The draft legislation published in the Finance Bill 2026 signals a clear move by the Government to tackle non-compliance within the temporary labour market, particularly around umbrella company arrangements.
As we explored in our blog on 18 July, this is not just an umbrella issue. These reforms have far-reaching implications for recruitment agencies, end hirers and contractors too.
Following a period of consultation, the proposals aim to , protect workers and ensure tax is paid correctly across complex supply chains. The message is simple: those who are compliant have nothing to fear, but for everyone else, things are about to change.
What’s changing
The most significant measures is the introduction of joint and several liability. This means that where PAYE tax and National Insurance contributions are not properly paid by an umbrella company, HMRC will be able to recover that debt from other “relevant parties” in the chain. Where an agency is supplying a worker engaged by the agency, both the agency and the umbrella will be liable. Where there is no UK-based agency involved, the liability will be with the end client and the umbrella company.
Where there are multiple agencies in the supply chain, such as MSP recruitment programmes, the liability will sit with the agency who contacts with the agency, and the umbrella company.
This reinforces the importance of knowing exactly who you’re working with. Contract terms alone won’t protect a business if a supply chain partner fails to operate compliantly.
Clarity around umbrella status
The legislation also brings a formal definition of what constitutes an umbrella company. It describes any business that employs individuals to provide their labour to end clients, where the worker does not hold a material interest in the business. The draft also outlines the typical contractual arrangements that meet the definition.
To prevent misuse of this structure, the bill introduces the concept of a “purported” umbrella company. This covers entities set up to appear legitimate but are instead designed to avoid paying correct taxes, and ensures HMRC can still pursue liabilities in these cases.
Why it matters
HMRC’s aim is to reduce tax loss, protect workers from unexpected liabilities, and ensure all labour market participants operate on equal terms. The draft legislation is a significant step toward delivering this.
Crucially, compliant umbrella companies will not need to make major changes. These proposals are targeted at those who seek to gain an unfair advantage or avoid their responsibilities.
What agencies should do now
While the legislation won’t take effect until April 2026, agencies should act now. As we advised earlier this month, it’s vital to:
- Review and document supply chains clearly
- Strengthen and regularly audit due diligence processes
- Review expense’s policies to ensure that they are treated appropriately for tax purposes
- Work only with stable, well-vetted umbrella companies
- Revisit indemnity clauses and assess the financial position of supply partners
- Streamline PSLs to include only those who meet high compliance standards
We expect the core proposals to remain largely intact as the Bill progresses through Parliament. Agencies that prepare now will be well-placed to operate smoothly when the changes come into force.
If you have questions about how the draft legislation could affect your business, or want to review your current processes, our team is on hand to support you.
We're hosting a webinar with the FCSA on Tuesday 29th July 2025, click here to join and learn the latest about the umbrella regulations and other relevant legislation changes.
