What is a purported umbrella company? Fortunately, not a devil in the HMRC detail

Finally, at the end of the working day on Monday July 21st 2025, the government gave the contractor industry sight of the draft Finance Bill 2025/26 with the new “Chapter 11,” which caters for umbrella companies, writes tax lawyer Rebecca Seeley Harris, founder of Re Legal Consulting.

Finance Bill 2025-26; definitely worth the wait for contractors

Officials promised that the direction of travel would be Joint and Several Liability (JSL), and they did not disappoint. So the draft was, perhaps, worth waiting for -- particularly because there are no devils in the detail as far as I can see.

But the bill does introduce a “purported umbrella company,” which is a new and interesting concept. I will come to what that is later in this article, exclusively for ContractorUK.

Joint and Several Liability: definition and applications

The Joint & Several Liability (JSL) legislation will have effect in relation to payments made to umbrella company workers on or after April 6th 2026.

These new JSL rules apply to the agency that has the direct contract with the end-client to supply the worker (‘the first agency’) or the end-client, if there is no agency.

New definition of umbrella company

As well as introducing the concept of “purported umbrella companies,” the bill contains another new area.

Contractors operating through umbrella companies must understand this change, as the implications could significantly alter how they engage with clients, recruitment agencies, and umbrella providers.

Specifically, the Finance Bill definition of ‘umbrella company’ is based on the worker being employed by a third person who carries on a business of supplying labour, whether or not with a view to profit.

JSL? It’s a powerful measure...

The central change is, of course, the introduction of Joint and Several Liability (JSL). It’s a measure that I recommended in my report on umbrella reform.

Joint & Several Liability is a powerful measure that holds recruitment agencies and potentially end-clients, financially responsible for any unpaid PAYE tax and National Insurance Contributions (NICs) that an umbrella company fails to remit to HMRC.

Historically, when umbrella companies engaged in tax avoidance or fraud, contractors could be caught unawares, facing HMRC demands for unpaid tax.

Now, agencies themselves will face these liabilities directly, prompting more rigorous vetting of umbrella companies.

Purported umbrella company: explained

As mentioned, a particularly crucial new concept is the "purported umbrella company."

This provision tackles scenarios where entities appear to operate as legitimate umbrellas, but deliberately evade tax obligations by misclassifying workers or diverting payments to avoid payroll taxes.

If an agency or client reasonably assumes the umbrella is the worker’s employer, yet in reality, the umbrella is not genuinely employing or paying the worker correctly, HMRC will deem the arrangement as employment for tax purposes.

The agency or end-client would then be liable for the missing PAYE and NICs.

High-profile fraud

Recent high-profile cases such as Ducas Ltd and PPS Umbrella illustrate the schemes in the crosshairs of this incoming legislation. Ducas allegedly diverted around £171 million intended for employment taxes through fraudulent structures using Personal Service Companies (PSC). Ducas has been accused of misleading recruitment agencies into believing taxes were being properly deducted.

Meanwhile, PPS Umbrella stands similarly accused of engaging in moving healthcare contractors from payroll to bogus self-employment, allegedly avoiding £7.3 million in NICs.

Under the April 2026 rules, such schemes would trigger immediate JSL, shifting financial responsibility up the supply chain to recruitment agencies. This significantly increases agencies' incentives to thoroughly check umbrella companies' compliance.

Will the ‘Purported Umbrella’ provision benefit contractors?

Although the inclusion of the “purported umbrella” in the legislation doesn’t directly benefit the contractor, making the supply chain more compliant does. 

Equally, though, contractors will still have to do their own ‘due diligence’ when choosing an umbrella company.

That said, in reality, most of the time, the contractor doesn’t get to choose anything other than an umbrella on the Preferred Supplier List. 

Will JSL lead to more umbrella non-compliance?

Even if the paint is still drying on the draft finance bill measures to target umbrella company non-compliance, there is a train of thought that JSL will actually encourage more non-compliant umbrellas, because they now know that the agency is on the hook -- and they will be long gone by the time HMRC catches up with them!

In a perfect world, JSL would see the end of payroll pirates entirely.

But those who are intent on committing fraud will no doubt find another way. It will all come down to the management of compliance in the supply chain. If the agency doesn’t do their ‘due diligence,’ then there is a potential that they will get caught out. And that, I think, is the point.

Greater scrutiny -- and the prospect of change

For contractors, this all means greater scrutiny of umbrella arrangements.

Recruitment agencies will likely tighten their processes, possibly opting to pay payroll taxes directly to HMRC themselves, reducing the risk of umbrella companies defaulting.

This could lead to changes in payment terms, administrative procedures, or even agencies bringing more contractors onto internal payroll systems.

Contractors should therefore expect closer collaboration and increased compliance documentation requests from their agencies.

Umbrella company regulation

The regulation of umbrella companies (in the shape of the umbrella regulations) is a very welcome measure, and there is more to come in a consultation in the autumn. 

In fact, the regulations are likely to have a bigger impact on contractors than Monday’s draft legislative tax policy introducing JSL.

The umbrella regulations will come under the remit of the Fair Work Agency (FWA) which is due to be operational by April 2026. As long as the FWA has sufficient powers and funds, this should have a very positive impact on umbrella company workers.

TLDR: Finance Bill 2025/26 imposing JSL on umbrella company clients...

Overall, contractors working through umbrella companies should anticipate significant shifts in industry practice driven by these legislative changes.

Contractors should proactively verify their umbrella provider's compliance, maintain transparent communications with agencies, and be prepared for potential shifts towards more direct employment relationships or agency-managed payrolls.

Ultimately, both JSL and regulation aim to protect contractors by reducing fraudulent practices, but they require awareness and engagement to navigate effectively.