The UK government has published draft legislation that would significantly reform how tax compliance is enforced in the umbrella company sector. The proposals, released by HM Revenue & Customs (HMRC) in the policy paper "Umbrella Companies: Tackling Non-Compliance in the Umbrella Company Market", aim to reduce tax avoidance by shifting PAYE obligations from umbrella companies to recruitment agencies and end clients.
The reform targets widespread non-compliance among umbrella companies—firms that employ temporary workers on behalf of recruitment agencies and clients. According to the policy paper, many umbrella companies are failing to operate PAYE correctly, leaving workers vulnerable and contributing to tax loss.
To address this, the government is proposing to make the party closest to the end client—typically the recruitment agency—legally responsible for deducting and paying PAYE income tax and National Insurance contributions (NICs).
The proposed changes include:
· PAYE Responsibility Shift: If a worker is employed by an umbrella company but supplied through a recruitment agency, the agency (if it has a direct contractual relationship with the client) would be responsible for operating PAYE.
· End Client Liability: Where no recruitment agency is involved, the end client would assume PAYE responsibility.
· Debt Transfer Provisions: Changes to social security rules will ensure that joint liability for NICs also applies to the relevant party in the supply chain.
These changes are intended to improve enforcement and accountability, reducing opportunities for tax evasion and protecting workers from being caught in non-compliant arrangements.
The reforms are set to be introduced in the Finance Bill 2025–26, with implementation planned for 6 April 2026, aligning with the start of the new tax year.
HMRC notes that this lead time allows affected businesses to review supply chain arrangements and take necessary compliance steps.
The policy paper emphasises that while umbrella companies can serve a legitimate administrative function, the current system has enabled widespread abuse. By realigning liability with those who have the greatest control over labour supply chains, the government aims to curb disguised remuneration schemes and ensure taxes are properly paid.
This legislative change also reflects HMRC’s ongoing efforts to simplify enforcement and address non-compliance in flexible labour markets without imposing undue burdens on workers.
Stakeholders are expected to review the draft legislation and prepare for implementation. Additional technical guidance and detailed regulations are likely to follow as HMRC continues to refine the framework ahead of April 2026.
