In a significant move to tackle tax non-compliance in labour supply chains, the Government has announced plans to introduce the expected joint and several liability for PAYE income tax and Class 1 National Insurance Contributions (NICs). The proposed changes from 6 April 2026 aims to ensure that all parties involved in the supply of labour – particularly through umbrella companies – are held accountable for their tax obligations.
The legislation seeks to recover £2.85 billion in unpaid tax between 2025–26 and 2029–30, with £75 million anticipated in the 2025-26 tax year, raising to £895 million in the following year when the legislation is introduced.
Background and Rationale
Labour supply chains, especially those involving umbrella companies, have long posed challenges for HM Revenue and Customs (HMRC). In some cases, unscrupulous umbrella companies have failed to account for PAYE income tax and NICs correctly, resulting in tax losses and leaving workers vulnerable to unexpected liabilities.
To close these gaps and reinforce compliance, the Government is proposing a new legal framework under which recruitment agencies and end clients will share responsibility for ensuring PAYE income tax and NICs are correctly paid.
Key Features of the Proposed Framework
Joint and Several Liability Introduced
Under the new rules:
- Recruitment agencies will be held jointly and severally liable for PAYE income tax and NICs due on payments made via umbrella companies. This means that if an umbrella company fails to pay the required taxes, HMRC can pursue the agency for the unpaid amounts. Where multiple agencies are involved, the agency with the direct contract to supply the worker to the end client will bear responsibility.
- Where no recruitment agency is involved in the arrangement, the end client – the business that ultimately receives the worker’s services – will assume full responsibility for any unpaid PAYE income tax and NICs
Purported Umbrella Companies: A New Compliance Priority for 2026
A pivotal change in the upcoming April 2026 tax legislation is the introduction of the term “purported umbrella company.” This new legal concept is designed to address a growing area of concern: entities that present themselves as compliant umbrella companies but are, in fact, operating to deliberately avoid their employment tax obligations.
These arrangements typically involve misclassifying workers or rerouting payments in a way that evades PAYE income tax and NICs.
What the New Rule Means
Under the new provision, if a recruitment agency or end-client reasonably believes that a worker is employed by an umbrella company – but the umbrella is not genuinely fulfilling employer responsibilities (such as paying the worker or deducting taxes correctly) – then HMRC will reclassify the relationship as employment for tax purposes.
In such cases, the financial liability for any unpaid PAYE income tax and NICs will fall on the agency or client, not the umbrella company.
Strengthened Compliance Across the Supply Chain
The proposal mandates enhanced due diligence throughout the labour supply chain. Agencies and end-users will need to:
- Vet umbrella companies thoroughly.
- Establish robust contractual safeguards.
- Monitor tax compliance on an ongoing basis.
The draft Finance Bill marks a shift towards a proactive compliance model, where businesses must actively manage risks associated with third-party labour intermediaries.
HMRC Empowered to Enforce Compliance
The joint and several liability model strengthens HMRC’s enforcement powers, enabling it to recover unpaid liabilities from any responsible party in the labour supply-chain. This significantly reduces the risk of revenue loss to the Exchequer and accelerates enforcement action.
Similar legislation was introduced under the Off payroll working rules to combat perceived non-compliance by workers engaged through an intermediary, typically their own Personal Service Company (PSC). However, safeguards have been introduced in the legislation to ensure that PSCs and similar contracting models are not inadvertently captured by the rules.
Strategic Objectives of the Reform
The proposed changes are part of a wider government strategy to improve transparency and fairness in the labour market. Specifically, they are designed to:
- Combat tax fraud and reduce revenue loss by holding accountable those who enable non-compliance.
- Protect workers from being saddled with tax bills when intermediaries fail to meet their obligations.
- Ensure a level playing field, so compliant businesses are not undercut by those exploiting loopholes in the system.
Implications for End-users and Agencies
The proposed changes are likely to have a wide-reaching impact on how businesses engage with umbrella companies and manage their labour supply chains:
- Recruitment agencies will need to reassess their contractual arrangements, implement rigorous onboarding checks for umbrella partners, and regularly review compliance.
- End clients may find themselves more exposed to risk and may respond by bringing more labour engagement in-house or tightening oversight mechanisms.
- Umbrella companies will face increased scrutiny, and only those demonstrating full compliance and transparency are likely to remain competitive.
Recommended Preparatory Actions for Businesses
Although the implementation date may appear distant, businesses are strongly encouraged to begin preparations now to mitigate future compliance risks. Suggested preparatory steps include:
Conduct a Comprehensive Supply Chain Audit
- Identify all instances where umbrella companies are used within the organisation’s labour supply.
- Develop stringent due diligence criteria for engaging compliant umbrella companies.
- Assign clear responsibility for managing and reviewing these relationships.
Coordinate Cross-Functional Alignment
- Ensure that HR, procurement, finance, and legal functions are aligned and fully apprised of their respective obligations under the new framework.
- Promote organisation-wide awareness of compliance requirements.
- Train relevant stakeholders, if applicable.
Strengthen Record-Keeping Protocols
- Maintain accurate and detailed documentation regarding all labour supply arrangements, contractual terms, and payroll operations.
- Well-maintained records will be essential in demonstrating compliance during HMRC reviews.
Seek Formal Assurance from Umbrella Companies
- Request written confirmation that umbrella companies are operating PAYE appropriately for all workers.
- Obtain corroborating evidence, such as Real Time Information (RTI) submissions, payslips, or payment schedules.
Conclusion
This proposed reform signals a decisive shift in how tax compliance is managed in modern labour markets. By introducing joint and several liability, the Government aims to restore fairness, protect workers, and ensure all parties in the supply chain uphold their tax obligations. Businesses that take early steps to strengthen their compliance practices will be best positioned to navigate this evolving regulatory landscape.
Contact details
To understand how these changes may impact your organisation, or to receive tailored compliance support, please contact a member of our Employment Taxes team.
