We often encounter distressed recruitment agencies using umbrella companies to facilitate payroll and HMRC liabilities. New legislation in April 2026 substantially changes the risks and responsibilities for agencies using umbrellas and end-user clients.
What is an umbrella company?
Umbrella companies employ individuals, on behalf of recruitment agencies, who are supplied to end clients. Recruitment agencies (usually sitting between umbrellas and end clients in the labour supply chain) find work for individuals, not the umbrellas. Typically, umbrellas enter a contract with a recruitment agency, who find and place workers under the control of end clients.
Many umbrella companies operate diligently, supporting their employees and providing cost savings for agencies. However, too many umbrellas facilitate non-compliance including tax avoidance. This incurs losses for taxpayers and can leave workers with unexpected tax bills.
Inefficiencies in the umbrella – agency – HMRC relationship
A government consultation, tackling non-compliance in the umbrella company market, led to the conclusion that there is widespread non-compliance causing significant tax losses to the Exchequer.
HMRC analysis shows that umbrellas were used to engage at least 700,000 workers in 2022/23 and that at least 275,000 of these workers were engaged at some point by umbrellas that failed to comply with their tax obligations. HMRC estimate £500m was lost to disguised remuneration tax avoidance schemes in 2022/23, almost all of which was facilitated by umbrella companies.
Aims of the Legislation
- Close the tax gap by protecting taxpayers from losses caused by the fraudulent activities of some umbrellas — this will also reduce the large sums of money going to organised criminal gangs involved in labour supply chain fraud.
- Prevent workers facing large, unexpected bills for taxes not paid to HMRC by non-compliant umbrella companies.
- Ensure that the temporary labour market operates fairly by preventing fraudulent operators under-cutting compliant businesses that operate within the rules.
What is changing?
From April 2026, HMRC will make agencies that use umbrellas to employ workers responsible for ensuring that the correct tax and NICs are deducted and paid to HMRC.
The agency that contracts with the end-client and supplies the worker to them will be legally responsible for operating PAYE on the worker’s pay and will be liable for any shortfall, whether they operated their payroll themselves or used the umbrella company to run payroll for them. If there is no agency involved, this responsibility will be placed on the end client itself.
The government understands that some agencies value the ability to outsource to umbrellas and the positive role that compliant and well-managed umbrella companies can play in the functioning of the temporary labour market.
This measure will not prevent businesses from continuing to use umbrella companies to operate payroll on their behalf as they do now. While businesses can continue to do this, they will no longer be able to outsource the underlying tax obligation and will be ultimately responsible if the umbrella operating payroll on their behalf fails to do so correctly.
Impact on recruitment agencies
There could be increased costs for some agencies. One-off costs could include familiarisation with PAYE obligations and training staff to undertake payrolling obligations. Continuing costs would include processing payroll and operating PAYE, including staffing and payroll software costs.
Next steps
It is important that recruitment agencies reduce their risk of an unexpected HMRC liability arising. Immediate steps to take are:
- Review supply chain contracts and check existing suppliers against the HMRC umbrella blacklist.
- Be aware of the upcoming legislation and the potential liabilities the agency could face for their umbrella’s failures.
- Be satisfied that their umbrellas are meeting taxation obligations and regularly audit.
In the event a distressed recruitment agency fails to pay an umbrella creditor, consider the knock-on risk that the umbrella does not then pay workers or tax. The unpaid HMRC liabilities will now come back to the distressed agency, worsening its cashflow further.
If you would like to know more and a free review to ascertain how this may affect your recruitment business, then please call us to arrange.
This article was originally produced for The Institute for Turnaround and material sourced from gov.uk, where the HMRC umbrella blacklist and other resources can also be found.
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