Umbrella Companies: joint and several liability for PAYE
Umbrella companies and those who use them are now jointly and severally responsible for underpayments of tax and National Insurance from 6 April. Previously, the tax compliance obligation was on the umbrella company - not the end client.
Any business supplying ‘off-payroll’ workers to another business under a contract of employment is considered an umbrella company. Umbrella companies are used solely to employ workers performing their work for other businesses – often, agencies supplying workers for temporary assignments to the end business.
HMRC has been onto umbrella companies for many years, even though the tax benefits have not been the only to be benefits derived from such arrangements. The IR35 rules, for example, were tightened back in 2021; then in 2023, there was a government consultation on proposals to tackle non-compliance among umbrella companies.
New rules, under the Employment Rights Bill, came into force on 6 April 2026 and specifically target recruitment agents, clients and others who use umbrella companies to engage staff.
New rules
The reforms apply to existing labour supply chains as well as to new ones, with two fundamental changes:
· Joint and several liability for PAYE - Those using umbrella companies have been made jointly and severally liable to HMRC for the umbrella companies’ PAYE responsibilities within their labour supply chains. So, where incorrect tax or National Insurance is paid (or underpaid), liability could fall on the end client.
The fundamental principle is that individuals are ultimately responsible for their own tax liabilities. Any worker engaged by a non-compliant umbrella company should consider pulling out from the arrangement given the financial risk they will face.
· Oversight - Agencies and other umbrella companies will need to exercise strong and robust oversight of tax compliance throughout their labour supply chains.
Even so, joint and several liability will operate on a strict liability basis, with no ‘get out clause’ for an organisation who has demonstrated due diligence and robust procedures.
Essentially, there is no statutory defence available and HMRC may pursue the organisation for payments due.
HMRC’s guidance on the new rules is important reading for anyone within a labour supply chain which includes an umbrella company, or any third parties supplying labour.
Exceptions
Note that HMRC has confirmed that the rules do not apply where a worker is employed through their own personal service company (if certain conditions are met); is deemed employed through a managed service company; is a salaried member of an LLP; or is treated as employed by an agency.
In those cases, the existing rules under the relevant legislation will apply as normal – with one exception. If a business claims to operate as an umbrella company but does not employ workers in the way a genuine umbrella company would, the workers will be treated as employed by that company anyway — and joint and several liability will therefore apply.
This will prevent businesses from structuring arrangements to get around the new rules.
What should we do?
Conducting due diligence across the labour supply chain is crucial to identify the risks of non-payments and non-compliance, and how best to manage them. Businesses should review their existing agreements and, if necessary, draw up new agreements with clear contractual clauses to mitigate any increased risks.
Organisations impacted by the new rules should also train their staff on the new compliance measures and how those within their labour supply chains may be affected.
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