Legal Clash Ahead: How the 2003 Conduct Regulations Conflict with New 2026 Umbrella Company Tax Legislation

As new tax legislation is set to take effect in April 2026—making recruitment agencies joint and severally liable for unpaid tax arising from umbrella company arrangements—a critical conflict with existing employment law has come into sharp focus. Specifically, the upcoming changes appear to directly contradict the Conduct of Employment Agencies and Employment Businesses Regulations 2003, leaving agencies in a legal and operational dilemma.

What the 2003 Conduct Regulations Require

The Conduct of Employment Agencies and Employment Businesses Regulations 2003 were introduced to protect the rights and freedoms of agency workers and job seekers. A key provision—Regulation 5—prohibits employment businesses from restricting a work-seeker's ability to provide services through an intermediary (including an umbrella company) of their own choosing, as long as that intermediary is compliant with legal requirements.

In short:

• Agencies must not dictate which umbrella company a contractor uses.
• Contractors have a legal right to choose their own payment vehicle, including any compliant umbrella company.

This regulation is designed to prevent coercion or limitation on a contractor’s working choices, promoting autonomy and fair treatment in the recruitment supply chain.

What the New 2026 Legislation Demands

The legislation expected to take effect in April 2026 will place joint and several liability on recruitment agencies for any unpaid tax liabilities arising from the umbrella companies they engage with. It is being introduced in response to umbrella company liquidations that effectively allow unpaid tax to vanish, forcing HMRC to pursue upstream parties in the supply chain.

This new law is intended to:

• Hold recruitment agencies financially accountable if the umbrella company fails to pay its tax.
• Encourage agencies to carry out extensive due diligence, or ideally, to move away from umbrella arrangements entirely.

However, these requirements directly conflict with Regulation 5 of the 2003 Conduct Regulations.

The Legal Dilemma for Agencies

This creates a compliance paradox for recruitment agencies:
• If they allow contractors to choose any umbrella, as required under the 2003 Conduct Regulations, they risk inheriting tax liability from a potentially non-compliant umbrella under the 2026 rules.
• If they restrict umbrella choices to mitigate tax risk, they may be in breach of the 2003 Conduct Regulations, exposing themselves to enforcement action from the Employment Agency Standards Inspectorate (EAS) or civil claims.

This puts agencies in an untenable position. Without clear legislative alignment or guidance, they are effectively forced to choose between two regulatory frameworks, both of which carry serious penalties for non-compliance.

No Clear Opt-Out Without Risk

While some contractors opt out of the Conduct Regulations (often under Regulation 32), many do not. Agencies cannot assume or enforce opt-outs as a workaround. As such, they may remain bound by Regulation 5 even when trying to shield themselves from tax exposure under the new rules.

Furthermore, even if agencies do restrict umbrella choices via indirect means—such as only accepting "approved providers"—they could still fall foul of the 2003 Conduct Regulations if challenged.

What Needs to Happen

For recruitment agencies to operate safely and lawfully post-April 2026, there are three possibilities:

1. Regulatory reform: The Conduct Regulations may need to be amended to allow agencies to restrict umbrella choice where financial liability is at stake.

2. Government guidance: Clarification from HMRC or the Department for Business and Trade could outline how agencies can lawfully balance these obligations.

3. Standardised due diligence frameworks: If only umbrella companies meeting strict compliance criteria are permitted, agencies need clarity and consistency to defend their decisions.

Until then, agencies are stuck in the middle—legally obligated to honour contractor choice, yet financially exposed for doing so.

Final Thoughts

The upcoming 2026 umbrella company legislation aims to close a critical tax loophole—but in doing so, it creates a direct regulatory collision with the Conduct of Employment Agencies and Employment Businesses Regulations 2003. Unless action is taken to reconcile these conflicting frameworks, recruitment businesses will continue to face a high-stakes compliance gamble.