A major overhaul of how tax compliance is enforced in the umbrella sector has now taken effect, with recruiters and compliance experts calling it the most significant disruption to the temporary labour market since the private sector IR35 changes in 2021.
From 6 April, liability for unpaid pay as you earn (PAYE) and national insurance contributions connected to umbrella workers has moved further up the labour supply chain. Under the updated framework, both the umbrella company and the client can be held jointly and severally responsible for tax that should have been deducted from a worker’s pay. In practice, HM Revenue and Customs (HMRC) can pursue either party for the full amount, leaving them to resolve reimbursement between themselves afterwards.
Where an intermediary, such as a recruitment agency, sits between the end client and the umbrella company, it is typically that contractual party “above” the umbrella that bears the risk rather than the hirer. As a result, recruitment agencies now find themselves at the centre of the reform, facing pressure to ensure that every umbrella company they work with is compliant, financially stable and operating payroll correctly.
Umbrella firms act as intermediary employers for contractors and temporary staff, managing payroll, tax deductions and employment-related obligations.
The reforms aim to clamp down on long‑running tax avoidance schemes that have operated through the umbrella market, often presenting themselves as legitimate providers while failing to deduct the correct taxes. The changes are expected to have far‑reaching implications for the UK’s flexible workforce, which includes an estimated 700,000 individuals working via umbrella arrangements.
The legislation also includes anti‑avoidance measures intended to prevent organisations from bypassing the rules through artificial structures. Even where a worker is not formally employed by an umbrella company, the provisions can still apply if the working relationship effectively mirrors employment.
Businesses using employers of record (EORs) may also feel the impact. EORs employ staff on behalf of clients and supply them to end users; these now fall within the legal definition of an umbrella company. This means clients could face unexpected tax exposure if payroll is not handled correctly, particularly where overseas entities form part of the contractual chain.
Sam Cox, spokesperson for UmbrellaSure, said: “The industry is now operating under one of the most fundamental tax reforms in years, arguably the biggest regulatory shift impacting the flexible workforce since the off-payroll working rules came into force in the private sector. This is a clear push towards self-policing. Much like the IR35 reforms, liability has moved up the chain, and with that comes significant risk to recruiters engaging a non-compliant umbrella company or even one that isn’t financially robust and becomes insolvent.
“Recruitment businesses are now firmly in the firing line. If [they] work with the wrong umbrella company, [they] could be exposed to significant tax liabilities. This isn’t simply a box-ticking exercise. Agencies must urgently review their preferred supplier lists, ensure they are tightly controlled, and avoid any off-PSL engagements. Above all else, this reform underlines the need for robust, proactive risk mitigation.”
This article is based on a piece written for Personnel Today
