HMRC’s Umbrella Indemnity Advice Faces Industry Pushback

Change in HMRC Guidance Brings Controversy

HMRC has suggested that recruitment agencies request umbrella company directors to personally indemnify agencies for tax liabilities if PAYE has not been correctly deducted from contractor payments. While the intention is to protect agencies from potential non-compliance, this recommendation is meeting considerable scepticism and resistance across the contracting sector.

Industry Reluctance to Sign Director Indemnity Clauses

Legal experts report that only a handful of umbrella company directors are willing to accept such clauses. According to one unnamed lawyer, only a “few” of his umbrella clients have agreed to indemnities of this kind in their contracts with agencies. The majority, however, are unwilling to bear the substantial personal and financial risk that such terms create.

One umbrella company owner put it plainly: “I would not be happy to put my house on the line.” The risks stretch beyond unpaid tax to a broad range of potential liabilities. For most directors, this level of personal exposure is unacceptable.

Legal Perspective: Good Reason, Poor Reception

Theresa Mimnagh, director at compliance law specialists Lawspeed, points out that while HMRC’s recommendation is logical – agencies need protection if the umbrella cannot pay – the real-world enforceability is limited. "An indemnity only protects an agency if it can be enforced. If the umbrella company lacks sufficient assets, an indemnity may be meaningless, leaving the agency exposed to debt transfer without effective recourse."

Mimnagh explains that an indemnity has been available as an option in Lawspeed’s contracts for years. Nonetheless, few directors are willing to provide personal guarantees, especially given the risks associated with group company structures where assets might not be easily accessible.

Industry Consensus: Recommendation Is Unrealistic

Professional Passport’s CEO, Crawford Temple, states unequivocally: “I have not heard of a single umbrella agreeing to the clause HMRC recommends.” He adds that no agency client of Professional Passport has ever suffered debt transfer losses during their 17 years in operation while working with accredited umbrella providers.

Instead, Temple stresses that robust accreditations, ongoing monitoring, and data sharing agreements between agencies and umbrella providers are more than sufficient safeguards. "Holding umbrella providers to account through continuous assessment and data exchange is a proven risk mitigation tool." According to Temple, regular due diligence and accredited partnerships negate the need for personal indemnities entirely.

Accredited Umbrellas Offer Compliance Assurance

Lucy Smith, Managing Director of Clarity Umbrella, reinforces this point: “Accredited umbrella companies undergo comprehensive audits and regular compliance checks, often far exceeding annual requirements. Using a verifiably accredited provider effectively eliminates the risk that HMRC’s indemnity clause is aimed to cover.”

Smith adds that if agencies implement regular due diligence and select only accredited umbrellas, the indemnity clause becomes redundant.

Compliance Recommendations for Agencies

While HMRC stands by its advice – that agencies should seek an indemnity from directors as an additional compliance step – leading voices suggest that industry best practice already provides robust alternatives.

Recommended measures for agencies:

• Vet umbrella providers for reputable accreditation and regular audit history
• Demand ongoing evidence of compliance, such as payslip reviews and HMRC payment records
• Maintain direct data exchange protocols with umbrella partners
• Avoid working with providers unable or unwilling to demonstrate compliance

Perspective Table: Approaches to Managing Umbrella Company Risk

Compliance Approach	Level of Protection	Industry Acceptance	Personal Risk to Directors
Director Indemnity Clause	Medium–High	Very Low	High
Accredited Providers & Checks	High	Very High	Low
Group Structure Risk Spread	Low–Medium	Moderate	Low–Medium

Takeaway

HMRC’s recommendation, while well-intentioned, is largely seen as unrealistic and excessive in practice. Accredited umbrella providers and diligent, collaborative agency management stand out as more robust and workable risk mitigation steps for agencies.

Key points for agencies:

• Focus on due diligence and accreditation, not on director indemnity clauses
• Establish continuous data and compliance review mechanisms
• Be selective in umbrella partnerships to reduce risk exposure

Next Steps

For agencies and contractors looking to strengthen compliance:
• Review umbrella company accreditations and audit processes before engagement
• Consider regular internal compliance reviews of umbrella partners
• Liaise with specialist compliance advisory firms for targeted risk mitigation