You’re looking for temporary workers to get your company’s project off the ground. A friend has suggested sourcing workers through an umbrella company. As you’ve heard some negative comments about these, should you avoid using them?
What are umbrella companies?
Umbrella companies spawned as a response to the IR35 and off-payroll anti-avoidance rules. They are created mainly by recruitment agencies who use them to employ and pay temporary workers through PAYE. Typically the workers are contractors and freelancers who, rather than set up their own intermediary company etc., work through umbrellas to ease administrative burdens.
Why is HMRC interested?
While many umbrellas operate within the rules, a minority offer tax and NI-saving arrangements to entice workers on to their books, but sometimes flout the tax rules and ignore workers’ rights. This is especially true of so-called “mini-umbrella companies” which use their small size to take unfair advantage of the employment allowance and VAT registration limits. This results in underpayments to HMRC.
HMRC’s attack
To counter the threat of tax dodging and non-paying, new anti-avoidance measures will apply from April 2026. These will make other parties in the supply chain jointly and severally liable if an umbrella company fails to account to HMRC for the right amount of tax.
Example. Don is employed by an umbrella company, Umbrella Ltd, which has a contract with Cosmo Ltd (an employment agency). In turn Cosmo finds work for Don with Trading Co Ltd (the client). If Umbrella fails to deduct and pay the right amount of tax and NI to HMRC it will first knock on Cosmo’s door and demand the shortfall. However, if HMRC is unable to collect the tax from Cosmo then it will turn to Trading Co. If Cosmo was not in the supply chain, i.e. Trading Co had a contract direct with Umbrella for it to supply workers, the new rules will mean that HMRC will come straight to Trading Co for PAYE tax and NI that Umbrella fails to pay.
Mitigating the risks
As the client you will need to be more careful about using workers supplied by umbrella companies at any point in the supply chain as you could be held liable for tax and NI shortfalls higher up the chain.
Trap. The draft legislation for the new rules is tough. You can’t escape liability even if you have a good excuse, e.g. you’re the victim of fraud from someone higher up the supply chain. Therefore, as a client business if you intend to use workers from agencies and umbrellas you need to take extra care.
Tip. Choose a reputable umbrella company. Work with a fully compliant and reputable umbrella company that adheres to the tax laws.
Tip. Carry out thorough due diligence. You should have robust procedures to vet the companies used.
Tip. Work with trusted recruitment agencies. Partner with established agencies with a known track record.
Tip. Stay informed about legislation. Keep up to date with HMRC guidance regarding the new rules and umbrella company best practice (see Further information ).
There’s nothing inherently wrong with using workers supplied through umbrella companies. However, some are involved in dodgy tax practices or don’t pay their tax bills and from April 2026 you could be held liable for tax they underpay for workers. Guard against this by using umbrella companies with a good track record.
Further information
The new rules and best practice guidance
HMRC’s policy paper
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.