Be Prepared

Tania Bowers, Global Public Policy Director at APSCo outlines what recruiters need to know and how to prepare for the umbrella company reforms.

The UK’s umbrella company market is undergoing its most significant regulatory overhaul in decades. While this will certainly bring some order to a remit that has gone unregulated for some time, for staffing businesses, these changes will reshape compliance obligations, increase financial risk, and demand a new level of transparency across labour supply chains. With implementation deadlines looming, now is the time to understand what’s changing, why it matters, and how to prepare.

Why are umbrella companies under the spotlight?

Umbrellas have long provided a convenient solution for engaging contractors, particularly after IR35 reforms pushed many workers away from limited company models. Acting as intermediaries, umbrellas have been employing workers on behalf of agencies or end clients for some time, handling payroll, tax deductions and employment rights.

However, HMRC has identified widespread abuse of this model, particularly in low paid roles and healthcare. According to Government figures, nearly 40 per cent of umbrella workers are employed by firms that do not comply with tax law, costing the Exchequer over £500 million annually in lost revenue through tax avoidance schemes and fraudulent practices such as “mini umbrella” scams and phoenix companies that dissolve to evade liabilities.

Tackling this non-compliance has been a priority of the Starmer administration – indeed there were provisions announced in the Budget last month to give HMRC more resources to address tax evasion, and we expect that more steps will be implemented.

The core changes coming in 2026

The main reforms already announced were delivered in the Finance Bill 2025-26 and accompanying HMRC guidance introduced two major shifts:

1. Joint and several liability (JSL) for PAYE and NICs

From 6 April 2026, recruitment agencies and, in some cases, end clients will be jointly and severally liable with umbrella companies for unpaid PAYE income tax and Class 1 National Insurance Contributions. If there is more than one employment business in the chain then it is the recruiter that holds the contract with the end client that will be responsible. HMRC will have the discretion to recover unpaid amounts from the chain regardless of fault or contractual terms.

This strict liability approach means agencies can no longer rely on contractual indemnities or assume that compliance sits solely with the umbrella. If a contractor is paid through your supply chain, you could be on the hook for their tax liabilities.

2. Statutory definition and regulation of umbrella companies

For the first time, umbrella companies will be legally defined and brought within the scope of the Employment Rights Bill, aligning them with the Conduct of Employment Agencies and Employment Businesses Regulations 2003. This will enable regulators and, eventually, the new Fair Work Agency to monitor and enforce standards, ensuring workers receive correct pay and statutory entitlements. This will be consulted on in 2026 and is likely to come into effect in 2027.

What does this mean for recruitment agencies?

The implications are profound.  There is no “due diligence” defence, but taking steps to audit umbrellas will reduce risk in practice:

• Increased compliance burden
  Recruiters must implement robust due diligence processes to vet umbrella providers. This includes reviewing contracts, requesting proof of PAYE compliance, and maintaining auditable records of checks. Failure to do so could result in financial penalties and reputational damage.
• Financial risk exposure
  Under the joint and several liability, HMRC can pursue agencies for unpaid taxes even if they were unaware of non-compliance. Liabilities can quickly escalate into millions for recruitment businesses and Managed Service Providers (MSPs) with large contractor volumes.
• Operational changes
  Agencies will need to map their entire labour supply chain, conduct regular audits, and work only with umbrellas that can evidence transparency and compliance. Membership of accreditation schemes such as FCSA or platforms like SafeRec and veriPAYE will become critical indicators of trustworthiness in the future.

Reforms needed, but support is critical

At APSCo we have broadly welcomed these efforts to tackle non-compliance but we are working closely with policy makers to ensure that the legislation doesn’t create “additional administrative burdens for recruiters” without providing sufficient tools to manage risk. We’ve called for licensing of the umbrella market and statutory codes of practice to support agencies in meeting these new obligations.

It is our belief that there is a critical need for clear HMRC guidance on best practice strategies, including digital solutions to streamline compliance checks. Without this, recruiters risk being left exposed despite acting in good faith.

What’s next for umbrella regulation?

While the tax reforms take effect in April 2026, broader regulatory changes are on a longer timeline:

• 2025-2026: HMRC publishes detailed guidance; agencies prepare for JSL rules.
• 2026: Joint and several liability for PAYE and NICs comes into force.
• 2027: Full statutory regulation of umbrella companies under the Employment Rights Bill, including oversight by the Fair Work Agency and potential licensing requirements.

How should recruitment businesses prepare?

While we expect that umbrella reforms will be a continuous development, it is vital that staffing companies begin preparations now if they haven’t already done so. Here are five practical steps recruiters can implement to mitigate risk and stay ahead of the curve:

1. Audit your supply chain
   Identify all umbrella companies you work with and assess their compliance credentials. Request evidence of PAYE and NIC payments, and verify membership of recognised accreditation bodies. It’s also wise to ask for details about the credit terms offered to other recruiters and whether they are credit insured or how they fund it.
2. Update contracts and policies
   Include clauses requiring umbrellas to provide regular compliance reports and indemnities. While these won’t eliminate liability under JSL, they demonstrate proactive risk management.
3. Implement ongoing monitoring
   Move beyond one-off checks. Establish monthly or quarterly audits, supported by technology platforms that track compliance in real time. Ensure you also understand a company’s VAT position as part of your due diligence checks.
4. Educate your teams
   Train recruiters, finance teams, and compliance officers on the new rules. Ensure they understand the risks and the importance of rigorous due diligence.
5. Engage with industry bodies
   Leverage resources from APSCo and other trade associations. Participate in webinars and consultations to stay informed and influence future policy.

The bottom line

Umbrella company reforms represent a seismic shift for the recruitment sector. While they aim to tackle tax avoidance and protect workers, they also transfer significant compliance and financial risk to agencies and end clients. For staffing businesses, the message is clear: due diligence is no longer optional, it’s mission-critical.

By acting now, auditing supply chains, strengthening processes, and engaging with accredited partners, recruitment firms can navigate these changes confidently and turn compliance into a competitive advantage.