The new 'umbrella company' legislation: how wide is the canopy?

The new rules will make agencies and clients liable, jointly and severally with umbrella companies, for underpaid tax. Its aim is to extend compliance across labour supply chains.

However the draft legislation captures various forms of labour supply and not just what industry participants typically understand to be umbrella models.

HR professionals at, and inhouse lawyers of, companies who receive labour supplies should ensure they understand the legislation and have the correct compliance processes and contractual conditions in place to deal with the risks.

This article looks at the main risk running through the draft legislation.

The changes

The key takeaway is that the new rules create joint and several liability for either clients or intermediaries like agencies, from 6 April 2026.

• End-client liability. This is where the end client engages straight with the umbrella company, or a person 'connected with' it.

• Intermediaries' liability. Where client does not hold a contractual relationship with the umbrella company, the intermediary would be liable.

Crucially, the rules do not say that HMRC will prioritise the liability of the umbrella company above that of the end-client or intermediary. HMRC will thus have a choice whom to pursue.

Unlike IR35, subject to certain anti avoidance rules, the rules aim to capture scenarios where workers are employed by an employer in which they do not have a material interest (less than 5%) and are then supplied to someone else. 

Main risk

The obvious risks are unexpected financial (and indeed reputational) exposure as a result of someone else's conduct in the supply chain.

Common umbrella issues

In the UK, where hire and fire practices are illegal, umbrella companies perform an important function in the temporary labour market, and also supply volume payroll compliance. However, squeezed margins at the bottom of the supply chain, have historically invited controversies around 'tax saving' measures adopted by some. These range from: 

• outright fraud; to
• unsuccessful tax avoidance practices using contrived structures; and on to
• misunderstandings over the interpretation and application of complex expenses legislation.

The significant turnover and sums paid through umbrella companies can result in proportionately significant PAYE, NIC or VAT liabilities.

Mitigation

Clients can mitigate risks by taking positive steps before 6 April 2026. These can include:

• moving away from umbrella models (however note the hidden risk in labour supplies below); and/or
• significant and meaningful compliance and risk monitoring of the supply chain; and / or
• involving intermediaries between umbrella and client (but note the points on client identity below); and
• appropriate clauses, indemnities and warrantees.

Labour supplies

This section is relevant to businesses who receive supplies which include personnel. Umbrella models are diverse, so the rules are broad.

Paraphrased, the legislation says it applies if all of these conditions are met:

• an individual personally provides services to another (the "client");
• but, the individual is employed by a third person (the "umbrella company");
• the umbrella company carries on a business (whether or not with a view to profit and whether or not in conjunction with any other business) of supplying labour; and
• the umbrella is paid for those services.

Both 'personal services' and the 'business of supplying labour' are important, but fact sensitive, terms which are not yet entirely satisfactorily defined by the courts and tribunal.

Personal service

The law on personal services which is also in the IR35 rules, is still in a state of development as a statutory concept.

Personal service can be linked with employment status for tax: i.e. is the person self-employed or employed. In the umbrella scenario, the worker is employed, perhaps just not by the person they work for. The uncertainty here is whether the relationship between the worker, and their client, must be one of employment.

In any case, in the IR35 rules, personal service sometimes crops up in the context of determining who the client of a worker is. In that context, HMRC say the answer should normally be obvious: who does the employee work for? HMRC also say that where a service is truly outsourced, it is less likely to be a labour supply and thus personal service.

But as the example below shows, things can be a bit more ambiguous. The correct answer will likely depend on a complex interaction of fact, law and degree.

Business of supplying labour

The legislation also does not define what a supply of labour is or at what stage someone carries it on as a business. It might be obvious in many cases, but not always.

There is ambiguity in how much labour supply must be repeated to be part of a company's business.

Who is the client, and who is jointly or severally liable?

Under the legislation, the client is the person whom the employee personally performs services for. As discussed, that may be clearer in some case than in others.

But the client is not jointly or severally liable unless they have a contract with the deemed umbrella company (who employs the worker) or someone 'connected' with the umbrella.

It is unclear what 'connected' means, and does not mean. It could be as simple as having the same Director, but could it include some kinds of commercial or contractual relationships, including joint ventures.

It may be that 'connected' will ultimately be given the same meaning as in Section 1122 of the Corporation Tax Act 2009, that is as implying a familial relationship, partnership, trusteeship, or control of a company, or persons in a group. But, the legislation does not currently say that.

The anti-avoidance rules: looks like an employee or only partially paid as an employee

There are some additional anti-avoidance rules too. These will mainly be relevant to due diligence and identifying unusual models in the supply chain.

They broadly operate by deeming certain companies to be umbrellas. This happens in two main scenarios:

• The relevant worker is not an actual employee of anyone, but it is reasonable to think that another party in the supply chain would assume the company employs the individual; or
• The worker is an employee but has a significant interest in the company. The legislation applies where it is reasonable to suppose another party in the chain 'would assume that a substantial proportion of amounts provided to the purported umbrella' for the services will be paid as earnings to the employee. There may be some overlap here with IR35.

Dealing with uncertainties

In reality, the likelihood of things going actually wrong depends the level of compliance by the 'umbrella company'. Unless they underpay tax, there is a legal risk, but that does not mean there is a practical one.

So, at this point, good compliance and due diligence processes for clients are key. That is the main aim of the legislation.

Risk could be further mitigated by avoiding contractual uncertainties over who is working for whom, and whether or not a supplier is in the business of supplying labour.

Warrantees and indemnities, as well as contractual clauses, may also provide a commercial framework for the event that HMRC commence investigations into the matter. There could be clauses that deal with the oversight and legal costs associated with investigations, for example.

Warning

The legislation is still in draft, so some of the issues above may change or could still be solved. The examples and the content of this article is not exhaustive, and should not be taken as advice.

Want to know more?

Please do get in touch if you have questions. We can answer them, and / or we can help you develop a strategy to deal with the implications of the new umbrella rules. 

Fieldfisher has a dedicated employment tax practice which harnesses the expertise of employment lawyers, tax and tax disputes experts to give holistic advice to find solutions which are compliant and best for your business.

Any questions? Contact Ranjit Dhindsa, Partner, Head of Employment, Pensions, Immigration and Compliance and Christopher Kientzler, Director (Barrister), Employment Tax Lead in the Tax and Contentious Tax team.