pursue tax liability from either the Umbrella or agency/end client; and once paid, the liability of both the Umbrella and the agency/end client would be discharged.
The final notable point from the announcement is that this approach will operate on a strict liability basis. This means no excuses! If there is a tax debt, the top tier agency/end client is automatically on the hook.
What now?
Further detail, expected July 2025, is necessary to understand this thoroughly. It’s clear however that HMRC remain committed to reducing non-compliance in the industry, aligning with the Government’s broader goal to “close the tax gap.”
Steps you should take now are:
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Revisit your current due diligence policies, controls and procedures (“PCPs”). Although agencies won’t have a mandatory legal requirement to perform due diligence, it is critical to protect your business. If necessary, work with your advisers to produce robust PCPs using multiple methods (data collection and review, on-site visits, evaluation and testing), don’t simply rely on a tick-box checking exercise.
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Review and map your supply chain. Supply chain compliance has grown in priority over recent years, not least to avoid wider corporate compliance offences such as those under the Bribery Act and the Criminal Finances Act, but also to play a role in the prevention of modern slavery and other social and ethical issues. It’s now critical that you have vetted the Umbrella company in your supply chain that is paying the worker.
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Consolidate your Preferred Supplier List (PSL) to only your most trusted and stable partners. Your due diligence PCPs are likely to take more time to complete in future, on the assumption you have made them more robust. Consolidating your PSL and ensuring no Umbrella payments to workers fall outside that regime, will be more time and cost effective than a large PSL.
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Review contractual indemnities weighted against the financial strength of your PSL partners. There is little point having an Umbrella company sign an indemnity in your favour if its financially unable to foot the bill. If you’re an agency that works under a top tier recruitment business, expect for your business to be asked to sign indemnities that you’ll inevitably want to flow down to your financially robust and vetted Umbrella company.
HMRC continue to issue guidance
In the meantime, HMRC continue to release guidance and advice for both agencies and contractors with regards to working with an Umbrella company. This ranges from advice on how to spot non-compliance to how to check your payslip. Their latest initiative includes a guide showcasing examples of good practice, encouraging Umbrella companies to operate responsibly and be clear, open and honest in the information they provide their employees.
Change is coming
At PayStream, we’ve always championed compliance and so we welcome the increased scrutiny that will help to flush out non-compliant operators within the industry. That being said, with the reforms due to be implemented in April 2026, there’s not much time for the sector to adjust.
It’s clear that agencies must take more responsibility to drive compliance and standards within the industry. This is an opportunity for agencies to support workers to help ensure they don’t get embroiled in tax avoidance schemes and to protect the Exchequer.
It’s with proper planning, robust due diligence processes, and by having confidence in your supply chain, you can mitigate risks posed by the Umbrella reform. This will allow you to continue to operate confidently in the evolving contractor landscape.
And remember, we’re here to make this process as easy as possible for you. If you have any questions or need a helping hand, don’t hesitate to reach out to your Key Account Directors.
