Rocky road ahead for umbrella companies

Following last year’s consultation and the announcement in the Autumn Budget, umbrella companies and recruitment agencies are now on alert for impending new legislation which signals moving potential tax liability up the commercial chain onto the party (typically an agency) which contracts with the umbrella company.

Legislation timeline

The new legislation has not yet been drafted and ultimately would not come into force until April 2026. So arguably there is little immediate concern; however, due to the length of commercial engagements between agencies and their end-clients, it is highly likely that contracts entered after April 2025 may continue after April 2026. This means that agencies will be looking to umbrella companies early next year to seek assurances about their compliance.

HMRC guidance

Accountants and tax advisers will no doubt be called upon to aid umbrellas in their quest to not only ensure compliance but to provide demonstrable proof of that compliance to their agency clients.

HMRC updated its guidance for individuals working through an umbrella company, including guidance on how to check pay. It also updated guidance to employments businesses who contract with umbrella companies. While HMRC guidance is not law, these give a clear indication of what HMRC consider to be the minimum compliance expectations and should be fully read and understood. The guidance for agencies is particularly relevant.

Legal responsibilities

While reminding the agencies of their legal responsibilities and obligations under the conduct of recruitment agencies regulations and the agency workers regulations, the guidance continues to warn agencies of the potential consequences of working with non-compliant businesses in the supply chain. Among other things, it highlights the potential for prosecution for failure to prevent criminal facilitation of tax evasion in the supply chain; penalties for knowing, or should have known, you were connected to VAT fraud, and publishing details of those involved in tax avoidance schemes.

Due diligence

The guidance also provides a clear message to agencies to carry out due diligence:

• Only use umbrella companies that you have carried out due diligence on
• You should identify the entities in your labour supply chain
• Understand how workers are being engaged and paid
• Assess and reduce any risks of non-compliance

The checks you undertake should be regular, reasonable, and proportionate for your business. You should also keep a record of the due diligence checks that you have undertaken on an umbrella company. The list of what to check which follows within the guidance will be familiar to any accountant who has previously been involved with an HMRC supply chain fraud review, and it seems clear that these will form the basis of due diligence requirements to safeguard against potential liability imposed by future legislation.

Compliance pack recommendations

For umbrellas and anyone advising them, we would recommend that umbrella companies develop their own in-house ‘compliance pack’ which can be provided to agencies and readily updated on an ongoing basis. As part of that pack, as a minimum, we would recommend including:

• Payslip and example calculations: Payslips should identify salary, holiday pay, and any expenses as separate line entries. It should be clear on any payslip what represents employees' pay and deductions. Any reference to the ‘agency rate’ paid to the umbrella should not be found on the PAYE payslip element itself, but (if provided) it should form part of a separate reconciliation statement.
• Employment contracts: A contract of employment will be necessary for any umbrella company. It must be up to date, containing all the fundamental and necessary employer obligations, and statutory entitlements. These will undoubtedly need to be provided to demonstrate compliance.
• Contract for services: A contract between the umbrella company and its client is a necessity. This contract should confirm the umbrella’s obligations to provide services, their responsibilities as an employer, and their insurance responsibilities. This contract should automatically be provided to agencies in any event but will be needed for any compliance.
• Evidence of registration and insurances: An umbrella, like most businesses providing commercial services, should provide evidence of their companies house registration, VAT registration, and evidence of insurances as a minimum (as well as any other tax or regulatory documents required by the industry in which they work).
• Payment of taxes: We are likely to see a focus on enhanced due diligence by agencies who will want to see evidence that taxes have been paid to HMRC on time. This will likely include RTI submission confirmation and VAT payment confirmation as a minimum.
• Expenses: The payment of employee expenses through an umbrella company is fraught with complications and compliance hurdles, particularly where those expenses relate to travel and subsistence. For any umbrella paying those expenses, it will likely be expected that specialist advice has been taken and the umbrella company can demonstrate clearly how it complies with the temporary workplace rules, along with the additional supervision, direction, and control legislative requirements which must be met before those expenses can be paid.

Transparency is key

The overall message for umbrella companies is that they must be transparent, and they will be asked to show their compliance clearly if they wish to maintain their current agency engagements and secure new business.

Markel Tax has been advising umbrella companies on their compliance obligations for over 20 years. If you would like advice or support on how we can help manage your clients’ compliance for 2025, then please contact us at contractorsolutions@markel.com.