In a little more than 12 months, legislation of the umbrella company market will come into play to crack down on tax avoidance, from April 2026. Preparation will be key, but what can umbrella companies do now?

Four key areas of focus include bolstering internal processes; reviewing how compliance is demonstrated externally; staying up to date with sector developments; and seeking professional support where necessary. Here, we outline more on each of these areas.

Background

Announced in the Autumn Budget 2024, legislation will involve the transfer of legal responsibility to account for income tax and National Insurance contributions from the umbrella companies that are deemed to employ the workers to the recruitment agencies that supply the workers to an end client. This means that the recruitment agencies will be liable for any shortfall. Where a business is not using an agency, the legal responsibility will fall on the end client business.

The rationale for this approach is because recruitment agencies can control which umbrella companies they engage and so, by extension, they can prevent illegitimate operators from entering the supply chain.

Making recruitment firms legally responsible for ensuring that the correct taxes are paid to HMRC is expected to tighten due diligence and ongoing monitoring practices around engaging umbrella companies and thereby improve overall compliance.

What steps should umbrella companies take?

The government announced it would set out full details of how this measure will operate 'in the coming months' and give stakeholders an opportunity to provide feedback. As compliant umbrella companies keep abreast of HMRC and industry updates, payroll operators would be well placed to begin preparing for legislation now.

Whilst the legal responsibility for correct tax payments will be removed from umbrella companies, the risk they face is losing business. Over the coming year, employment businesses will put in place more rigorous due diligence processes to protect themselves and raise their requirements of the umbrella companies they work with.

As soon as possible, umbrella companies should carry out a thorough review of their own processes to identify anything that could raise a red flag for a recruitment firm and make improvements accordingly, with transparency a key priority. This includes a comprehensive and regular audit of payroll processes, all tax calculations and deductions, as well as a review of how these are communicated with workers. It is important that there is an open line of communication with workers to clearly share and explain any deductions, respond to questions and clarifications. A review of how queries or complaints are handled is also recommended.

Recruiters and contract workers can identify a non-compliant umbrella firm through dubious or inaccurate paperwork. It follows, then, that ensuring paperwork is in order and fully transparent will demonstrate to stakeholders that a payroll firm is trustworthy. Ensuring all payments and deductions are clearly displayed on payslips and that they align with the agreements previously made, as stated in contract workers' Key Information Documents (KIDs), will demonstrate that a firm is acting legitimately and is not engaging in unscrupulous practices.

Trust is key. When recruiters see evidence that they can trust a payroll company, they are more likely to engage its services either side of legislation.

External support

As details of legislation are shared, umbrella companies will need to ensure they fully understand the implications of any changes and that they do all they can to support recruitment agencies as they prepare. Consulting legal and tax professionals to ensure correct implementation and full compliance is advisable.

The next 12 months will also be an opportunity for umbrella companies to nurture their existing relationships with recruitment agencies and reinforce to them their commitment to compliance. However, actions are more important than words and one of the most straightforward ways an umbrella company can demonstrate they are compliant with employment legislation and tax guidelines is to seek membership of a respected accrediting organisation in the sector. This offers third-party assurance of an umbrella company's legitimacy. There are several membership organisations in the sector. It is important that an umbrella company conducts thorough due diligence before pursuing membership, including a review of any handling of members' compliance issues, and to choose one that offers them the best opportunity to demonstrate their own unequivocal compliance.

As the only not-for-profit accreditor in the market, the Payroll Compliance Authority is unique, with the sole purpose of reducing non-compliance in the sector rather than seeking to make a profit.

The PCA will continue to monitor the landscape and engage with HMRC as we approach legislation, as well as provide helpful insights and updates to support umbrella companies as they prepare.