What Small Business Owners and Contractors Need to Know about Umbrella Companies



As a small business owner or contractor in the UK, it’s important to stay informed about changes in legislation that may impact your operations. The government is currently considering new proposals that could have significant implications for those who work with umbrella companies. These companies serve as intermediaries for hiring temporary workers and have faced criticism for facilitating tax avoidance and employment rights abuses. In this blog post, we will explore the key points of the government’s proposals and discuss what they mean for you.

Understanding the Proposals:

The UK Treasury has put forth three broad options to address the issues surrounding umbrella companies:

  • Due Diligence Requirement:

Under this proposal, recruiters or their clients would be required to conduct due diligence on umbrella companies. Failure to comply with this requirement could result in penalties. This measure aims to promote transparency and accountability in the hiring process.

  • HM Revenue & Customs Collection of Unpaid Tax:

The second option empowers HM Revenue & Customs to collect unpaid tax from businesses in the labor supply chain, even if they are not the direct employer. This approach seeks to hold all entities involved in the hiring process accountable for any unpaid taxes.

  • Recruiters as Responsible Employers:

The third proposal suggests treating recruiters as the employers for tax purposes, regardless of whether they utilize an umbrella company. This would make recruiters liable for any irregularities in payroll, providing an added layer of responsibility and accountability.


Implications for Small Business Owners and Contractors:

If these proposals become law, they will have significant implications for small business owners and contractors who work with umbrella companies. Here’s what you need to consider:

  • Due Diligence:

If the due diligence requirement becomes mandatory, recruiters or their clients will need to invest time and resources into thoroughly vetting umbrella companies. This means ensuring that they comply with tax regulations and employment rights standards. Failure to conduct due diligence could result in penalties, so it’s crucial to prioritise this step in the hiring process.

  • Financial Responsibility:

Under the proposed changes, recruiters could be held financially responsible for any irregularities in payroll, even if they utilize an umbrella company. This means that small business owners and contractors should be vigilant about the companies they choose to work with. It is advisable to select reputable umbrella companies that prioritize compliance and adhere to legal obligations.


  • Increased Enforcement:

The government’s proposals indicate a commitment to cracking down on tax avoidance and employment rights abuses facilitated by umbrella companies. This suggests that enforcement of existing labor market rules may become more rigorous. Small business owners and contractors must be prepared for potential audits and stricter regulations surrounding the use of umbrella companies.



The UK government’s proposals to address tax avoidance and employment rights abuses by umbrella companies have significant implications for small business owners and contractors. By familiarising yourself with the proposals and understanding their potential impact, you can make informed decisions when engaging with umbrella companies. It’s essential to prioritize due diligence, select reputable companies, and stay updated on any changes in regulations or enforcement. Adapting to these potential changes will help you navigate the evolving landscape and ensure compliance with the law.