HMRC has updated its guidance for employment intermediaries, adding information about PAYE rules where labour supply chains include umbrella companies. For recruitment agencies, staffing firms, contractors using labour suppliers and small businesses that place workers with clients, the update is a useful prompt to check who is responsible for tax and National Insurance in each arrangement.
The guidance was last updated on 8 May 2026. It explains when a business is treated as an employment intermediary, when agency rules can require PAYE to be operated, and what reporting duties apply where an intermediary does not need to operate PAYE. The rules are technical, but the practical message for SMEs is simple: do not assume responsibility sits somewhere else in the chain without checking the contracts and how the work is actually supplied.
What HMRC means by an employment intermediary
HMRC describes an employment intermediary as a person or business that arranges for someone to work for a third person. This often includes an employment agency or employment business, but the guidance is not limited to firms that use those labels.
A business may be an intermediary if it supplies workers to a client or another intermediary, and the client pays that business, or someone connected to it, for the worker’s services. That is why small recruitment firms, sector specialists, care staffing suppliers, construction labour providers and project-based service firms should pay attention.
Where the agency rules apply, the intermediary may need to operate PAYE as if the workers it supplies are employees. HMRC says the payments the worker receives are treated as employment income. This can matter even where the commercial relationship feels more like a flexible assignment than a normal employment contract.
Why the umbrella-company point matters
The latest update adds information about PAYE rules for labour supply chains that include umbrella companies. Umbrella arrangements are common in temporary work and contractor markets, but they can also create confusion about who is operating payroll and who is responsible if something is wrong.
HMRC’s guidance says agency rules do not apply if the worker is already employed by someone else in the labour supply chain and that employer must operate PAYE. It gives umbrella companies as an example. For SMEs, that does not mean the issue can be ignored. It means the business should have enough evidence to show who employs the worker, who operates payroll, and what role each party plays in the chain.
If there is more than one UK employment intermediary involved, HMRC says the business with the contract with the end client is treated as the employer for these purposes. If only one intermediary in the chain is in the UK, the UK business is responsible for meeting PAYE obligations for the worker. Those details are easy to miss when a fast-moving client wants staff quickly.
What small firms should check
First, check whether your business is actually supplying workers, rather than simply introducing candidates or providing a managed service. The contracts, payment flow and day-to-day control of the work all matter. If workers personally provide services to a client, there is a contract between the client and the agency, and the client pays for those services, the agency rules may need to be considered.
Second, review who has the right to supervise, direct or control how the worker does the work. HMRC’s guidance sets out situations where agency rules may not apply, including where the worker provides services without anyone having that right. This is an area where small wording changes in a contract may not be enough if the real working arrangement points the other way.
Third, keep clear records for umbrella-company arrangements. Small agencies should know the umbrella’s legal name, payroll role, contract position and worker communication route. Clients may ask for reassurance, and HMRC may expect the chain to be understandable rather than vague.
Fourth, remember the reporting duty where PAYE is not operated. HMRC says UK employment intermediaries that have not operated PAYE must send an electronic return with information about their business and each worker supplied to a third party. Returns must be sent at least once every three months, and late, incomplete or incorrect reports can lead to penalties.
The practical takeaway
This is not only a tax issue for large staffing groups. A small firm that supplies workers into hospitality, logistics, health and care, construction, IT support or seasonal projects can find itself inside the agency-rules framework without intending to be.
The safest response is a short compliance review: list the labour-supply chains you use, identify who contracts with the end client, confirm who operates PAYE, and check whether any intermediary reports are due. Firms already tightening their HMRC processes may also find it useful to revisit our guide to Making Tax Digital and small business tax compliance, because the same principle applies: clear records reduce last-minute risk.
If the position is unclear, take professional advice before assuming an umbrella company, client or overseas party has removed your obligations. HMRC’s update is a reminder that labour supply chains need to be documented, not just trusted.
Source: HMRC guidance, “Check if you’re an employment intermediary”, last updated 8 May 2026.
