Background
As announced by the Chancellor of the Exchequer, Rachel Reeves, in the Autumn Budget 2024, the government will be introducing new legislation, from April 2026, to combat non-compliance in the umbrella company market.
Umbrella companies are employment intermediaries who employ temporary workers on behalf of agencies and/or end clients. The workers’ services will ultimately be provided to end clients but the responsibility for operating the associated PAYE and accounting for national insurance contributions (NICs) sits with the umbrella company, as the employer of the workers. The umbrella company model can provide flexibility to both workers and end clients and also means that agencies and end clients can avoid the administrative burden of themselves directly employing the workers. Since the reforms to the private sector off-payroll working rules, known as IR35, in April 2021, the umbrella company model has been increasingly used as a way of ‘de-risking’ labour supply chains from the application of the regime.
However, in recent years, HMRC have become increasingly concerned that many umbrella companies have not been complying with their tax obligations and that the umbrella company model has facilitated tax avoidance and other fraudulent activity. In 2023, a consultation was undertaken by the previous government into options to reduce non-compliance in the umbrella company market.
What is changing
With effect from April 2026, new legislation will be introduced to change who has responsibility for accounting for PAYE and NICs (including employer NICs) where an umbrella company is used in a labour supply chain to engage a worker. This will move responsibility for accounting for PAYE and NICs from the umbrella company that employs the worker to the agency that ultimately supplies the worker to the end client. Where there is no agency in a labour supply chain, the responsibility will instead sit with the end client itself.
Impact and next steps
Whilst it expected that agencies and/or end clients will still want to outsource their payroll obligations to umbrella companies for the administrative benefits this provides (and this will still be possible), under the new legislation the agency and/or the end client will ultimately remain liable for any shortfall or failings of the umbrella company under such arrangements.
Given the significant impact that the new legislation will have on agencies and end clients who engage with umbrella companies, it is important that all such organisations take advantage of the time available prior to April 2026 to fully prepare for their introduction. As a starting point, organisations will need to review the nature of, and their role in, any existing labour supply chains in which umbrella companies are involved, which will provide them with an understanding of the potential impact the new legislation will have on them which in turn will help inform their strategy for dealing with it.
Where an agency or end client chooses not to outsource their payroll obligations to the umbrella company, they will need to ensure that they have in place internal systems and processes to comply with their obligations under the new legislation. It is likely that any current contractual documentation with umbrella companies would also need to be amended to ensure they contain adequate rights and protections. Existing fee arrangements may also need re-evaluating.
Where an agency or end client chooses to outsource their payroll obligations to the umbrella company, this will require a high level of due diligence to be undertaken into the relevant umbrella company, to ensure that they are reputable and reliable. As a minimum, agencies and end clients are likely to want to engage with umbrella companies who are members of, or accredited by, leading industry bodies. New contractual documentation will be required to reflect the parties’ obligations and liabilities under any such outsourcing arrangements and to provide necessary safeguards.
In our experience, it is relatively uncommon for end clients to engage directly with umbrella companies within a labour supply chain. This should mean that many end clients are not likely to be directly impacted by the new legislation. However, in addition to the broader reputational and commercial issues of being involved in potentially non-compliant supply chains, it is also possible that the new legislation could impose secondary liability for failings of impacted agencies, as is already seen under IR35, or liability could be contractually moved through the supply chain through existing or new contractual terms. As such it will still be important for end clients to diligence their supply chains and contractual arrangements even when they are not contracting directly with umbrella companies.
Written by David Smith and Richard Johnson
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