End clients to take responsibility for umbrella company tax compliance

Under the new legislation, the responsibility for operating PAYE/NICs on the earnings of a worker engaged by an umbrella company will move from the umbrella company to the end client or, if there is a UK agency in the labour supply chain, the UK agency.  If there is more than one UK agency the chain, it is the agency that has the direct contractual relationship with the end client that will be responsible.

What is an umbrella company?

An umbrella company is an intermediary which engages individual workers (typically as employees) to provide services to end clients on assignments. The umbrella company generally manage all the administration (such as time sheets and billing) relating to the assignment. The umbrella company is also obliged to operate PAYE and NICs on the workers’ earnings, thereby protecting the end client and any agencies in the chain from PAYE and NICs liabilities.

Who uses umbrella companies?

Many businesses use UK umbrella companies in their labour supply chains. HMRC analysis shows that in the tax year 2022/23 at least 700,000 workers were engaged via an umbrella company.

The use of umbrella companies increased substantially following the introduction of IR35 to the private sector in April 2021.  Businesses often require those contractors who are inside IR35 (i.e. contractors who are supplying their services via their own intermediary (such as a personal services company) and who would be an employee of the end client if hired directly by the end client) to provide their services as an employee of an umbrella company instead.

What’s the issue?

While many umbrella companies comply in full with their PAYE/NICs obligations, some do not using a variety of avoidance schemes designed to reduce their tax burden.  HMRC estimate that in the tax year 2022/23 umbrella companies failed to comply with their tax obligations for at least 275,000 workers.

What’s the solution?

The previous government published a consultation paper proposing potential solutions mainly focused on encouraging businesses which use umbrella companies to undertake greater due diligence on their supply chains to ensure tax compliance.

The new legislation announced by the Chancellor goes a significant step further than this by making the end client (or UK agency) ultimately responsible for the PAYE/NICs. 

The government have committed to publishing the full details of how this will operate in practice “in the coming months” as well as draft legislation before it appears as part of the Finance Bill 2025. The government will also engage with stakeholders so there is an opportunity to provide feedback.

What’s the effect?

While it is essential to tackle non-compliance by umbrella companies, making end clients and agencies responsible for PAYE/NICs compliance will impose a significant burden on those businesses. This comes at a time when the costs and administration on businesses is increasing exponentially.  However, businesses have nearly 18 months to consider their approach including whether they wish to continue to use umbrella companies and, if so, how they can safeguard their position.  However, for some businesses, this may be one burden too many.

For further information on the implications of the Autumn Budget click here.