ESM2440 - Umbrella companies legislation: Chapter 11 ITEPA 2003- purported umbrella companies

This guidance is effective from 6 April 2026 and relates to draft legislation expected to be included in the next Finance Bill. The legislation and guidance is subject to revision before or during the process of Parliament considering the Bill. 

Section 61Z1 Chapter 11, Part 2 ITEPA 2003

Section 61Z1 Chapter 11, Part 2 ITEPA 2003 specifies the conditions under which joint and several liability applies to circumstances where a worker is supplied by a business that is a purported umbrella company. 

This happens when the conditions set out in any of three Cases are met. Where there is a reference to “employed”, this does not include deemed employment.

Case 1 applies when it is reasonable to suppose that one or more parties in the contractual chain would think the purported umbrella company employed the worker, or that a step the purported umbrella company took was intended to give this impression, when in fact it did not employ the worker. 

The conditions for Case 1 to apply are that:

  • the purported umbrella company participates in arrangements that would result in the umbrella company arrangements conditions being met (see ESM2410- when the legislation applies and commencement) if it employed the worker
  • Either
    • It is reasonable to suppose that one or more participants in the arrangements, other than the purported umbrella company or the worker, would assume that the purported umbrella company is the employer of that worker, or
    • The purported umbrella company has taken a step that it is reasonable to suppose was intended to give the impression that the purported umbrella company is the employer of the worker. It does not matter whether the step taken by the purported umbrella company did in fact give that impression.
  • The worker is not employed by the purported umbrella company and
  • If the worker were employed by the purported umbrella company, joint and several liability would apply.

Whether something is “reasonable to suppose” for the purpose of establishing whether Case 1 is met is an objective standard. It means, whether a reasonable person would draw this conclusion based on the factual circumstances.

Case 2 applies when a purported umbrella company supplies workers directly to an end client and engages them on a self-employed basis, such that the agency legislation would otherwise apply (see ESM2000).

The conditions for Case 2 to apply are that:

·       were it not for the umbrella companies legislation, the agency legislation would apply to make the worker a deemed employee of the purported umbrella company (see ESM2000)

  • If the worker were otherwise employed by the purported umbrella company, joint and several liability would apply

·       The purported umbrella company is in a direct contractual relationship with the client, under or in consequence of which the worker’s services are provided or the purported umbrella company is paid for the services

·       no party in the contractual chain provides work-finding services to the worker that result in the worker providing the services to the client

Case 3 applies when the worker has a material interest in the purported umbrella company and it is reasonable to suppose that one or more parties would expect the purported umbrella company to pay a substantial proportion of the payments it receives for supplying the worker’s services to the worker as earnings, or that a step the purported umbrella company took was intended to give this impression, but it did not in fact make payments in this way.

The conditions for Case 3 to apply are that:

  • a worker has a material interest in the purported umbrella company
  • the purported umbrella company participates in arrangements that would, if it were the umbrella company, result in the umbrella company arrangements conditions being met (see ESM2410- when the legislation applies and commencement) in relation to the services the worker provides to the client
  • Either
    • It is reasonable to suppose that one or more participants in the arrangements, other than the purported umbrella company or the worker, would assume that a substantial proportion of the amounts received by the purported umbrella company for providing the worker’s services would be paid to the worker as earnings, or
    • The purported umbrella company has taken a step that it is reasonable to suppose was intended to give the impression that a substantial proportion of amounts provided to the purported umbrella company in respect of the services will be paid to the worker as earnings. It does not matter whether the step taken by the purported umbrella company did in fact give that impression.
  • A substantial proportion of amounts received by the purported umbrella company in respect of the services has not been paid to the worker as earnings, and 
  • Joint and several liability would apply if the material interest element of the umbrella companies' legislation did not exist.

Whether something is “reasonable to suppose” for the purpose of establishing whether Case 3 is met is an objective standard. It means, whether a reasonable person would draw this conclusion based on the factual circumstances.

If any of the Cases applies:

  • The worker is deemed for income tax purposes to hold an employment with the purported umbrella company, the duties of which consist of the services the worker provides to the client
  • All relevant remuneration is treated for income tax purposes as earnings from that deemed employment
  • The purported umbrella company is treated as making a payment of PAYE income to the worker of the amount of relevant remuneration that is not already PAYE income of the worker, at the time that the relevant remuneration is first provided, and
  • Accordingly, joint and several liability will apply.

For further guidance on material interest

See ESM2415 - defining umbrella companies 

More than one purported umbrella company

Where there is more than one purported umbrella company, only one is treated as employing the worker. This will be the purported umbrella company that is closest to the worker by reference to the contractual chain and is within the scope of PAYE. Where there are no purported umbrella companies within the scope of PAYE, it will be the purported umbrella company that is closest to the worker by reference to the contractual chain.

Where there is an umbrella company and one or more purported umbrella companies, the umbrella company will be the worker’s employer and will be treated as if it has made a payment of earnings to the worker in the sum of the relevant remuneration.

Where there is more than one person that is either a purported umbrella company or an employer of the worker in relation to the services the worker provides to the client, each is jointly and severally liable for any amount payable, in accordance with the PAYE provisions, in relation to the relevant remuneration.

Relevant remuneration means

All remuneration receivable by the worker (from any person) in consequence of providing the services and any other amount that it is just and reasonable to attribute to the provision of the services by the worker. This could include, for example, any amounts that would be included in Chapters 8 to 10, Part 2 ITEPA 2003, calculations.

Interaction with other legislation

Where there is a deemed employment as a result of any of Cases 1 to 3 applying, Chapters 7 to 10, Part 2 ITEPA 2003, and the LLP salaried members 863A ITTOIA 2005 rules will not apply.

This means that workers who supply their services in a way that would otherwise have given rise to a deemed employment as a result of that legislation will instead be treated as employees of the purported umbrella company, if there is one involved in the provision of the services.