HMRC is implementing significant changes to regulate umbrella companies and tackle non-compliance. These measures represent the most substantial shift in responsibility and compliance obligations we’ve seen in this sector for years.
The government’s recent announcements follow extensive consultation and are driven by compelling evidence. With approximately £500 million lost to disguised remuneration tax avoidance schemes in 2022/23 alone, almost all facilitated by umbrella companies, the need for decisive action has become clear.
From April 2026, fundamental changes will reshape how the umbrella company sector operates, affecting everyone in the labour supply chain from recruitment agencies to end clients. Understanding these changes now is crucial for protecting your business and ensuring continued compliance.
What is an Umbrella Company?
An umbrella company is an intermediary business that acts as an employer for temporary workers on behalf of employment agencies. Here’s how the typical arrangement works:
- A recruitment agency identifies workers for client companies
- Instead of the agency directly employing these workers, an umbrella company takes on the employer role
- The umbrella company becomes the legal employer, handling payroll, tax obligations, and employment responsibilities
- Workers are then supplied to the end client to carry out their assignments
- The umbrella company invoices the recruitment agency, who in turn invoices the end client
Umbrella companies provide valuable benefits including administrative efficiency, flexibility, compliance support and risk management for agencies and end clients.
Government estimates for 2022/23 indicate that umbrella companies were used to engage at least 700,000 temporary workers across the UK, demonstrating the significant role these arrangements play in the modern labour market.
The umbrella company model, when used properly, facilitates legitimate business needs whilst ensuring workers receive appropriate employment protections and benefits.
Tax avoidance and Umbrella Companies
Unfortunately, the umbrella company model has been extensively exploited for tax avoidance purposes, creating significant problems for workers, legitimate businesses, and the Exchequer.
The government’s data reveals the extent of non-compliance:
- Of the 700,000 workers engaged through umbrella companies in 2022/23, at least 275,000 were employed by non-compliant operators
- Approximately £500 million was lost to disguised remuneration tax avoidance schemes
- Almost all of these schemes were facilitated by umbrella companies
Common tax avoidance tactics:
Umbrella companies are often found to use tax avoidance tactics such as disguised remuneration schemes, false expense claims, VAT Flat Rate Scheme abuse or employment allowance manipulation.
Workers caught up in these schemes often face:
- Unexpected tax bills when HMRC investigates
- Reduced take-home pay once proper tax is applied
- Difficulty obtaining mortgages or other credit due to irregular pay structures
- Lack of proper employment protections and benefits
Legitimate umbrella companies and recruitment agencies face unfair competition from non-compliant operators who can appear to offer better rates by avoiding their tax obligations.
Understanding these issues is crucial for any business working with umbrella companies, as the new rules will hold supply chain participants accountable for ensuring compliance throughout their arrangements.
Changes announced in Umbrella Company regulation:
The widespread nature of tax avoidance in umbrella companies has prompted HMRC to take unprecedented action. The government has announced a comprehensive package of measures to tackle umbrella company non-compliance, with the most significant changes stemming from the 2024 Autumn Budget announcements.
Key changes from April 2026:
Liability Shift for PAYE and National Insurance: The most fundamental change announced at the Autumn Budget 2024 will take effect from April 2026. The government will legislate to move the responsibility for accounting for Pay As You Earn (PAYE) and National Insurance contributions away from umbrella companies to:
- Recruitment agencies where they’re involved in the supply chain, or
- End clients where there’s no recruitment agency involved
This doesn’t prohibit the use of umbrella companies, but it means that if an umbrella company fails to operate PAYE correctly, the liability for any shortfall will transfer up the supply chain.
Regulatory framework changes:
Employment Rights Bill amendment: The government will amend the Employment Rights Bill to bring umbrella companies within the definition of employment businesses. This will:
- Allow for the formal regulation of umbrella companies for the first time
- Bring umbrella companies within the scope of the Employment Agency Standards Inspectorate’s remit
- Subsequently include them under the Fair Work Agency’s oversight
Enhanced due diligence requirements regarding Umbrella Companies:
Whilst the government decided not to proceed with mandatory due diligence legislation at this stage, HMRC has published comprehensive guidance setting out how employment businesses should exclude non-compliant umbrella companies from their labour supply chains.
Following consultation feedback, the government will not immediately implement:
- Targeted measures to address abuse of the VAT flat rate scheme
- Changes to employment allowance eligibility
- Mandatory legislative due diligence requirements
However, the government has stated it will continue to monitor levels of abuse and may consider taking action on these areas in the future.
The government expects these measures to protect around £2.8 billion from being lost to umbrella company non-compliance across the scorecard period to 2029-2030, demonstrating the scale of the expected impact.
The key message is that early preparation is essential. These changes will impact businesses from the commencement date of 6 April 2026, and likely before in the run-up period as supply chain participants adjust their arrangements.
How we can help:
Our tax dispute resolution team is closely monitoring these developments and can assist you with:
- Assessing your current exposure to umbrella company compliance risks
- Developing appropriate due diligence procedures
- Reviewing and updating contracts and supply chain arrangements
- Planning for the transition period leading up to April 2026
- Ensuring ongoing compliance with the new requirements
If you’d like to discuss how these changes might affect your specific circumstances, please don’t hesitate to get in touch on 01905 777600 or email hello@ormerodrutter.co.uk. More information can be found on the gov.uk website.
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