The Ripple Effect of Umbrella Credit Terms
Weighing Up The Risk of Credit Terms Offered By Payroll Companies
Many umbrella payroll companies offer credit terms to recruitment agencies, allowing wages to be paid upfront while agencies settle invoices later.
While this may appear convenient, it creates significant systemic risk. If just one or two agencies default on payment, the umbrella shoulders the financial loss.
Given the tight margins most umbrellas operate on, this can quickly lead to insolvency.
New Legislation
From 6 April 2026, under new legislation, recruitment agencies will face joint and several liability for PAYE and NIC compliance failures if an umbrella in their supply chain collapses.
This means that if an umbrella fails because another agency defaulted, all other agencies using that umbrella could still be held responsible for unpaid tax liabilities – even if they always paid their invoices on time.
The Domino Effect
1. One Agency’s Default Affects Everyone
· If one recruitment client does not pay, the umbrella absorbs the shortfall.
· When credit is extended across multiple agencies, the risk multiplies – it only takes one or two failures to destabilise the entire umbrella.
2. Umbrella Insolvency Creates Tax Exposure
· Once the umbrella goes bankrupt, HMRC can pursue other agencies in its supply chain for any unpaid PAYE/NIC.
· Agencies that were not involved in the original default may still face substantial unexpected liabilities.
3. Double Risk for Agencies
· Agencies that lose a trading partner through umbrella insolvency also risk significant HMRC enforcement action.
· This creates a domino effect where one agency’s failure cascades across multiple others.
Recommended Actions
· Avoid umbrellas offering extended credit terms – they introduce collective risk beyond your control.
· Assess the financial stability of umbrella partners regularly, especially those providing credit to multiple agencies.
· Protect your own business by insisting on transparent, immediate payment terms that reduce exposure to other agencies’ defaults.
· Prepare for April 2026 by reviewing all umbrella relationships and ensuring you are not tied to high-risk funding models.
In Summary
Umbrella credit terms may seem attractive, but they create a shared risk environment.
If one or two agencies fail to pay, the umbrella can collapse – leaving every other recruitment agency in the chain exposed to HMRC tax recovery under the 2026 legislation.
The safest approach is to work only with umbrellas that operate on secure, immediate payment models, protecting both your cash flow and compliance position.
If you have any questions, please don’t hesitate to contact us using the form below, or speak to one of our experienced team by calling us today on 0161 713 1730.
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