What is an Umbrella Company? (and why Hudson Contract aren't one)

Umbrella companies get confused with a lot of things: employment agencies, payroll bureaus, CIS intermediaries. That confusion has real consequences. Construction firms that misidentify who they are dealing with can find themselves on the wrong side of HMRC, holding tax liabilities they did not expect.

The stakes have never been higher. Major new legislation came into force on 6 April 2026, shifting financial liability for umbrella company non-compliance directly onto end clients and recruitment agencies. Understanding exactly what an umbrella company is, and what it is not, is now a legal and financial necessity for every construction business in the UK.

What is an Umbrella Company?

An umbrella company is an employment intermediary that sits between a contractor and the end client or recruitment agency that needs their services. The umbrella company employs the worker directly, handling payroll, deducting income tax and National Insurance contributions under PAYE, and passing the net pay to the worker.

The model became widespread from around 1999, initially as a way for contractors to avoid the administrative burden of running their own limited companies. The umbrella company becomes the legal employer; the worker remains a contractor in practice.

How the money flows

On paper, this looks straightforward. In practice, the model has been widely abused, and the construction sector has felt the effects more than most.

The problem with umbrella companies in construction

The construction sector has been disproportionately affected by non-compliant umbrella schemes. HMRC analysis found that in 2022/23, over a third of the approximately 700,000 workers paid through umbrella companies were using non-compliant structures. The annual tax loss to the Exchequer from umbrella company non-compliance is estimated at £500 million.

The most common issues construction firms encounter include:

• Confusing payslips – deliberately complex pay advice designed to obscure the fact that rates are lower than agreed and fees are being hidden
• Mini-umbrella fraud – splitting a workforce across dozens of micro-companies to exploit Employment Allowance multiple times, reducing each company's NIC liability
• Disguised remuneration – paying workers through loans or other non-salary mechanisms to reduce the tax take, leaving workers exposed to future HMRC demands
• Unexpected tax bills – workers receiving demands from HMRC for income tax that the umbrella deducted but never paid over
  
  

For construction businesses, the risk is not just reputational. Since 6 April 2026, it is directly financial.

The 2026 Legislation: What construction firms must know

The Finance Bill 2025-26, confirmed by HMRC on 22 July 2025 and in force from 6 April 2026, introduced Joint and Several Liability (JSL) for PAYE in umbrella company supply chains.

If an umbrella company in your labour supply chain fails to correctly deduct and remit income tax and NICs to HMRC, HMRC can pursue you – the end client or recruitment agency – for the full unpaid amount.

This is not a minor compliance update. The liability is absolute. There is no "reasonable care" defence available, unlike the IR35 rules. If there is a tax shortfall, the debt transfers automatically, and HMRC has full discretion to pursue whichever party in the supply chain it chooses first.

Who is affected?

• Construction firms using umbrella-supplied labour directly – you are the end client and carry full liability if there is no agency in the chain
• Firms using agencies that use umbrella companies – the agency is primarily liable, but if the agency cannot pay, HMRC can pursue you
• Businesses where multiple agencies are involved – the rules apply to the agency with the direct contract with the end client

The practical implication: due diligence on your labour supply chain is no longer a box-ticking exercise. It is a legal and financial necessity. Not knowing how your contractors are paid is no longer a valid position.

What comes next

The April 2026 JSL rules are the first wave of a broader regulatory shift. The Employment Rights Act 2025 formally defined umbrella companies in law for the first time, and wider regulation of employment rights and operational standards within the umbrella sector is expected from 2027 onwards.

The difference between an umbrella company and a CIS intermediary

This is where construction firms most commonly get confused, and the distinction carries real legal weight.

An umbrella company is the employer. A CIS employment intermediary like Hudson Contract is not. Hudson Contract does not employ contractors, does not act as a recruitment agency, and does not sit in the payment chain between a construction firm and its workers in the way an umbrella does.

Instead, Hudson Contract provides workplace auditing and contract services to construction companies – verifying the genuine self-employed status of their contractors and ensuring the business is fully compliant with CIS legislation and employment law.

The protection runs in the opposite direction. Rather than taking on the employment relationship, Hudson Contract ensures the construction firm can demonstrate it never had one. That is a fundamentally different model, with fundamentally different legal consequences.

Why the distinction matters for construction businesses

Getting this wrong now has direct financial consequences, not just compliance headaches.

If you use a non-compliant umbrella company, you face joint and several liability for unpaid PAYE and NICs from 6 April 2026. HMRC does not need to exhaust its options against the umbrella first. It can come straight to you for the full amount.

If you use a genuine CIS intermediary correctly, the exposure runs in the opposite direction. A properly structured self-employed relationship, verified and documented, means no PAYE liability arises in the first place. There is no umbrella company in the chain because there is no employment relationship to manage.

If you confuse the two, you may believe you have compliance cover when you do not – or be paying for a service that does not actually protect you from the risks you face.

Red flags that suggest a provider is operating as an umbrella, not a CIS intermediary

• The provider employs your contractors directly
• Workers receive payslips from the provider, not from their own business
• The provider deducts PAYE and NICs rather than operating CIS deductions
• The provider charges fees based on headcount or payroll volume rather than per-contract auditing
• Take-home pay figures seem unusually high – a common indicator of a non-compliant scheme
• The provider's payment process is opaque or deliberately complicated
  
  

If any of these apply to a provider you currently use, the liability that sits with you from April 2026 is real and immediate.

What Hudson Contract actually does

Hudson Contract has operated in the construction sector since 1996, working with over 2,600 construction businesses across the UK and handling around 1.8 million payments annually.

The service is built around three core functions:

1. Workplace auditing – verifying that contractors working on your sites are genuinely self-employed, with the documentation to prove it to HMRC or an employment tribunal
2. Contract services – providing the contractual framework that correctly defines the working relationship between a construction firm and its self-employed contractors
3. CIS compliance – ensuring that all deductions, submissions and obligations under the Construction Industry Scheme are met correctly and on time
   
   

Hudson Contract does not act as an employer or an agency. It does not charge workers to receive their pay, and it does not offer to save income tax. Instead, it sits in the contract and payment chain in a way that genuinely severs any possible employment relationship between a construction business and its self-employed contractors. Its role is to ensure that working arrangements are structured, documented, and demonstrable – to HMRC, an employment tribunal, or any other body.

That is a fundamentally different proposition from an umbrella company. The legal consequences of confusing the two are now more significant than at any point in the sector's history.

If you are unsure whether a provider you use – or are considering – is operating as an umbrella company, contact Hudson Contract for an independent assessment of your supply chain arrangements.