In her first Budget speech on 30 October 2024, Chancellor of the Exchequer Rachel Reeves announced plans for new legislation aimed at addressing non-compliance in the umbrella sector. In response, HMRC released a policy paper (Tackling non-compliance in the umbrella company market – GOV.UK) to outline the proposed changes, set to take effect in April 2026.
This initiative follows a consultation published in June 2023, which primarily focused on combatting employment rights abuses and tax non-compliance associated with umbrella companies.
The key outcome of this legislation will be a shift in responsibility for accounting for Pay As You Earn (PAYE) when an umbrella company is involved in a labour supply chain to engage a worker.
Who will be affected by this and what will those changes be?
Any recruitment agency using an umbrella company in their labour supply chain to engage a worker will face new legal responsibilities under the proposed changes. The agency supplying the worker to the end client will be held accountable for operating PAYE on the worker’s pay and will be liable for any shortfalls, regardless of whether they operate the payroll themselves or whether they rely on the umbrella company for payroll services. Additionally, agencies will be responsible for paying employer National Insurance Contributions (NICs).
If multiple agencies are involved in supplying a worker paid through an umbrella company, the agency that has a direct contractual relationship with the end client will be responsible for managing PAYE.
In cases where there is no recruitment agency within the labour supply chain, the responsibility for PAYE will fall on the end client.
Umbrella companies will no longer be legally responsible for operating PAYE on payments to the temporary workers that they employ.
What are the practical implications of this?
The due diligence process that recruitment agencies will normally follow when reviewing their supply chain will change dramatically. There will no longer just be a focus on tax, procedural and legal compliance, but also on the accuracy of the PAYE and NI figures, as the legal responsibility of those figures will sit with the recruitment agency.
The practical implementation of these changes remains uncertain, and further consultation may lead to amendments to the proposals. However, the anticipated impact is significant, placing considerable risk with recruitment agencies.
Conclusion
HMRC will soon release an online tool to provide additional guidance. In the meantime, any recruitment agency impacted by these changes should begin reviewing their supply chain due diligence processes. It is essential that, by the time these changes come into effect, measures have already been implemented to ensure the accuracy of PAYE and National Insurance calculations, particularly when these are handled by the umbrella company.
For guidance on supply chain due diligence, please see my recent post here.
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