Ensuring compliance and due diligence with agency workers and umbrella companies

Nowadays, many companies rely on agency workers and umbrella companies to meet their staffing needs. However, this approach comes with its own set of challenges and compliance obligations. In this blog, we look at the complexities of using agency workers and umbrella companies, highlighting key considerations to ensure your business remains compliant and efficient.

Agency workers

Many businesses use agencies to source labour. This could be for seasonal fluctuations in workforce requirements, short-term cover or specialist skills that cannot be found within the business. Whatever the reason, use of agency workers can help businesses maintain a flexible approach to staffing. This approach avoids the additional costs and administrative burdens that come with full-time employees.

Typically, the agency will employ the worker and account for PAYE on their wages. The business will enter a contract directly with the agency, not the worker. The agency will take their cut from the fee they charge the business and pay the worker accordingly. This allows businesses to source labour without having to take on a worker as an employee. Whilst the fee the agency charges would be more than the wages the worker will get, these arrangements allow flexibility. They eliminate the commitment of taking on a worker as an employee.

Agency workers and off-payroll risks

When speaking to clients about these types of arrangements, it is often the case that the agency operates PAYE on the workers wages. In many instances, assumptions rather than facts drive decisions, particularly in areas where due diligence may be lacking. How many businesses have it confirmed in writing from the agency that they operate PAYE?

The risk here is in relation to the off-payroll working rules. Were the agency to engage a worker through a limited company as opposed to as an employee, a business could unwittingly find themselves not complying with IR35 legislation. The rules state that as the end user, they must carry out an assessment to see if the engagement falls within IR35 or not (where the business is not a small company).

Whilst this arrangement may rare, not knowing how the agency engages and pays the workers it supplies can lead to unforeseen compliance issues. These issues could arise if HMRC investigates in the future.

Construction industry scheme (CIS)

Even assuming all the above doesn’t apply, and the workers are employed by the agency, this does not absolve a business from considering CIS. When workers supplied by the agency are engaged in projects that meet HMRC’s definition of construction operations, the business business (as a CIS contractor) should withhold CIS deductions from the agency, which acts as the CIS subcontractor.

Does CIS apply if workers are employed by an agency?

There is a general assumption that if the workers are employed by the agency, then CIS doesn’t apply, and this is not the case. This could mean that businesses are failing to meet their CIS compliance obligations. We have recently seen HMRC taking a punitive approach to errors like this, and the CIS regime has tax-geared penalties attached which can significantly increase any tax liability.

Umbrella companies

When operated properly, umbrella companies act as a payroll bureau, accounting for the correct amount of tax and national insurance (NI). They also absolve businesses of any off-payroll working obligations. The problem with this sector is that it is rife with non-compliance. HMRC publishes a list of named tax avoidance schemes, promoters, enablers and suppliers, which is populated with umbrella companies. Typically, the non-compliant companies pay the workers minimum wage with untaxed bonuses on top, folding before HMRC can recover any unpaid tax arrears.

New tax rules shift liability up the chain for umbrella companies

To tackle this, HMRC are changing where the liability sits for any unpaid tax/NI due from umbrella companies. It is now moving up the chain to the end user i.e. the business receiving the services of the worker. These measures were announced in the recent Budget and are due to come into effect in April 2026. HMRC will finalise this in the Finance Bill 2025 and it is interesting to note their recent paper on this matter was an announcement and not a consultation.

Your compliance obligations

In the current climate, it is simply not enough to assume an agency or umbrella company you engage is operating PAYE correctly. Proper due diligence should be carried out to ensure the agency and/or umbrella company is operating PAYE correctly. Evidence should be requested and kept on file. Where your business falls under the SAO regime, this is even more important as the SAO can find themselves personally liable from HMRC.