L-Day: tackling non-compliance in the umbrella company market

Originally, the Government proposed moving the legal responsibility for operating PAYE to the relevant recruitment agency or, as appropriate, the end-client (albeit that payroll administration could still be outsourced to the umbrella company). However, draft legislation published on Legislation Day (L-Day) 2025 instead provides for joint and several liability for relevant PAYE obligations between an ‘umbrella company’ and the ‘relevant party’ where the services of an umbrella company’s employees are provided to another person for consideration.

For these purposes an ‘umbrella company’ is, in summary, a person who carries on a business of supplying labour (regardless of whether this is done in conjunction with any other business or with a view to a profit), and who employs a worker who personally provides services to another person. However, the draft legislation includes provisions which are intended to prevent companies that are intermediaries for the purposes of the ‘IR35’/off-payroll working regimes falling within the definition of ‘umbrella company’ for these purposes (e.g. by excluding companies in which the worker has a ‘material interest’).

The basic position is that the ‘relevant party’ who, together with the umbrella company, is jointly and severally liable for PAYE on payments made to the umbrella company’s employees is the:

• Recruitment agency that contracts directly with the end-client; or
• End-client if they contract directly with:

o An agency that is not UK resident;

o An agency that is connected with the umbrella company; or

o The umbrella company itself.

However, if neither the agency that contracts directly with the end-client nor the end-client itself is a UK resident, the UK resident agency that sits closest to the end-client in the labour supply chain will have joint and several liability with the umbrella company.

The draft legislation also contains provisions to counter avoidance of these measures through artificial structures.

Recruitment agencies who engage directly with end-clients to supply umbrella company workers, and end-clients who engage directly with umbrella companies, should review their systems and processes to ensure they remain robust and effective when joint and several liability comes into effect from 6 April 2026.

Issues to consider include:

• How could you evidence that 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?;
• How do your payroll governance and risk management processes need to change in light of joint and several liability? For example, what processes would be necessary to obtain comfort, potentially in real time, that PAYE and NIC have been calculated, reported through Real Time Information, disclosed on workers’ pay slips, and paid to HMRC by the umbrella company correctly and on time? Could it be preferable to move the relevant workers onto your own payroll and, if so, what are the broader implications (e.g. concerning employment rights)?; and
• How could you demonstrate to HMRC that ‘reasonable care’ has been taken to comply with your obligations? Should errors arise it will be important to be able to demonstrate reasonable care to minimise any penalties that HMRC might otherwise impose. Is specific training required to upskill personnel within your organisation?

End-clients that do not engage directly with umbrella companies should also consider how the above points should be reflected in their revised due diligence process for engaging with recruitment agencies and securing payroll compliance in their labour supply chains. For example, what enquiries will be necessary to establish whether a recruitment agency is connected with an umbrella company such that the end-client would be the ‘relevant party’?

The draft legislation is subject to consultation until 15 September 2025. This offers an important opportunity to raise any practical concerns with HMRC when preparing for its implementation.

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, or if there are any matters you would like us to consider reflecting in any submissions we make to HMRC on the draft legislation.

For further information please contact:

• Christian Verri
• Anne-Marie Robinson