Umbrella Companies & Joint and Several Liability | Government Reforms to Tackle Tax Avoidance and Worker Exploitation
We often discuss the activities of umbrella companies in our articles. Noting that whilst many provide legitimate and professional services, there are others established solely for the purpose of tax evasion and general financial fraud, often causing considerable hardship to unsuspecting workers whom they employ.
In a previous article entitled ‘Umbrella Companies | Government Proposals to Tackle Non-Compliance,’ we highlighted the Government’s intention to take action against umbrella companies which ‘exploit workers’ and to amend the Employment Rights Bill to re-define umbrella companies and regulate them in the same manner as existing employment businesses.
As anticipated in that article, the Government has now indicated in draft legislation dated 21 July 2025, as a part of the Finance Bill 2025-2026, its intention to drastically reform the umbrella company sector by introducing joint and several liability as from 6 April 2026.
Accordingly, recruitment agencies, or end user clients where no agency is involved, will become jointly and severally liable for all unpaid tax losses should the umbrella company default in meeting its obligations.
This proposal addresses long standing concerns and problems created as the result of worker exploitation, tax avoidance and regular non-compliance within supply chains.
Additionally, it appears that the definition of ‘umbrella company’ is being extended through the introduction of ‘purported umbrella companies.’ Proposed amendments to the Employment Rights Bill seek to impose stringent regulatory control to ensure that umbrella companies provide workers with protections such as transparent pay structures and protection against the withholding of holiday pay.
Hamraj Kang of KANGS briefly comments on the proposals.
Joint and Several Liability
Joint and several liability renders all companies within a supply chain liable for the specified tax losses caused upon the default of the umbrella company within the chain to make payment.
HMRC states in its recent Policy Paper:
- ‘The legislation will …make employment agencies or end clients joint and severally liable for any amount required to be accounted for under the PAYE provisions where an umbrella company forms part of a labour supply chain.
- Further legislation will be introduced …to provide HM Treasury with the power to make regulations imposing an equivalent joint and several liability for NIC purposes.
- Joint and several liability will allow HMRC to pursue an agency in the first instance for any payroll taxes that a non-compliant umbrella company fails to remit to HMRC on their behalf. The end client will be liable if contracting directly with an umbrella company.’
It seems clear that HMRC is anticipating seeking recovery directly from the agency without the obligation to pursue any other party.
Purported Umbrella Companies
The legislation has introduced ‘purported umbrella companies,’ targeting entities that present themselves as umbrella companies but are used to evade taxes or compliance. It appears that Mini Umbrella Companies and other disguised remuneration schemes will be caught.
The aim is to support HMRC’s attempts to identify and defeat all forms of fraudulent models from the market place.
The draft legislation states:
Purported umbrella companies
‘(a) a person (“the purported umbrella company”) participates in arrangements that would, if an individual were employed by the purported umbrella company, result in the umbrella company arrangements conditions being met,
(b) it is reasonable to suppose that one or more participants in the arrangements, other than the purported umbrella company or the individual, would assume that the purported umbrella company is the employer of that individual,
(c) the individual is not employed by the purported umbrella company,’
The full extent of the Government’s proposals remains to be seen.
The full extent of the Government’s proposals remains to be seen.
Rethinking Payroll Strategy Ahead of Employment Law Reform
It is clear that the new legislation, expected next year, will have a significant impact on recruitment agencies and end users, even though many details are still to be finalised and digested.
With so much focus upon umbrella companies, some recruitment agencies or end-client users may consider it prudent to operate their own payroll in place of using an umbrella company.
Whilst the contents of the Employment Rights Bill are far from having been determined, it is apparent that fundamental changes will result in creating enhanced rights for workers, extending existing employment rights such as rights to sick pay, and protection against unfair dismissal.
How Can We Assist?
Despite HMRC’s ongoing efforts to tackle the operations of umbrella companies, they are still being operated and such operations are often accused of tax fraud by HMRC. Where potential tax losses are identified, HMRC is likely to issue tax assessments on all the companies involved in the supply chain.
The team at KANGS have extensive experience acting for companies and recruitment agencies involved in the supply of temporary labour that have become subject of a HMRC investigation concerning VAT, PAYE, and National Insurance Contributions.
Our solicitors have acted for numerous organisations within the labour supply and recruitment sectors who have been served by HMRC with Kittel Notices or been subject to VAT assessments.
If you are currently involved, or anticipate, a dispute with HMRC, obtaining specialist legal guidance is essential. Our team offers comprehensive support throughout the entirety of HMRC investigations, including representation before the Tax Tribunal.
If we can be of assistance, please do not hesitate to contact our team using the contact details below:
Tel: 0333 370 4333
Email: info@kangssolicitors.co.uk
We provide initial no obligation discussion at our three offices in London, Birmingham, and Manchester. Alternatively, discussions can be held through video conferencing or telephone.
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