C2E: Umbrella Company Draft Legislation Explained

The UK Government has published draft legislation introducing joint and several liability for unpaid PAYE and NICs in umbrella company arrangements. This briefing explains what the changes mean for recruitment agencies, the risks they face from April 2026, and practical steps to protect their business. 

Summary of the Draft Legislation 

Under the draft Finance Bill, amendments to ITEPA 2003 introduce Section 61Y(2), which makes agencies and other supply chain parties jointly and severally liable for unpaid PAYE and NICs where an umbrella company fails to account for tax properly. 

HMRC will have the legal right to recover: 
- Unpaid PAYE/NICs 
- Statutory interest 
- Penalties for non-compliance 

This applies even if the agency: 
- Paid all fees (including tax) to the umbrella 
- Believed in good faith that the umbrella was compliant 

Sections 61Z1(1) to (3) capture scenarios where a business appears to operate as an umbrella company but does not meet the legal definition. In such cases, agencies remain liable for tax as though the umbrella company existed. 

The legislation (see Section 61V(4A)) removes any protection where fraudulent documentation is provided by the umbrella. Even if an agency did not know the documents were fraudulent, this will not be a defence. HMRC expects agencies to conduct thorough, ongoing due diligence and verify authenticity of all compliance evidence. 

Agencies must assume ultimate responsibility for ensuring tax has been properly accounted for and remitted. 

Risks for Agencies 

1. Financial Exposure
   - Agencies may be pursued for 100% of the umbrella’s unpaid tax
   - Interest on late payments 
   - Penalties under PAYE provisions (referencing PAYE Reg. 80(5A)) 
2. Legal Liability
   - Agencies are treated as “relevant parties” under Section 61Z
   - HMRC can collect from agencies even if the umbrella is offshore or insolvent 
3. Reputational Damage
   - Association with non-compliant umbrellas risks agency credibility and client relationships
   

Timeline 
21 July 2025: Draft legislation published 
April 2026: Joint and several liability takes effect 

Agency Risk Defence Plan 

Step 1: Audit Current Umbrella Partners 
- Check accreditations (FCSA, Professional Passport) 
- Request evidence of PAYE/NIC compliance 
- Independently verify any documents provided to reduce risk of relying on fraudulent paperwork (critical under Section 61V(4A)) 

Important Note: Accreditation alone (e.g. FCSA, Professional Passport) is not sufficient protection. Even fully compliant umbrellas can face financial difficulties, leading to non-payment of PAYE/NICs and potential winding up. Agencies should assess financial health and monitor for early signs of distress. 

Step 2: Strengthen Contracts 
- Include indemnity clauses covering tax liability 
- Require umbrellas to provide RTI filings and HMRC payment receipts 

Step 3: Ongoing Monitoring 
- Set up regular audits of umbrella compliance 
- Monitor for signs of financial instability or non-compliance 

Step 4: Train Recruiters 
- Ensure staff understand risks of using non-compliant umbrellas and how to spot red flags in documentation 

Step 5: Preferred Supplier List (PSL) 
- Limit relationships to fully vetted umbrellas 

Due Diligence Checklist for Agencies 

- Is the umbrella FCSA or Professional Passport accredited? 
- Can they provide up to date RTI and HMRC receipts? 
- Are documents independently verified (SafeRec, veriPAYE) to avoid reliance on potentially fraudulent evidence? 
- Are all contractor payments run through PAYE? 
- Is the umbrella UK-resident for tax purposes? 
- Does the umbrella have a clean compliance history? 

Risk Flowchart: Who Pays? 

1. Umbrella fails to pay PAYE (under Section 61Y)
2. HMRC pursues umbrella
3.  Umbrella collapses
4. HMRC pursues agency (under Section 61Z)
5. Result: Agency becomes liable for tax, interest, and penalties – regardless of whether fraudulent documentation was unknowingly relied upon. 

Key Takeaways 

- Agencies must act now to audit their supply chains 
- Proof of payment to umbrellas will not protect you 
- Reliance on fraudulent documents – even unknowingly – is not a defence (Section 61V(4A)) 
- Accreditation alone is not enough; even compliant umbrellas can face financial collapse 
- From April 2026, HMRC can enforce liability directly on agencies for umbrella non-compliance 

Next Steps for Agencies 

- Review your umbrella arrangements immediately 
- Update commercial contracts 
- Implement a PSL and robust due diligence process