Are your contractors using Umbrella companies? How to find out and understand the risk

If you rely on contract engineers to keep projects moving, hit production targets, or deliver specialist skills, umbrella companies are likely already part of your supply chain (whether you realise it or not). With significant legislative changes taking effect from April 2026, engineering and manufacturing organisations will carry far greater responsibility for how those contractors are paid and by whom. Understanding where umbrella companies sit in your supply chain, and the compliance and commercial risks they create, is no longer just a box-ticking exercise; it's a business-critical issue. 

What are Umbrella Companies?

Umbrella companies are employment intermediaries that employ workers on behalf of agencies and end clients. They process payroll, handle tax and National Insurance contributions, and manage employment contracts for contractors who work on temporary assignments. While many umbrella companies operate compliantly, the sector has historically lacked formal regulation, creating opportunities for non-compliance that can expose your organisation to significant risk.

How to Identify Umbrella Companies in Your Supply Chain

Many organisations don't realise they have umbrella companies in their contractor supply chain. Here's how to find out:

Review Your Agency Contracts

Examine your agreements with recruitment agencies. Ask directly whether they use umbrella companies to pay contractors. Request a list of all umbrella companies they work with and understand the relationship between the agency and these providers.

Check Contractor Payment Structures

Look at how your contractors are paid. If workers are receiving payslips from a company that isn't the recruitment agency or your organisation, an umbrella company is likely involved. Review contractor invoices to identify who is actually employing and paying the workers you engage.

Conduct Supply Chain Mapping

Create a visual map of your entire contractor supply chain. Identify every entity between your organisation and the contractor providing services. This exercise often reveals umbrella companies that weren't previously visible to procurement or HR teams.

Ask Your Contractors Directly

Simply asking contractors about their employment status and who pays them can provide valuable insight. Many contractors will openly share that they're employed through an umbrella company if asked.

The Compliance Risks You're Facing

From April 2026, the risk profile changes significantly. Umbrella company non-compliance will no longer sit solely with the umbrella provider. Where an umbrella forms part of the labour supply chain, liability for unpaid tax can be passed up the chain to agencies and, in some cases, directly to the end client. The consequences of non-compliant umbrella companies in your supply chain are severe, particularly with new joint and several liability rules taking effect from 6 April 2026.

Joint and Several Liability from April 2026

Under legislation in Finance Bill 2025-26, employment agencies or end clients will become jointly and severally liable for any amount required to be accounted for under PAYE provisions where an umbrella company forms part of a labour supply chain. This means if an umbrella company fails to pay PAYE or National Insurance contributions correctly, HMRC can pursue your organisation or your recruitment agency for the full amount of any unpaid taxes.

The liability operates on a strict basis with no statutory defence. Even if you conducted due diligence on an umbrella company and they provided assurance of PAYE compliance, you can still be held liable if they fail to remit taxes correctly. HMRC can demand payment from the agency, or, where there's no agency, directly from your organisation as the end client.

Financial Exposure

For engineering and manufacturing organisations that rely heavily on contractors, the financial exposure can be significant. A single non-compliant umbrella company supporting multiple contractors across long-term projects could leave a business facing substantial backdated PAYE and National Insurance liabilities, along with penalties and interest. For organisations with large contractor workforces or high day rates, this exposure could run into hundreds of thousands or even millions of pounds.

Reputational Damage

Association with non-compliant umbrella companies, particularly those using disguised remuneration schemes or other tax avoidance arrangements, can seriously damage your reputation. HMRC guidance highlights potential consequences, including prosecution for failure to prevent criminal facilitation of tax evasion and publishing details of those involved in tax avoidance schemes.

Worker Protection Issues

Non-compliant umbrella companies may be failing to provide workers with proper employment rights, including minimum wage, holiday pay, or statutory sick pay. This creates ethical concerns and potential liability under employment law, particularly as the new Fair Work Agency begins enforcement activity from April 2026.

Common Non-Compliance Red Flags

• Mini-Umbrella Structures: Multiple umbrella companies used to exploit VAT Flat Rate Scheme and Employment Allowance, artificially reducing tax liabilities.
• Disguised Remuneration Schemes: Arrangements where workers receive part of their pay through loans or other structures designed to reduce tax obligations. HMRC has flagged over 100 such operations.
• Opaque Payment Structures: Payslips that don't clearly show salary, holiday pay, and expenses as separate items, or that reference payment rates in ways that obscure actual employment income.
• Unusually Low Costs: Umbrella companies offering significantly lower rates than competitors may be cutting corners on compliance or using non-compliant payment arrangements.
• Lack of Proper Documentation: Inability or unwillingness to provide employment contracts, evidence of PAYE payments to HMRC, or professional indemnity insurance.

Taking Action

• Map your supply chain: Identify all umbrella companies paying contractors across the organisation through a full audit, not assumptions.
• Assess liability exposure: Determine whether your organisation is the “relevant party” under the new legislation, based on whether you contract directly with umbrellas or via agencies.
• Review agency contracts: Strengthen compliance warranties, tax indemnities, and audit rights, and assess any agency–umbrella connections that could shift liability.
• Implement due diligence: Verify umbrella company legitimacy, financial stability, PAYE/NIC payments, employment documentation, HMRC risk status, and independent compliance accreditation.
• Strengthen ongoing governance: Put in place continuous oversight through regular audits, performance reviews, monitoring of HMRC guidance, and clear escalation routes.
• Update policies and training: Ensure HR, procurement, finance, and hiring managers understand umbrella risks and reflect the new liability regime in supplier policies and training.

At Owen Daniels, we understand the complexities of contractor compliance and the challenges posed by umbrella companies in your supply chain. Our Payroll & Compliance solutions are designed to help organisations in the STEM sector navigate these risks effectively. 

Contact us today to discuss how we can help secure your contractor supply chain and protect your organisation from umbrella company compliance risks.