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The new draft tax legislation applying to umbrella companies has been published by the government, putting those using labour supply chains on notice to be ready for implementation in April 2026. We consider here the rules and what you need to be doing to be ready for them.
Proposed legislation
The draft legislation will form part of the Income Tax (Earnings and Pensions) Act 2003 and is open for consultation until 15 September 2025. It must achieve Royal Assent before it can become law in April 2026.
Questions or comments on the draft law can be directed to the Treasury at umbrellacompanyevidence@hmtreasury.gov.uk.
What does the proposed legislation say?
Where all the following apply:
- an individual who personally provides services to an end client and that individual is employed by an umbrella company; and
- there is a contract between:
- an umbrella company and an agency; or
- an umbrella company and the end client directly; and
- The purpose of the contract is the supply of services in return for which the umbrella company will receive consideration,
the agency or the end client will be jointly and severally liable with the umbrella company for any failure by the umbrella company to properly operate its PAYE obligations (including national insurance contributions).
An “umbrella company” has been defined as:
- a company that carries on a business of supplying labour;
- not being the personal services company of the individual providing the services; and
- being in receipt of consideration for the services which are supplied by the employees of the umbrella company.
Whether it is the agency or the end client which bears the joint and several liability is dependent on how the supply chain is structured.
- The agency that contracts directly with the umbrella company will bear the onus of joint and several liability; or
- The end-client will have joint and several liability where they contract directly with:
- an agency that is not UK resident;
- an agency that is connected with the umbrella company; or
- the umbrella company itself.
- Where neither the agency nor the end-client are UK resident, the UK resident agency that sits closest to the end-client in the supply chain will have joint and several liability with the umbrella company.
What is the impact?
These proposed rules are reminiscent of the off-payroll rules and operate to shift the risk of any income tax and national insurance contributions (together with penalties and interest) not correctly withheld and paid over by the umbrella company to the agency or end-client contracting with the umbrella company. Note, that the effect of joint and several liability is that HMRC can recover the unpaid tax from any one of the umbrella company, the agency or (if there is no agency) the end client. There is no requirement for HMRC to first attempt to recover the unpaid tax and NICs from the umbrella company which is in default; they can go directly to the party which is jointly liable. This will be true regardless of whether the agency or the end client is at fault and regardless of any arguments in mitigation that due diligence checks were carried out to ensure compliance in the supply chain.
HMRC has published a very detailed and lengthy guidance note Help with labour supply chain assurance — GfC12 – Guidance – GOV.UK aimed at helping business mitigate and reduce labour supply chain risks. A very useful section of the guidance is the “Questions to ask yourself” which prompts businesses to consider their supply chain; the way they manage and audit the supply chain on an ongoing basis and spotting risks. We at Michelmores are also very experienced in helping you review and audit your supply chain to identify risks and put mitigation strategies in place.
In particular, contract review will be very important to ascertain that the correct indemnities and undertakings are present to protect agencies and end clients and ensure a right of recovery in the event HMRC exercise their rights under the joint and several liability regime.
Further provisions to tackle non-compliance
Provisions dealing with “purported umbrella companies” are also set out in the draft legislation. Purported umbrella companies are those which do not comply with their legal or tax obligations in the way in which parties contracting with them would expect. For example, tax is not correctly withheld and paid over or the individual providing the services is in fact not employed by the purported umbrella company. Where the provisions relating to purported umbrella companies apply, the individual providing the services will be treated for income tax purposes as holding an employment with the purported umbrella company. This will enable the umbrella company legislation (as described above) to apply to the arrangement.
Many businesses that contract the supply of labour or have large contracting cohorts may have gone through this supply chain review process when the off-payroll rules were implemented a few years ago. Please do take the time to consider your processes again now. Joint and several liability is a new tool to drive compliance and it is more important than ever to ensure your audits and checks are done before April 2026.
If you would like any further information or would like to chat to one of our tax experts please call Cathy Bryant or Anthony Reeves.