Umbrella companies and IR35 rules: what you need to know

It is well known that successive Governments and HMRC consider some umbrella companies to be a source of tax loss to the Exchequer and potential exploitation of workers’ rights. Umbrella companies contract out workers to other organisations, and the responsibilities surrounding off-payroll labour/IR35 rules can become blurred – see our flowchart for end engagers.

What is an umbrella company?

There is no statutory definition of an ‘umbrella company’. Generally speaking, an umbrella company refers to a company that employs temporary workers who work at different end clients’ premises.

Typically, umbrella companies enter a contract with a recruitment agency, who sources work from end clients.

Depending on the number of parties in the labour supply chain, an umbrella company may be the ‘fee payer’ for off-payroll labour purposes and be obliged to deduct PAYE and NIC before paying the worker – read more on each party’s responsibilities.

Legislation updates for umbrella companies

On 4 March 2025, the response was published to the consultation on tackling non-compliance in the umbrella company market.

Recognising the role of compliant umbrella companies, the Government has rightly rejected calls to ban umbrella companies completely.

The government originally suggested three means of dealing with non-compliance from a taxation perspective:

Mandatory due diligence requirements for employment agencies and end-clients;

Legislate to give HMRC the powers to collect unpaid PAYE/NIC from another business in the labour supply chain, such as employment agencies or end-clients under a ‘transfer of debt;’ principle.

The employment agency or end-client being responsible for the PAYE/NIC liabilities for payments made to the workers.

Finer details on these proposals is yet to come. However, the consultation response reiterates the announcement made in the Budget in October 2024. From April 2026, the responsibility to account for PAYE will shift to the recruitment company. If there is no recruitment company in the chain, the responsibility will sit with the end engager organisation (for whom the work is carried our).

If these reforms do deliver their aim of eliminating non-compliance in the umbrella company market so that only the compliant operators remain, that can only be a good thing.

While we wait for more practical details, it is clear that there will be greater scrutiny of umbrella companies in future. If your business is involved with umbrella companies as an agency or end engager organisation benefitting from the worker’s services, you will need to be comfortable that the umbrella company is compliant with all necessary obligations. If the companies you engage with are non-compliant, there will be tax and reputational issues at stake.