The End of the Umbrella? HMRC’s Move to Reshape Labour Supply Chains

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On 21 July 2025, HMRC published a policy paper outlining further steps to address non-compliance in the umbrella company market.

The paper states:

“Many umbrella companies operate diligently, supporting their employees and providing convenience and administrative benefits for agencies. However, too many are used to facilitate non-compliance including tax avoidance and tax fraud.”

“Legislation will be introduced […] to make employment agencies or end clients jointly and severally liable for any amount required to be accounted for under the PAYE provisions where an umbrella company forms part of a labour supply chain.”

“Joint and several liability will allow HMRC to pursue an agency in the first instance for any payroll taxes that a non-compliant umbrella company fails to remit to HMRC on their behalf. The end client will be liable if contracting directly with an umbrella company.”

In short, HMRC intends to make recruitment agencies - and, in certain cases, end clients -jointly and severally liable for unpaid payroll taxes where workers are supplied via umbrella companies.

The End of the Umbrella?

While we support the Government’s commitment to closing the tax gap and ensuring fair tax compliance, these measures raise significant concerns.

Most notably, the proposals appear designed to dismantle the umbrella company sector. HMRC’s paper states:

“It is anticipated that some agencies or end-client businesses may decide to operate their own payroll, rather than contract with an umbrella company.”

We would go further: many agencies are likely to bring payroll in-house to avoid the substantial financial risk of being held liable for unpaid taxes - liability that may arise without any practical means of recovery.

This apparent (and at times explicit) intent to eliminate umbrella companies is troubling. The sector plays a vital role in the labour market, offering workers a single, continuous employment relationship across multiple assignments. This continuity is often essential for workers—for example, when applying for a mortgage or demonstrating income stability. Yet, the HMRC paper fails to acknowledge this under its “Impact on individuals, households and families” section.

While HMRC recognises that many umbrella companies operate responsibly, it also claims that enforcement efforts are undermined by the ease with which non-compliant entities can be created. In our view, this points to a broader regulatory issue - one that should involve the Department for Business and Trade and Companies House taking steps to address this issue - rather than a blunt-force approach that risks destroying an entire industry.

Economic Impact

HMRC estimates that these measures will raise:

• £75 million in 2025/26, and
• £895 million in 2026/27.

These figures appear to rest on one or both of the following assumptions:

• Recruitment agencies and end clients will begin engaging workers directly; and/or
• HMRC will successfully enforce the new rules through investigations and enquiries -quickly and effectively.

If the latter is the basis, the projections seem overly optimistic. For HMRC to collect £895 million in 2026/27 through investigations and enquiries, it would need to:

1. Conduct timely and effective investigations - something it has struggled with for over a decade. These cases are complex and fact-intensive, and typically take years to resolve.
2. Rely on agencies having the financial means to pay any liabilities assessed - an assumption that may not hold in practice.

How to Prepare

With the new rules expected to take effect from 6 April 2026, we recommend the following steps:

For End Clients:

• Audit supply chains to identify where umbrella companies are used.
• Ensure there are no current compliance issues.
• Review contracts with agencies and umbrella companies to include appropriate warranties and indemnities.
• Clarify expectations around umbrella company use in contractual terms.

For Agencies:

• Conduct a similar audit of umbrella company relationships.
• Review upstream and downstream contracts.
• Consider how to manage this risk going forward - including whether insurance coverage is available or appropriate.

Final Thoughts

These measures are likely to increase costs for agencies and end clients in an already strained sector. They also introduce further scrutiny from HMRC - an organisation that acknowledges its own enforcement resources are already stretched.