Part two of the tax crackdown on non-compliant labour supply chains in the UK is set to take effect on 6 April 2026. From that date, any UK-based agency or end client making use of umbrella companies will be liable to settle any underpaid PAYE liabilities related to workers supplied by them.
This change is very much in line with the fundamental shift that followed the introduction of the new IR35 rules in 2021 – part one of the crackdown – with the responsibility for working out if the off-payroll working rules apply, and consequently any employment tax liability being moved to the end-client organisation receiving the contractors’ services.
As with the IR35 rules, the overall change does not impact the amount of taxes payable
Under the recently published draft legislation on umbrella companies, an end client will be legally responsible for ensuring that a worker’s PAYE is properly accounted for by the umbrella company (ie the employer of the worker) if there is no intermediary agency established in the UK in the labour supply chain. Otherwise, the joint and several liability will fall on the agency.
The government believes that this new set of rules will reduce the tax gap caused by the fraudulent activities of some umbrella companies; yield the Treasury between £500m and £1bn a year; and ensure that the temporary labour market can operate on a level playing field.
Improving compliance
As with the IR35 rules, the overall change does not impact the amount of taxes payable by the workers via their employing organisations. It is simply meant to improve compliance with the existing employment tax regulations, as in recent years successive UK governments have become increasingly concerned about the use of some umbrella companies to facilitate tax avoidance or, worse, tax fraud.
Typically, umbrella companies are third-party employers that carry on a business of supplying temporary labour to medium and large organisations, and process pay for workers on behalf of end clients and/or agency intermediaries.
A company where workers are seconded could be unaware of the liability
However, the definition in the draft legislation also captures companies that may only second workers occasionally, without a view to making a profit, and where the supply of labour is incidental to the core business of the organisation. A company where such workers are seconded could therefore become an end client (ie be caught by the legislation) and be unaware of the joint and several liability that comes with the secondment.
Considering this, it becomes paramount for businesses to enhance the due diligence on any broadly defined umbrella company. This may include being completely satisfied that the umbrella company concerned has appropriate and robust payroll processes in place, and is willing to share any documentation and evidence of such processes with the agency or end client upon request.
Broader impact
It seems also reasonable to anticipate that some agencies (which act as intermediaries between the umbrella companies and the end clients in certain cases) could decide to relocate outside the UK as non-resident companies will be outside the scope of this legislation, with the ultimate effect of making the end client the joint and several liable party.
End clients are likely to do business only with more established umbrella companies
With trust due to become an even more precious commodity in this sector, agencies and end clients are likely to tend to do business only with more established and reliable umbrella companies going forward.
They may be even more wary of the warning signs highlighted by HMRC in its mini-umbrella company fraud campaign. These include unusual company names, foreign national directors with no previous experience in the UK labour supply industry, and unrelated business activities listed on Companies House.
HMRC is trying hard to raise awareness of instances of VAT and PAYE frauds perpetrated by mini-umbrella companies where bad actors split one umbrella company into multiple small, limited entities to claim tax breaks or advantages aimed at small businesses, like the VAT Flat Rate Scheme or the Employment Allowance.
Where HMRC establishes that a business in the supply chain knew, or should have known, that there was fraud, the tax authority will, among other things, deny the right to recover VAT as input tax.
