Following prolonged uncertainty, HMRC has finally outlined its strategy for cracking down on non-compliance in the umbrella company market.
In March 2025, the Government issued its response to the consultation on “Tackling Non-Compliance in the Umbrella Company Market.” It confirmed plans to adopt Option 3—placing tax responsibility on the employment business that supplies workers to end clients. While this move signals a significant policy shift, it has also introduced new ambiguity. The industry is now left grappling with a critical question: who will be in charge of fulfilling PAYE obligations?
Umbrella companies
After industry representatives met with HMRC and the Treasury, we now know that umbrella companies will continue to deduct and pay tax and National Insurance, as usual. This is good news for compliant umbrella companies, but it’s not set in stone yet. We’re still waiting on formal legislation, which is expected to arrive in July 2025.
Who’s responsible for unpaid tax?
The agency closest to the end client will be the one liable if tax isn’t paid correctly. But it’s not as cut and dry as this, HMRC will use something called joint and several liability (JSL). If there’s no agency in the supply chain, then the end client becomes responsible.
What is joint and several liability (JSL)?
JSL means HMRC can pursue anyone in the chain for the full tax bill, whether that’s the umbrella, the agency, or the end client. Whoever they go to first must pay, and then it’s up to the parties involved to figure this out among themselves.
This will also be a strict liability approach. So even if you didn’t know something went wrong, if there’s a tax shortfall, you’re still responsible.
What should agencies be doing right now?
Even though it won’t be a legal requirement, you need to have strong processes in place to check who you’re working with. If you want to make sure your supply chain is compliant it’s important to be reviewing documents, visiting sites and completing assessments to get a real understanding of your supply chain.
1. Refine your Preferred Supplier List (PSL)
If your due diligence process is going to be more in-depth, you’ll save time and effort by only working with trusted umbrella partners. A tighter PSL makes it easier to maintain control and consistency.
2. Check your contracts and indemnities
Make sure any indemnities you have in place are realistic, they’re only reliable if the umbrella company is financially strong enough to back them up.
3. Keep an eye on HMRC guidance
In the meantime, HMRC continues to publish useful content aimed at both agencies and contractors. This includes guidance on how to spot non-compliant umbrella companies and how to check payslips. They’ve even released case studies showing what a good umbrella company looks like.
Change is coming
Focused has always had compliance at the forefront of our business practices, that’s why these changes are exciting to us, hopefully these changes will help to phase out some of the bad apples in our sector. This is why you can always come to us for further advice, simply get in touch with your Account Manager for any guidance on preparing for these changes or help with reviewing your current processes.
Related article: What green and red flags should agencies watch out for when choosing an umbrella company?
In this article we highlight some of the ways agencies may want to mitigate the risk of working with non-compliant umbrella companies.