Upcoming 2026 Legislation: What Recruitment Agencies Need to Know About Umbrella Company Tax Liabilities

A significant legislative change is on the horizon for recruitment agencies, with new rules coming into effect in April 2026. The proposed changes will make recruitment companies joint and severally liable for unpaid tax arising from their use of umbrella companies. With potential criminal sanctions also in the mix, agencies need to start preparing now—especially as the 2025/26 tax year (which we’re already in) will be crucial for enforcement.

Why This Is Happening

The root of the new legislation lies in a growing trend: some umbrella companies enter into "conveyor belt" liquidations to sidestep their tax liabilities, effectively passing the debt onto HMRC. Under the new rules, HMRC will be able to bypass non-compliant umbrellas entirely and seek repayment directly from recruitment companies.

The timing of this change is deliberate. Agencies’ Full Payment Submissions (FPS) for the 2025/26 tax year will be with HMRC by mid-April 2026, even with Week 53 payrolls. P60s will be due by the end of May, and P11Ds by early July. This means that, practically speaking, HMRC will likely begin enforcement between April and July 2026 — and they’ll be collecting on tax liabilities incurred in the current tax year, not from April 2026 onwards.

Two Clear Strategies for Agencies

To mitigate risk, two key strategies are being recommended to employment businesses:

1. Move Away from Umbrellas and Employ Workers Directly

This approach provides the most robust protection against liability, as the agency gains full control over PAYE. Steps include:

• Transitioning workers to PAYE contracts as their current assignments end.
• Outsourcing payroll to a reputable, non-umbrella provider.
• Being prepared for TUPE implications (Transfer of Undertakings—Protection of Employment).

Pros: Significantly reduces legal risk under the new regime.

Cons: Increased admin burden and potential resistance from contractors.

2. Continue with Umbrellas, But Fortify Protections

If an agency continues working with umbrella companies, it's essential to strengthen contractual and legal safeguards. Recommendations include:
• Contracts with director guarantees, offering an extra layer of liability protection.
• Insurance-backed umbrellas, not just those with trade association memberships.
• Thorough due diligence — including reading provider T&Cs carefully to avoid hidden liability exclusions.
• Avoid using umbrella-supplied contracts; always rely on independently vetted terms.

It's important to note that even umbrellas which appear compliant may ultimately default, as evidenced by past cases involving substantial unpaid tax. Due diligence is essential but not a guarantee of immunity.

Key Considerations Going Forward

• Director Guarantees: These are becoming a non-negotiable standard rather than an exception.
• Data Protection & RTI: Recruitment companies are still protected by existing data rules. Agencies aren't expected to manage Real-Time Information (RTI) themselves, but will need to remain alert to audit obligations.
• TUPE Complexity: The intricacies of TUPE could dissuade some agencies from switching payroll models—but this should be verified with legal advice.
• Deadline Awareness: Agencies don’t have until April 2026 to prepare. Since the changes impact liabilities from the 2025/26 tax year, preparations needed to begin by April 2025 at the latest.

Final Thoughts

By July 2026, it’s expected that only fully compliant umbrella companies — or those operating outside of any schemes considered tax avoidance—will remain viable. Agencies relying on models with tax avoidance risks or unclear responsibilities may find themselves exposed to HMRC enforcement.

With serious financial and legal consequences at stake, this is not a situation to delay. Agencies should take action now: review contracts, reassess umbrella relationships, and consider legal advice to navigate what may be the most impactful change in the industry in years.