Georgie Ward, policy and research officer at the Chartered Institute of Payroll Professionals (CIPP) explains what the Umbrella reforms mean for agencies.
IR35 feels like a story that has been told for decades. Its name comes not from a grand policy vision but from ‘Inland Revenue press release number 35’, published in 1999. It was originally introduced to address the growth of limited companies providing the services of an individual, often described as a Personal Service Company (PSC). The label stuck, even as the rules evolved well beyond the original announcement.
Since reforms from 2017 onwards, IR35 has reshaped how contractors are engaged and how tax risk is managed across both the public and private sectors. As the rules expanded and responsibility shifted away from contractors and towards the organisations engaging them, the rules became more widely referred to as ‘off-payrolling working’.
For recruitment agencies, IR35 marked an important shift from acting purely as intermediaries to becoming active participants in tax compliance and risk management. The latest changes affecting umbrella companies make one thing clear: this story is far from over.
Shifting responsibility
To understand why umbrella companies are now firmly in the Government’s sights, it helps to view IR35, off-payroll working and the new umbrella rules as chapters in the same story. The common theme is a shift in where responsibility sits within the labour supply chain, drawing recruitment agencies towards the centre.
IR35 was always about one core issue: fairness in the tax system. Where individuals are contracted to work for a business in a way that closely resembles employment, they should broadly be taxed like employees. Put simply, if a contractor works regular hours, uses the organisation’s equipment and a substitute cannot be sent, IR35 applies because the arrangement looks more like employment than independent business activity.
What changed with the off-payroll working reforms was not the principle but who was responsible for applying it. From 2017 in the public sector and 2021 in the private and voluntary sectors, contractors were no longer able to determine their own employment status.
The reforms didn’t change the rules. They changed who had to assess them and bear the consequences if they got it wrong. Responsibility moved up the supply chain to the organisations benefiting from the contractor’s work, on the basis they were better placed to assess reality and manage risk.
All public sector bodies are automatically within scope, regardless of size. In the private and voluntary sectors, the off-payroll working rules only apply where the end client is classed as medium and large, based on tests around turnover, balance sheet size and employee numbers. For agencies, this meant a contractor’s tax treatment could change overnight, even though their commercial role remained the same.
Under the off-payroll rules, the organisation receiving the contractor’s services must assess whether the role is inside or outside IR35 and document that decision in a Status Determination Statement (SDS), which must be shared across the supply chain.
If the role is inside IR35, someone must operate PAYE; deduct tax and National Insurance, and pay Employers NICs and Apprenticeship Levy where applicable. This person or organisation is known as the deemed employer, and responsibility for tax follows the decision of the SDS and is often the fee payer. In many cases that responsibility lands with the agency if they pay the contractor’s PSC.
These reforms didn’t just introduce more process, they introduced liability. Once the engagement fell within the scope, agencies needed to ensure the SDS had been issued and passed on correctly, understand whether they were the deemed employer, and operate PAYE where required.
Umbrella company growth
One of the clearest consequences was the rapid growth of umbrella companies. Faced with the administrative burden of SDSs, the risk of being deemed employers, and the financial exposure that came with non-compliance, many agencies and clients turned to umbrella arrangements that appeared simpler. Umbrella companies, which employ the contractors directly and operate PAYE as standard, seemed to remove the off-payroll risk, and this method of simplification boomed.
But simplicity is not the same as assurance.
As umbrella companies became the preferred method for off-payroll working compliance, concerns within Government and HMRC grew. Evidence emerged of poor transparency, inconsistent application of employment rights and failures to operate PAYE correctly. From an agency perspective, these failures were often hidden. The payslip looked correct, so compliance failures were missed and, unlike IR35 arrangements, there was no SDS to clearly show responsibility if things went wrong. This highlights weaknesses in how the model has been applied.
The Government’s response has been measured. Instead of banning umbrella companies outright, they have returned to a principle we all recognise from the IR35 reforms: risk should sit with those that have ability to control the supply chain and influence the outcome.
This principle now supports the umbrella company reforms that have taken effect from April 2026 and the further regulations due to come into force in 2027. Where contractors are supplied via umbrella companies, recruitment agencies are now responsible for accounting for tax and National Insurance if the umbrella company fails to do so. Where there is no agency in the supply chain, that responsibility moves to the end client. In short, liability follows control, and HMRC can now pursue the recruitment agency for the full tax and NICs shortfall, regardless of fault.
Early market behaviour already reflects this shift. As Patrick Day, Director at Portfolio Payroll, explains: “As the April 2026 umbrella company reforms come into effect, we’re seeing responsible businesses get ahead of compliance by consolidating their supply chains around vetted, HMRC-compliant umbrella partners, and proactively reaching out to agencies, specifying their preferred umbrella provider, and asking for payment routes to be updated ahead of the deadline. It’s a sensible, measured approach that protects everyone in the chain, and while contractors may need to switch umbrella providers as a result, the fundamentals of contract work remain unchanged. These reforms are squarely aimed at tackling non-compliant pay schemes, not legitimate contracting, and we don’t anticipate any meaningful impact on the contract market itself.”
Agencies: from passive to active
This evolving behaviour underlines a key point: agencies are no longer passive participants but active gatekeepers of compliance.
These reforms are designed to close the tax gap, protect contractors from unexpected tax bills, and restore a level playing field for the labour market. It seems that recruitment agencies are central to this approach because they decide which intermediaries are allowed into the supply chain and can exclude illegitimate operators.
This is not necessarily bad news. For agencies already focusing on compliance, transparency and strong supply-chain governance, clearer rules and tougher enforcement should be welcomed.
Ultimately, IR35, off-payroll working and the umbrella reforms are not separate stories, but successive chapters of the same book. Each chapter has steadily pushed responsibility further up the labour supply chain, away from individuals and towards those best placed to influence behaviour. For recruiters, the journey has been clear, moving from broker to deemed employer and finally to steward of compliant supply chains. The message from the Government is no longer subtle: fewer grey areas, clearer ownership, and an increasing expectation that agencies actively help ensure compliance. The story isn’t over but its direction is clear and recruitment agencies are firmly at the centre of it.
