Finance Bill: Umbrellas unfurled!

An umbrella company is a business often used by recruitment agencies to employ and pay temporary workers who work for different end clients. In most cases, the umbrella company will employ and pay the worker, and be responsible for operating PAYE, NIC and Apprenticeship Levy. Umbrella companies are generally contracted via a recruitment business and occasionally engaged directly by the end client.

The use of umbrella companies became more popular following the introduction of the Off Payroll Working (OPW or ‘IR35’) rules for the private sector in April 2021, allowing end clients to resource temporary labour with certainty over the PAYE/NIC position and in a way which fell outside the reporting requirements of the OPW rules.

The new Finance Bill clauses define an ‘umbrella company’ as a person “that carries on a business (whether or not with a view to profit and whether or not in conjunction with any other business) of supplying labour”. This definition is much wider than the type of business that might typically be referred to as an ‘umbrella company’ in general usage – and could therefore bring many other businesses within the scope of the legislation, including employers of record and other organisations that second their employees to clients.

The legislation will introduce joint and several liability for umbrella companies’ PAYE obligations (with separate legislation dealing with NIC) for ‘relevant parties’. For these purposes, ‘relevant parties’ are:

• The recruitment agency that contracts directly with the end client; and
• The end client if it contracts directly with either a non-UK resident agency, an agency that’s connected with the umbrella company, or the umbrella company.

But if neither the end client nor the agency that contracts directly with it are UK resident, the UK resident recruitment agency that is closest to the end client in the labour supply chain (if any) will be a ‘relevant party’. This means that both the umbrella company and the applicable relevant parties are equally liable to settle any applicable PAYE (and NIC and Apprenticeship Levy).

It does not matter which party pays, or how much each party pays, as long as the amount is paid in full. However, HMRC have indicated that they will approach the agency / end client in the first instance, rather than the umbrella company, to recover any underpayment of PAYE.

For end clients who are a ‘relevant party’, the liability is limited to payments that relate to the worker’s employment with reference to work for that specific end client.

It is worth noting that under the new legislation there is no right of appeal or defence against the liability for the relevant party – for example reasonable excuse or the provision of fraudulent information. End clients and agencies will therefore need to take robust and effective steps to secure the labour supply chain to manage the risk of a liability crystallising. Given that it will not always be immediately apparent for end clients whether they are a ‘relevant party’, and therefore jointly and severally liable, end clients will need to proactively confirm the nature of their labour supply chains to determine their risks and manage these appropriately.

The legislation also contains anti-avoidance provisions intended to prevent non-compliance through the use of artificial structures involving ‘purported umbrella companies’. These have been expanded since the legislation was published in draft and will apply in situations where the worker is not actually employed by the umbrella company, but it appears to one or more participants in the arrangements that they were the employer.

HMRC’s draft guidance (published to accompany the earlier draft legislation) includes five examples of labour supply chains, demonstrating which entity in the labour supply chain is jointly and severally liable, alongside the umbrella company. However, these examples cover only very basic labour supply chains. In reality, many businesses will have much more complex labour supply chains including multiple recruitment agencies and therefore it will be necessary to identify and analyse the full labour supply chain to identify the umbrella company, recruitment agency (if applicable) and end client in respect of each worker, to correctly identify the relevant parties for this legislation. 

Additionally, the new Fair Work Agency, which will become the single enforcement body for UK workers’ labour rights, will start work from 6 April 2026. Organisations (e.g., umbrella companies, agencies and end clients) can therefore expect more proactive scrutiny of their compliance with National Minimum Wage, holiday pay and other workers’ rights. 

• Review contractual arrangements for the supply of labour. It is important to identify all entities in the labour supply chain, to understand how your organisation may be impacted by these changes from 6 April 2026. This review should be undertaken in sufficient time to make any necessary contractual or process changes ahead of 6 April 2026. Where possible, organisations should look to identify whether the recruitment agencies you have contracted with are using ‘connected’ umbrella companies, meaning that your organisation is the relevant party which would be jointly and severally liable. Agencies which end clients currently use for the supply of labour may be changing their engagement models because of these changes. End clients should ensure that they are aware of any new engagement structures so they can satisfy themselves there are no additional risks and update governance processes and policies accordingly;

• Ensure your labour supply chain due diligence processes are robust. In particular, how could you demonstrate that your organisation has considered and appropriately applied HMRC’s published guidance on working with umbrella companies and managing labour supply chain compliance risks more generally? And how can you be sure that you’re identifying all umbrella companies in the labour supply chain?; and

• Assess how your payroll governance and risk management processes need to change in light of joint and several liability. What processes would be necessary to obtain comfort, potentially in real time, that PAYE and NIC have been correctly calculated, reported through Real Time Information, disclosed on workers’ pay slips, and paid to HMRC by the umbrella company on time? Could it be preferable to move the relevant workers onto an agency (or your own) payroll and, if so, what are the broader implications (e.g. concerning employment rights)?

KPMG has extensive experience assisting organisations to understand and discharge their own payroll withholding and reporting obligations, and to secure effective compliance in their labour supply chains. Please contact the authors, or your usual KPMG in the UK contact, if you would like to discuss the potential impact of these prospective new measures on your business.