Umbrella companies: what they are and why you need to know

Umbrella companies that don’t comply with their tax obligations have been in the government’s sights for some years. Worst case scenarios have seen fraudulent companies defaulting on HMRC, and workers landed with large, unexpected bills as a result of payment structures contrived to avoid tax.

Umbrellas explained

Umbrella company is not a term defined in statute, but it’s generally taken to mean a company employing temporary workers who work at different end clients’ premises, and HMRC recently described them as employment intermediaries employing workers on behalf of agencies and end clients. The government plans to bring umbrella companies within scope of the legal definition of an employment business through the Employment Rights Bill.

Typically, umbrella companies are used by recruitment agencies to pay temporary workers. The recruitment agency does the business of matching clients with suitable workers, but it may then outsource the employment and payment side of things to an umbrella company. This means the umbrella company acts as the actual employer, and should provide a contract of employment setting out working terms and conditions. Under current legislation, it is also responsible for paying the worker.

Preventing bad operators

It’s thought umbrella companies were used to engage at least 700,000 workers in 2022/23, with non-compliant umbrella companies responsible for engaging a third of this total — and probably more. The government is therefore introducing new rules to drive up tax compliance from April 2026. Broadly, where an umbrella company is used in a labour supply chain to engage a worker, the responsibility to account for PAYE will change.

Rather than the umbrella company employing the worker being legally responsible for operating PAYE, this will fall to the recruitment agency supplying the worker to the end client. They will have the legal responsibility for operating PAYE on the worker’s pay, and will be liable for any shortfall, regardless of whether they operate payroll themselves, or use an umbrella company to run payroll for them. Where there is no agency in the labour supply chain, legal responsibility passes to the end client.

Safe to deal?

As a worker, recruitment agency, or any other person in the labour supply chain, how do you know whether an umbrella company is a reputable and compliant organisation to do business with? HMRC has recently published a guide to good practice for umbrella companies, suggesting the type of behaviours to look for. Safeguarding your position by using guidance like this to carry out due diligence checks is highly recommended. We should be pleased to help if you have any concerns.

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