Umbrella reform: The proposals and how they will impact recruitment agencies

Umbrella reform: The proposals and how they will impact recruitment agencies

Long-awaited draft legislation outlining reforms set to tighten compliance in the umbrella company market finally arrived in mid-July.

The plans, which followed a multi-year review including consultation and stakeholder engagement, have broadly been welcomed but what will they mean for recruitment businesses going forward?

The introduction of joint and several liability:

The main headline of the Legislation Day (L-Day) announcement was that, under Chapter 11 of the Income Tax (Earnings and Pensions) Act, recruitment agencies will become joint and severally liable for PAYE for workers they place via umbrella companies.

This drafting specifically stipulates ‘each relevant party’ in an umbrella supply chain can be held liable for unpaid PAYE. As such, recruitment agencies will be liable for the employment taxes of their workers if the umbrella supplier fails to comply with tax obligations. 

If multiple intermediaries exist in the supply chain, the agency closest to the hiring organisation will be liable. This is especially important for Managed Services Providers (MSPs), who will carry the financial risk of the downward stream supply chains engagement of umbrella workers.

In those supply chains without a recruitment agency, the liability will fall on the end hirer.

Wider regulation and timelines:

The announced changes are part of a two-pronged approach which will also see umbrella companies brought within the remit of regulatory oversight.

This includes the introduction of a formal definition of umbrella companies, something which is being implemented through amendments to the Employment Agencies Act 1973, via the Employment Rights Bill.

Regulatory oversight will ultimately fall under the remit of the newly created Fair Work Agency, a new body – due to be established in April 2026 - which will be tasked with enforcing employment rights.

In terms of timelines, the tax compliance measures will come into effect in April 2026, while the regulatory changes will be implemented sometime in 2027 following further consultation this Autumn.

This consultation will consider if, and on what basis, umbrella companies should be brought under the scope of the Conduct of Employment Agencies and Employment Businesses Regulations 2023, with the aim of ensuring comprehensive enforcement and compliance monitoring across the temporary labour supply chain.

Further developments will emerge over the coming months, including:

• Royal Assent of the Employment Rights Bill in September 2025, which provides the legislative foundation for umbrella regulation.
• The launch of the umbrella regulation consultation Autumn 2025, and subsequent stakeholder and government response.
• The phased launch of the Fair Work Agency, which will gradually assume regulatory oversight and enforcement powers from 2026 onward.
• Supporting HMRC and Department for Business and Trade guidance, expected in late 2025/early 2026, will provide practical detail on compliance standards, monitoring expectations, and liabilities.

Recruitment businesses should therefore plan for evolving compliance responsibilities through 2026 and 2027.

What do the changes mean for recruitment businesses?

The move to joint and several liability creates a clear shift from, in some cases, surface-level due diligence to robust ongoing compliance monitoring across the supply chain. 

In future, partnering with non-compliant or unproven umbrella companies could expose agencies to serious financial and reputational damage.

To protect against these risks, it is increasingly important recruiters partner with compliant umbrellas. Transparency and accountability will become central to any engagement.

In short, recruitment businesses should:

• Review current umbrella engagement

  
  Begin by assessing how your business currently works with umbrella companies. This includes reviewing your Preferred or Approved Supplier List (PSL/ASL), the contracts you have in place, the level of due diligence carried out across the supply chain, and how umbrella partners are presented to contractors.

• Seek advice and external support

  
  Where appropriate, take external advice to benchmark your approach against industry best practice. Consider implementing payslip checking systems, requiring umbrellas to hold recognised accreditations, and drawing on specialist support to strengthen your compliance framework.
  
  

• Partner with reputable providers

  
  Prioritise working only with established umbrella companies that have a demonstrable track record of compliance. Choosing trusted, reputable partners significantly reduces risk and helps protect both your business and your contractors.
  
  

• Enhance due diligence and oversight

  
  Take steps to reinforce your compliance processes. This should include carrying out transparency checks, conducting regular audits, and reviewing umbrella accreditations. Maintaining clear documentation and audit trails will also provide assurance of ongoing compliance.

Agencies that act early to embed strong supply chain governance, contractual safeguards, and real-time monitoring will be best placed to manage the risks of joint liability and demonstrate to clients, contractors, and regulators that they are operating responsibly.