Matt Fryer, Managing Director at Brookson Group, a People2.0 company, explains that recruitment agencies must get on top of new compliance obligations by September 2025, to avoid missing the boat.
Tax liability shift
HMRC’s April 2026 tax liability shift – set to be confirmed in mid-July – will be the biggest change in umbrella sector accountability and comes along at the same time as fundamental changes are being proposed to employment rights legislation in the form of the Employment Rights Bill. This new legislation is coming, and recruitment organisations that work with umbrella companies need to act now or face the consequences.
Currently, umbrella companies (and in some cases their employees) are responsible for their own tax compliance failures. But the new rules will make agencies liable for umbrella company tax failures that they didn’t directly cause.
As legislators continue to play Whac-A-Mole catch-up with evolving contractor and temp payment mechanisms such as sole traders, Personal Service Companies (PSCs), agency payroll and umbrella companies, the choice to become self-employed or to work flexibly continues to grow in popularity as lifestyles and work-life priorities continually evolve. The current legislative landscape has deterred end clients and agencies from allowing some payment mechanisms and corralled contractors and temps into umbrella companies – but the upstreaming of tax compliance risk for umbrella companies will now mean that there is nowhere to hide.
Umbrella tax bills are incoming
The liability and financial exposure for recruitment agencies will continue to grow, with companies about to become liable for the tax portion of transactions between them and umbrella companies, despite not controlling tax calculations or payments, where businesses in their supply chain fail to meet the liabilities directly.
Tax rates for payments to umbrella companies – including National Insurance Contributions and the Apprentice Levy – are around 45% for basic rate taxpayers, and up to 60% for higher rate taxpayers.
HMRC can pursue historical liabilities going back several years (up to 20 years if fraud is proven). With multiple workers over extended periods, agencies could start to accrue millions of pounds in potential tax risk from April 2026.
A recent HMRC consultation revealed that only one-third of agencies said they already complete an audit of the umbrella companies they work with. This suggests that a worrying two-thirds of the market is behind the curve when it comes to mitigating this new risk.
Given the extent of recent non-compliant activity and the volume of the market who don’t currently audit their umbrella companies, the recruitment sector has no time to lose if they are to have a plan devised and implemented, ready for April 2026 implementation.
Only the compliant will survive
Market consolidation is likely, as agencies become more selective about which umbrella companies they work with. Agencies are likely to reduce the number of umbrella companies that they work with, focusing on the long-established, trusted partners who hold industry recognised compliance accreditations. There is also a strong possibility of agencies preferring established providers with at least three to five years of audited accounts and who can demonstrate ongoing compliance records.
When it comes to choosing an umbrella company to partner with, agencies should think twice before going with the lowest margin or the most attractive rebate, as this may imply that corners are being cut in terms of compliance and sustainability..
Compliance can’t be casual
Agencies will need to adapt their compliance strategy, factoring in due diligence over prospective umbrella company partners, as well as continuing to audit over time. Currently, due diligence for many firms goes as far as an annual or biannual questionnaire exercise, however this should be adapted to more frequent reviews and auditing focused on tax calculations and payments.
These reviews should entail ensuring that umbrella company contracts are compliant, as well as regular payslip checking and calculation audits. There should be confirmations that the umbrella company partner – which will ideally be accredited by an industry recognised body, such as the FCSA – physically pays taxes to HMRC on time.
IR35 checks could save you
Another aspect to consider relates to the 2021 adaptation to IR35 in the private sector, which shifted tax responsibility from contractors to end clients and agencies.
If agencies are placing genuinely self-employed contractors who have been forced to work in umbrella companies by end clients imposing blanket bans on PSCs or blanket inside IR35 determinations – that in fact may pass an IR35 test – now is the time to reassess them, or recommend that your clients reassess them, in order to move the candidates concerned away from the new risk.
Because the umbrella risk sits inside IR35, if candidates are working autonomously outside of IR35 (compliantly), you can move away from the new tax risk placed on agencies.
Balancing vigilance and resolve
While risks are increasing for recruitment agencies, this is not a time to jump from the frying pan into the fire.
Umbrella companies remain a highly beneficial partner to have, when it comes to employment risks and outsourcing such risks encompasses holiday pay, sick pay and other statutory payments. In addition, umbrella companies greatly reduce the administrative burden of payroll, benefits and compliance management; plus, they are especially valuable for career contractors with multiple concurrent assignments who value tax certainty with a consistent umbrella company.
It is, however, vital that recruitment agencies diversify their candidate payment options as much as possible, as opposed to relying solely on umbrella company services. Being model-agnostic and remaining open to all relevant payment models is key to effective risk management.
Once we have final clarity on the legislation in July, recruiters should waste no time in defining and rolling out their policies and procedures for mitigating this new risk to allow then to continue operating compliantly with peace of mind.
