Umbrella company reform: What agencies and end clients need to know ahead of April 2026
The UK labour supply chain is entering a period of major regulatory change. From April 2026, the government is expected to introduce the first formal regulation of umbrella companies, bringing with it joint-and-several liability for employment businesses (agencies) and their end clients when tax non-compliance occurs within umbrella company supply chains.
For organisations using Off-Payroll Workers (OPW), the reforms significantly increase compliance expectations and exposure to liabilities and reputational risk. This insight provides an overview of what is changing, how it interacts with existing risk areas, and the steps organisations should be taking now.
What the new umbrella company legislation will introduce
The upcoming legislation aims to tackle persistent tax non‑compliance, avoidance schemes and worker exploitation within parts of the umbrella market. For the first time, the government will formally regulate umbrella companies and strengthen HMRC’s enforcement powers.
A core feature of the reforms is joint-and-several liability, meaning:
Agencies and end clients may become liable for unpaid tax where umbrella companies in their supply chain fail to operate PAYE, NIC or other statutory deductions correctly.
- HMRC will be able to recover tax debts up the supply chain, not merely from the umbrella company itself.
- Robust supply chain due diligence becomes mandatory, with organisations expected to evidence compliance checks.
These changes reflect HMRC’s ongoing push to close compliance gaps, increase governance in labour supply chains and reduce the prevalence of mini-umbrella fraud, disguised remuneration, and other abusive arrangements.
Why the legislation matters
Umbrella companies have become a standard feature of temporary labour arrangements, but the sector’s rapid growth has brought substantial risks, such as:
- Mini umbrella company (MUC) structures designed to exploit NIC and VAT reliefs
- Incorrect or non-existent PAYE and NIC deductions
- Hidden skimming of worker pay or unlawful deductions
- Misuse of holiday pay and salary sacrifice arrangements
Under the new reforms, these risks will no longer be confined to the umbrella company. Agencies and end clients that fail to identify non‑compliant umbrellas may face:
- Transferred tax liabilities
- Interest and penalties
- Reputational harm
- Loss of commercial relationships
All businesses should be aware of these changes, and for businesses using high volumes of contingent labour, this represents a significant shift in compliance exposure.
Existing compliance risks in labour supply chains
The umbrella reforms build on an already complex risk environment. Agencies and end clients must navigate several overlapping regimes, each carrying its own enforcement pressures.
IR35/Off‑payroll working
- Incorrect status determinations can create PAYE/NIC liabilities for ‘end-engagers’.
- HMRC expect end-engagers to take reasonable care when engaging off-payroll workers, including robust procedures to ensure the correct tax status is applied and due diligence is undertaken across the supply chain.
- Even where third‑party advice is obtained, responsibility for correctly assessing tax status and completing supply‑chain due diligence remains with the end‑engager.
- Agencies should act on end-engager instructions where an ‘inside’ IR35 determination is confirmed and withhold PAYE if paying the worker.
- Agencies should also conduct robust due diligence on its supply chain to ensure compliance is maintained throughout.
Employment status
- Misclassifying workers as self-employed (sole trader) remains a key area of HMRC focus.
- Financial and legal risk can arise where workers have statutory rights – such as holiday pay or national minimum wage – under employment law even if they are treated as self-employed for tax purposes.
Construction Industry Scheme (CIS)
- For workers within CIS, your onboarding processes should always start by considering if the worker is employed rather than self-employed.
- New CIS legislation that applies from April 2026 gives HMRC powers to withdraw Gross Payment Status from Subcontractors who know or should have known that payments made or received were connected with fraudulent evasion of tax.
Umbrella company fraud
Growing forms of fraud include:
- Mini umbrella schemes obtaining fraudulently reduced VAT treatment and employment allowance
- Failure to operate PAYE correctly
- Disguised remuneration models marketed as legitimate umbrellas
These risks are a primary driver behind the 2026 legislation.
Intermediaries reporting (for agencies)
- Agencies must report non-PAYE engagements to HMRC.
- Errors or omissions can trigger penalties.
- HMRC is expected to increase scrutiny of reported data once the umbrella reforms take effect.
What agencies and end clients should do now
With joint-and-several liability on the horizon, proactive preparation is essential. Recommended actions include:
Strengthen supply chain due diligence
- Conduct compliance audits of all umbrella partners.
- Request PAYE, RTI and employment documentation.
- Avoid umbrellas using salary-skimming or disguised remuneration models.
Review contracts and commercial terms
- Clearly define responsibilities, compliance expectations and information-sharing obligations.
- Include audit rights and indemnities.
Enhance internal governance
- Implement a documented labour supply chain risk-management framework.
- Train HR, payroll, finance and procurement teams.
Reassess labour models
- Consider alternative models – such as direct PAYE, Professional Employment Organisation solutions or agency payroll – where risk tolerance is low.
Preparing for the road ahead
The April 2026 umbrella company reforms represent a major shift in HMRC’s approach to labour supply chain compliance. Agencies and end clients that rely on umbrella company structures will face increased scrutiny, a greater compliance burden, and significantly higher financial exposure.
However, organisations that invest now in strong governance, transparent supply chains and rigorous due diligence will be well-positioned to avoid costly HMRC intervention
We’re here to help
If you would like expert support in assessing your labour supply chain risks, reviewing umbrella models or preparing for the 2026 legislation, our specialist team is ready to help.
