Policy paper: Agencies responsible for PAYE where umbrella company used

• HMRC has published a policy paper to provide further information about the Budget announcement (on 30th October 2024) that it will make recruitment agencies responsible for accounting for PAYE on payments made to workers that are supplied via umbrella companies.
• The aim is to deliver the reform for the start of the 2026/27 tax year.
• HMRC consider that recruitment agencies can decide which businesses enter their labour supply chains and so, have the power to prevent “illegitimate” operators from being in the temporary labour market / supply chain. In this regard, Government believes making those who can control the labour supply chains legally responsible for ensuring PAYE is properly accounted for is the most effective way of improving compliance.
• The policy paper says
  • that Government understands the benefits that compliant umbrella companies play in the temporary labour market and states this new measure will not prevent businesses from using umbrella companies. They state it will ensure that the underlying PAYE obligation will be the agency’s ultimate responsibility if the umbrella company supplying workers fails to operate PAYE on the workforce correctly.
  • that legislation will be introduced that makes agencies that use umbrella companies legally responsible for ensuring the correct Income Tax and National Insurance Contributions (“NICs”) are deducted and paid to HMRC. The agency will be liable for any shortfall.
  • Where there is no agency in the supply chain, the responsibility will be placed on the end client.
  • If there are multiple agencies in the supply chain, the agency with the contractual relationship with the end client is responsible.
• Government anticipates that businesses that continue to outsource to umbrella companies will undertake due diligence to ensure the PAYE obligations will be met or put in place legal indemnities as the agency would be liable for any shortfall
• Or, an agency could operate PAYE themselves and withhold income tax and NICs before making payment to the umbrella company who employs the worker and remit these sums to HMRC themselves to avert the risk that umbrella companies will fail to pass these sums to HMRC. The agency would also be responsible for the payment of employer NICs.
  • In this scenario, the agency would only be using the umbrella company to reduce administrative burdens of HR related aspects of engaging a workforce and allowing the worker to have flexibility to work for multiple agencies but with one employer.

See the policy paper here.

Aspire comment

The devil is in the detail and so, we will await the full details of how HMRC envisage this operating and draft legislation as part of Finance Bill 2025.

This, alongside with all the other Budget 2024 announcements, doesn’t bring good news for umbrella companies.

The policy paper gives the impression that the author doesn’t quite have a true understanding of the relationship between an agency and umbrella company. Rather than referring to the supply of temporary labour, the policy paper refers to an umbrella company operating payroll on an agency’s behalf and refers to companies continuing to outsource payroll operation.

Furthermore, it gives an insight into HMRC’s perception of the “Agency Legislation” (Chapter 7, Part 2 of the Income Tax (Earnings and Pensions) Act 2003). This was amended in 2014 and states that where a temporary worker supplied to an agency is subject to Supervision, Direction and Control (“SDC”) then PAYE must be applied. Any financial liabilities that arise due to PAYE not being applied correctly sit with the agency (even if an umbrella engages and pays the labour). This policy paper alludes to HMRC considering that all “agency workers” are treated as employees for tax purposes. This is confusing and, in our view, an incorrect interpretation of the Agency Legislation.