Guidance

Responsibilities for employment businesses working with umbrella companies

How to protect your employment business, and the workers you supply, from non-compliant businesses in your supply chain.

• From: HM Revenue & Customs
• Published: 30 November 2023
• Last updated: 3 December 2024 — See all updates

As an employment businesses (sometimes called a recruitment agency) you find workers for other businesses (sometimes called end clients).

You may use umbrella companies to employ those workers. The umbrella company will usually be the worker’s employer. They are responsible for:

• paying the worker’s wages
• operating PAYE as part of their payroll

Many umbrella companies follow the tax rules, but some do not. They may not pay all the money owed to workers, or to HMRC.

Working within the law

As an employment business, you must comply with employment and tax law when working with umbrella companies. This includes requirements for:

• operating in the recruitment sector, in the Employment Agencies Act 1973 and the Conduct Regulations 2003

• ensuring agency workers are treated the same as permanent staff in the Agency Workers Regulations 2010

You must:

1. Submit the quarterly employment intermediaries return for workers you place with end clients, where you do not operate PAYE. This should include umbrella company employees.

2. Operate PAYE, where the workers you supply to a UK end client are employed by an overseas employer, such as an umbrella company, with no UK presence. This will not apply if someone else operates PAYE on your behalf. Read the rules for offshore intermediaries for more information.

3. Follow the VAT requirements for operating self-billing with an umbrella company.

4. Pay tax and any National Insurance contributions on any cash incentives or rewards your employees receive directly from an umbrella company.

5. Include incentives or rewards your business receive from an umbrella company (like payment for inclusion on a preferred supplier list) as part of taxable income or profits. Read the rules for income tax and rules for Corporation Tax, for more information.

6. Prevent illegal working. This includes checking that umbrella companies are carrying out and recording right to work checks on temporary workers. Read the Immigration, Asylum and Nationality Act 2006 for more information.

7. Not agree to or accept gifts (including money), which:

• encourage any part of the supply chain to perform their functions or activities improperly
• rewards them for having already done so

Read the Bribery Act 2010 for more information.

Supporting workers

Workers can find being employed by an umbrella company confusing. Working for a non-compliant umbrella company can cause them further problems. Supporting workers can mean that you will:

• receive fewer queries
• improve compliance in your supply chain
• help protect your business’s reputation

Explain how the worker will be employed

You should explain to the worker:

• how the umbrella company employment arrangement will work
• any other options for arranging employment that might be available to them

They can then decide if working through an umbrella company is right for them.

You should share information on working through an umbrella company with workers. This will help workers understand employment rights and tax responsibilities.

Be clear about pay rates

Be clear about pay rates, both when you:

• advertise a job
• discuss roles with prospective workers

You should be clear that:

• the assignment rate is the rate that you will pay the umbrella company, not the worker
• the worker’s gross pay will be less than the assignment rate

An assignment rate is sometimes known as:

• an uplifted rate
• an umbrella rate
• a day rate
• an hourly rate

You or your workers can use our tool to work out pay from an umbrella company.

Issue key information documents

You must provide workers with a key information document under the Conduct Regulations 2003.

You must issue key information documents when workers first register with you, before you provide any work-finding services. You must update and reissue them when there are significant changes.

Some umbrella companies create key information documents for employment businesses to use. However, it is always your responsibility to issue key information documents. You cannot defer this to a third party, like an umbrella company.

Before you issue a key information document, make sure:

• it contains the name of the umbrella company
• it is clear, accurate, and covers only the required information
• you’ve obtained any information you need to complete the key information document from the umbrella company in writing
• you have a process for getting updated information from the umbrella company when things change

For support completing a key information document, contact the Employment Agency Standards Inspectorate (EAS).

Working with umbrella companies that do not follow the law

There can be serious consequences for your business if you’re involved in non-compliant supply chains and do not take reasonable measures to avoid this. A non-compliant supply chain might include umbrella companies who do not follow employment and tax law.

In most circumstances, claiming that you were not aware of non-compliance is not a defence. 

If HMRC investigates and finds you are involved in non-compliant supply chains, we may take action. This could include, but is not limited to:

1. Prosecuting you for failure to prevent criminal facilitation of tax evasion in the supply chain.

2. Denying your right to recover VAT input tax and issuing penalties if you knew (or should have known) you were connected to VAT fraud.

