Melissa Mhondoro, Legal Advice Manager, Recruitment and Employment Confederation (REC) outlines the future for MUCs.
It may seem a small matter, a mini matter you might say, but it adds to the big headache for recruiters on how to engage with umbrellas going forward. This is HMRC confirming that from April 2026, the responsibility for ensuring the correct tax is paid under PAYE will fall on recruitment agencies that supply workers employed by umbrella companies, including mini umbrella companies (MUCs).
Mini umbrellas create a higher chance of recruiters getting caught in HMRC’s crosshairs, because they are usually fragile and non-compliant and typically fail or disappear overnight.
In July 2025 the government published its draft Finance Bill. In theory, the Bill introduces strict joint and several liability if there have been underpayments of PAYE with respect to umbrella company workers. This means that once an underpayment of PAYE is established, liability for it will apply to all parties in the supply chain, regardless of the circumstances surrounding the underpayment and HMRC should be able to pursue each party for the full amount owed, regardless of their role in incurring the underpayment. However, in a policy paper published alongside the Bill, HMRC confirmed that they will be pursuing agencies with a direct relationship to the end-user client in a supply chain involving actual or purported umbrella companies.
Review and safeguard
This means businesses should take steps to review their supply chains and safeguard themselves from being connected to umbrella company non-compliance. For master vendors the point to take away is that it is the party that has the contract with the client will be liable for PAYE underpayments incurred by umbrella companies in the supply chain. This poses a particular risk given the layers that could exist between an umbrella company and a master vendor in a long supply chain.
Mini umbrellas also pose a greater risk to recruitment agencies under these new measures. Mini umbrellas were a growing headache for HMRC a few years ago, even though they were not that many in the supply chain at the time. This was because of the potential for mini umbrella fraud. While there is no standard model of MUC fraud, it typically involves creating and shutting down multiple, small umbrella companies to evade tax and fraudulently exploit government incentives like Employment Allowance and the VAT Flat Rate Scheme aimed at small businesses.
The typical umbrella company model involves a client paying a recruitment agency £5,000 a month for someone’s work. This money is then passed on to an umbrella company by the agency. The umbrella then pays the worker their net salary and is supposed to pay £1,500 in taxes. But with a mini umbrella involved, it is riskier for a recruitment agency. If an agency uses a mini–umbrella company, the likelihood of the umbrella company being shut down without the outstanding tax payment being made is greater. In this scenario, under HMRC’s plans the recruitment agency will be pursued for the £1,500 underpayment of tax.
The maddening thing is that the proprietors of the mini umbrella can go on to set up new mini umbrella companies and transfer the workers engaged by the previous business to the new mini umbrella company. HMRC is unlikely to pursue them for tax liabilities owed in the previous umbrella company and will attempt to recover this from the recruitment agency.
Workers employed by a mini umbrella company are sometimes unaware of the underpayments of tax on their salaries or that they may have moved between mini umbrella companies. This is because these mini umbrella companies have a relatively short lifespan. New mini umbrella companies will typically be able to take their place in the supply chain and this change goes relatively unnoticed.
Be aware
There are red flags that recruiters should watch for to reduce their legal, tax, regulatory and reputational risks.
These include frequent changes of employer name and/or PAYE reference on payslips, requests to sign documents that shift risk or make you a billing intermediary and directors/personnel/admin who appear to have been behind multiple small companies.
There is also a demographic hint to spot them – in the shape of young people.
According to HMRC, for umbrella companies in general it is estimated that around 70 per cent of employees are aged between 25 to 54, whereas this age range represents around 50 per cent of the UK adult population. But among the payrolls of mini-umbrella companies deemed highest risk, which are fraudulent and therefore more likely to be impacted by this measure, employees aged 18 to 34 are particularly overrepresented at around 50 per cent of the population, compared to representing around 25 per cent of the UK adult population.
There are models and products that claim to protect employment businesses using umbrella companies from liability. But we are cautioning REC members against adopting any of these as full proof measures. The solutions for agencies that choose to continue to work with umbrella companies will need to be convincing umbrella companies to allow for real-time monitoring and sample checking of actual worker payslips and ideally evidence of payments being made to HMRC.
