Umbrella companies: draft legislation now published

We now have the draft legislation introducing a new regime for umbrella companies that will take effect from 6 April 2026 (with accompanying policy paper)). The key points of the draft Finance Bill measures are:

• Joint and Several Liability for PAYE and NICs: If a worker is supplied to an end client via an umbrella company, and the umbrella company fails to pay the correct Pay As You Earn (PAYE) income tax or National Insurance Contributions (NICs), the recruitment agency (or the end client if no agency is involved) becomes jointly and severally liable with the umbrella company for these amounts. This means HMRC can pursue agencies or clients directly for any unpaid payroll taxes, regardless of whether they carried out due diligence or were misled by the umbrella company.
• The regime applies when:
• A worker is employed by an umbrella company (one that supplies labour to clients, but is not controlled by the worker like a personal service company).
• The umbrella company, recruitment agency, or end client are all potentially “relevant parties” and can be held liable.
• The rules cover typical labour supply chains as well as cases where there are multiple agencies or managed service providers in the chain. The 'top agency' (the agency with the direct contract to the end client) bears liability, or the end client if there is no agency.
• There is no exemption for agencies or clients who have undertaken due diligence or used accredited umbrella companies; liability is strict - the obligation exists regardless of intent or fault.
• The legislation includes provisions to counter attempts to evade these rules, such as “purported umbrella” arrangements or schemes designed to avoid liability through worker shareholdings or other technicalities (e.g., artificial structures or misclassification).
• The changes aim to stop tax avoidance/fraud in the umbrella sector, prevent losses to the Exchequer, and protect workers from being left with unexpected tax bills due to non-compliance by umbrellas.
• HMRC can demand payment from any party in the supply chain without first having to attempt collection from the umbrella company.
• Separately, there are parallel plans to bring umbrella companies under broader regulatory oversight through the Employment Rights Bill and the Employment Agency Standards Inspectorate, although details are still subject to further consultation.

Why is this important for universities

Whilst limited in use, universities contract with umbrella companies for the supply of staff. If universities want to continue to do this, without an organisation in between it is imperative, at a minimum to carry out far more robust due diligence procedures to reduce the risk of non-compliance.

HMRC provides these recommended supply chain due diligence principles and sets out examples of good practice for umbrella companies in the temporary labour market. However, this is still no defence if HMRC find under-deduction of PAYE, they can legally seek repayment from the university (as an end user).