Agencies may no longer be required to run PAYE, but they could still be on the hook for unpaid tax.

The recruitment rumourmill reports that HMRC appears to be shifting its stance on the tax treatment of contractors employed via umbrella companies, despite new legislation expected to be published in July. Instead of treating recruitment agencies as the primary employer for tax purposes, the rumoured new proposal points to a model where agencies and umbrella companies share liability. A significant change with major implications for the sector.

What’s changing?

Under the proposals, linked to the wider Employment Rights Bill, umbrella companies would remain the primary party responsible for PAYE and NIC deductions. However, if this rumoured new proposal is in fact correct, if the umbrella company fails to fulfil its obligations, agencies may be held jointly and severally liable for the unpaid tax.

That means:

Agencies would no longer need to operate PAYE/NIC directly BUT could still be pursued by HMRC for any shortfall.

In theory, this removes a layer of admin, but introduces new financial exposure.

For comparison, this mirrors the principles behind the Managed Service Company (MSC) legislation of 2007 — which led many agencies to cut ties with MSCs altogether to avoid the associated risks.

The risk for agencies

This new model could:

Introduce contingent liabilities on agency balance sheets
Affect agency valuations and lending risk
Force agencies to reconsider their umbrella partnerships entirely

The exact impact will depend on what compliance checks, due diligence, and contractual protections are in place.

At minimum, we recommend:

Director guarantees from umbrella providers
Robust contracts clearly setting out tax obligations
Due diligence on umbrella partners

Remember: HMRC doesn’t need to prove fault, only that tax is missing. The rest may land on you.

What about the employment rights bill?

The evolving proposals form part of broader reform under the Employment Rights Bill, which seeks to address concerns around worker protections, umbrella company accountability, and supply chain enforcement. However, full legislative detail is still pending, and we expect further consultation before implementation.

The bottom line

This change, if introduced, is arguably better than treating agencies as employers outright. But let’s be clear: it doesn’t make agencies safe. It simply repositions the risk from upfront admin to back-end liability.

Those around in 2007 may recall the Managed Service Company legislation which made agencies potentially liable where a managed service company was involved. The principle here is very much the same, and the result then was that agencies stopped working with MSPs.

Agencies that work with umbrellas must now be even more selective, and contractually protected, than ever before.