3. Issuing an enablers penalty if you:

• use an umbrella company that is operating tax avoidance
• have been involved in designing, marketing or facilitating another person to avoid tax

4. Publishing details of those involved in tax avoidance schemes including promoters, enablers, and suppliers.

5. Publishing details of deliberate tax defaulters.

The Employment Agency Standards Inspectorate can: 

• close businesses and ban directors and others from running an employment business and publish their details where they breach the Employment Agencies Act 1973 or other relevant legislation such as the Conduct Regulations 2003, due to misconduct or unsuitability

• publish the names of individuals who have been banned from running an employment agency or business

The Gangmasters and Labour Abuse Authority (GLAA) issues penalties for criminal offences under the Gangmasters (Licensing) Act 2004, including those who use unlicensed umbrella companies in the sectors covered by the GLAA.

If HMRC, the EAS or GLAA take action against your business, it can damage your business’ reputation and ability to secure and maintain contracts and business relationships with end clients and workers.

Protecting your business

To protect your business you should understand your supply chains and take action if you spot non-compliance.

It is your decision whether to work with an umbrella company and you should not do so if you suspect they are not compliant, even if a worker requests it.

Due diligence

Only use umbrella companies that you have carried out due diligence on.

You should:

• identify the entities in your labour supply chain
• understand how workers are being engaged and paid
• assess and reduce any risks of non-compliance

The checks you undertake should be regular, reasonable and proportionate for your business.

You should keep a record of the due diligence checks that you have undertaken on an umbrella company.

You should:

• make sure that if workers ask to work through a particular umbrella company, this is not because the umbrella company has promised them increased take home pay, or additional untaxed payments — these can be signs of tax avoidance

• find out if the umbrella company is outsourcing its employer responsibilities to a third party, and do due diligence on that third party

• check the umbrella company is VAT-registered, charging VAT, and that the details provided by the umbrella company match

• check the umbrella company details you have match those registered with Companies House

• get reconciliation statements (also known as a pay statements) directly from the worker (where they have them), to check the assignment rate matches the money you have sent to the umbrella company

• get payslips directly from the worker, to check the umbrella company is acting as the employer and operating PAYE

• check payslips and reconciliation statements you have obtained from workers for unexplained deductions (sometimes called skimming), tax avoidance or underpayment of National Minimum Wage

• Understand your worker’s pay and use our tool to work out pay from an umbrella company

• check the name of the umbrella company corresponds with the bank details provided by the umbrella company

• check the umbrella company has the required insurance, including employers liability insurance

• check the accreditation status any umbrella company claims to hold with the relevant body

• check whether the umbrella company holds a GLAA licence on the GLAA website if it operates in a sector covered by the GLAA

Umbrella companies can be involved in many forms of tax non-compliance and there are checks you can carry out to identify them.

These checks:

• help you to apply due diligence to assure your labour supply chains
• prevent criminal facilitation of tax evasion
• reduce the risk of using an umbrella company that operates a tax avoidance scheme
• protect your supply chains from mini umbrella company fraud

Signs of mini umbrella company fraud can include:

• regularly having to reissue key information documents to workers, because the umbrella company keeps changing
• differences between the employer’s name on the latest key information document and the latest payslip
• frequent changes to the PAYE reference number, which may be included on payslips

Your end client may also want evidence that the umbrella company is the employer and operating PAYE, to ensure compliance with off-payroll working rules. You should share this if asked.

Reduce your risk

Structure your supply chains in a way that is easy to understand. You can do this by keeping your supply chains as short as possible. This makes it easier to carry out due diligence. It also lowers the risk of non-compliance further down the chain, particularly by fraudulent umbrella companies. 

Give your staff training to help them identify non-compliance within your supply chains and have clear procedures on how to report it.

If you think that an umbrella company in your supply chain is operating non-compliantly, report them to their accreditation body if they belong to one.

Report concerns

You can report tax fraud and avoidance by a person or business to HMRC .

You can report concerns about pay and work rights including National Minimum Wage, employment agencies, gang masters, or working hours.

Published 30 November 2023
Last updated 3 December 2024 + show all updates

1. 3 December 2024

   A link to a tool to help you work out pay from an umbrella company has been added.

2. 30 November 2023

   First published.