Exposing the Risks of Recruitment Agencies Using Illegal Umbrella Companies

Every week, over half a million temporary workers in the UK rely on umbrella companies to process their pay, with most of these workers engaged and paid through recruitment agencies. But how well do you know your supply chain? Many companies aren’t fully aware of how their contingent workers are paid or the hidden layers in their supply chains—and this lack of transparency can lead to serious risks.

While the government is ramping up its commitment to tackling non-compliance in the umbrella market, real change won’t come until April 2026. This means the risks remain very real today.

A Quick Recap

An umbrella company is an employer for contractors, handling payroll and tax requirements on behalf of recruitment agencies or end-hirers. Here’s a quick overview of how it works:

• Employment Role: The umbrella company enters into an employment contract with the worker and a service agreement with the agency or end-hirer.
• Payment Processing: It receives gross payments from agencies or end-hirers, deducting PAYE tax, National Insurance, and other statutory costs.
• Worker Benefits: A compliant umbrella company ensures that temporary workers receive the correct pay and benefits, while also managing tax obligations.

However, despite regulations, thousands of non-compliant umbrella companies still operate, often paying less tax than required. This can lead to significant financial and reputational risks for agencies and end-clients alike.

The Hidden Risks in Your Supply Chain

If you use agencies to hire contingent workers, there’s a high chance that umbrella companies are part of your supply chain. But are they compliant?

Due to changes in IR35 and a reluctance by some businesses to engage LTD company contractors, illegal umbrella schemes have surged. Many of these schemes offer higher take-home pay through tax avoidance tactics, penetrating supply chains with immoral practices like kickbacks and referral schemes. This means even well-intentioned businesses can unknowingly find themselves exposed to legal and financial risks.

Your Risk

1. Reputational Damage

HMRC has launched “name and shame” initiatives targeting businesses involved in tax avoidance and worker violations, such as failing to meet minimum wage requirements. In 2024 the HMRC published 524 businesses across all industry sectors for failing to pay 172,000 workers the national minimum wage (NMW). These lists include high-profile companies such as easyJet and Greggs, and a place on this list is the opposite of a badge of honour. The list included offences as small as £515.51, so it’s key you’re compliant from day one.

2. Financial Liabilities

If non-compliant umbrella companies are in your supply chain—whether you’re aware of them or not—your business faces financial risks. The Criminal Finance Act allows HMRC to pass fines, penalties, and unpaid tax down the supply chain. With non-compliant umbrellas often liquidating or operating offshore, HMRC may hold other businesses in the chain accountable for unpaid taxes and penalties.

3. Worker Impact

The overlooked victim of non-compliant umbrella companies is often the worker. These companies typically underpay workers or withhold incorrect tax amounts on their behalf. In cases where HMRC can’t recover taxes from the umbrella company (if, for example, it’s offshore or liquidated), the worker is left to shoulder the burden. Moving from a non-compliant umbrella to a compliant one may reduce a worker’s take-home pay due to correct tax deductions, which can impact morale and productivity. Ensuring compliance from the start protects both your business and your workers.

What’s Changing?

Umbrella company compliance has been under government scrutiny for some time, but until recently, there was little action. In October 2024, however, the Labour government announced changes that will take effect in April 2026. Under these new rules, whoever engages the umbrella company—whether it’s the end-client or agency—will be responsible for PAYE compliance.

This means that the person paying the umbrella company will either have to deduct tax before payment or accept liability for any shortfalls if the umbrella company fails to comply. These changes highlight the urgency for businesses to assess their supply chain’s compliance now to avoid future liability.

Let Owen Daniels Help

Navigating non-compliance in your recruitment supply chain can be complex and costly if not handled correctly. At Owen Daniels, we specialise in STEM recruitment and are here to help you manage these challenges. We provide thorough compliance checks to ensure your recruitment supply chain aligns with the latest regulations, so your workers are onboarded and paid compliantly.

Partnering with Owen Daniels helps you avoid the pitfalls of non-compliance, protecting your business’s reputation and financial health. Let us handle compliance so you can focus on growing your business with confidence.