The Finance Bill was published on 22 July 2025 containing proposed legislation to try to regulate the tax and NICs position in the use and abuse of umbrella companies in the labour supply chain. Where Umbrella companies are in the labour supply chain the recruitment agency or the end client is to become responsible for ensuring that the correct operation of PAYE and NICs. This will make the tax and NICs position for workers employed by and via umbrella companies the same as for other agency workers.
As we noted in our previous article, an umbrella company is a business which is often used by recruitment agencies to pay temporary workers. In most cases the umbrella company will employ the temporary workers and pays wages through PAYE. Ordinarily the work for the individual temporary worker is found by an employment business. The work is carried out for an end client, often on a short-term arrangement.
Businesses that engage with agencies that outsource payroll operation to umbrella companies will need to take steps to ensure that these obligations are being correctly met on their behalf including due diligence checks or putting legal indemnities in place.
For businesses to remain complaint, there is an increasing need to remain alert to the methods being adopted to avoid tax and exploit low paid workers in the labour supply chain.
Very often umbrella companies are used in a legitimate manner. However, increasingly structures are emerging where umbrella companies sit in or are being used in tax avoidance structures and/or to exploit low paid workers. This is becoming widespread in logistics, warehouse staff provision and care workers amongst many other areas where the demand for people is high and the supply is limited. Some umbrella arrangements target new staff or those unfamiliar with the UK systems.
There has been a proliferation of non-compliant labour suppliers. Some workers work for multiple agencies to make ends meet and have been receiving demands from HMRC because the wrong sums have been accounted to HMRC on their behalf or no sums accounted for as the labour supplier is treating the worker as a self-employed operative. In other instances, workers are not receiving the holiday pay they are entitled and don’t know as there are limited rules around what requires to be shown in a payslip.
Additionally, some workers are unwittingly being asked to contract out of their employment rights, but their payments remain subject to income tax and NICs but removing entitlement to sick pay, holiday pay or statutory leave. The loss of entitlement to holiday pay results in the umbrella being able to offer a lower hourly rate for its labour.
Businesses that engage with agencies that outsource payroll operation to umbrella companies will need to take steps to ensure that these obligations are being correctly met on their behalf including due diligence checks or putting legal indemnities in place.
For businesses to remain complaint, there is an increasing need to remain alert to the methods being adopted to avoid tax and exploit low paid workers in the labour supply chain.
Very often umbrella companies are used in a legitimate manner. However, increasingly structures are emerging where umbrella companies sit in or are being used in tax avoidance structures and/or to exploit low paid workers. This is becoming widespread in logistics, warehouse staff provision and care workers amongst many other areas where the demand for people is high and the supply is limited. Some umbrella arrangements target new staff or those unfamiliar with the UK systems.
Additionally, some workers are unwittingly being asked to contract out of their employment rights, but their payments remain subject to income tax and NICs but removing entitlement to sick pay, holiday pay or statutory leave. The loss of entitlement to holiday pay results in the umbrella being able to offer a lower hourly rate for its labour.
All these arrangements put the end client and user of the labour supply at risk and all businesses need to take steps to ensure its labour supply chain is compliant. These types of arrangement could result in national minimum wage breaches, employment status claims and involvement in enquiries from HMRC.
Points of note:
- Is your business being offered too good to be true rates for labour supply? Businesses should be asking why the rates are so low and for calculations to demonstrate how this plays out to the end worker.
- Spot checks should ideally be carried out on the payslips of labour supplied – is the supplier of the labour paying the correct holiday pay and the correct sums to HMRC? What are employees being paid?
- Contracts – does your contract contain sufficient protection in the event this all goes wrong? Do you have the right warranties and indemnities in place? Can you gain access to sufficient information to ensure your business is not at risk?
- Can you build some of this in on top of your existing VAT and AML due diligence?
Further change is expected under the Employment Rights Bill with umbrella companies being regulated for the purposes of employment rights. We are expecting a consultation in the autumn with the measures expected to take effect in 2027. You can read more about this here.
Should you wish to consider this further, or you have any questions arising from the above or you are concerned about existing issues in your labour supply chain, please do not hesitate to contact our experts.
