Government Announces Major Legislative Reform to Tackle Umbrella Company Non-Compliance

The UK Government has now published its long-anticipated policy paper, “Umbrella Companies — Tackling Non-Compliance in the Umbrella Company Market” (21 July 2025), outlining a landmark shift in how umbrella company compliance will be enforced across the temporary labour supply chain.

This development marks a significant moment for the recruitment and payroll sectors. The proposed legislative reforms, set to come into force from 6 April 2026, place new legal responsibilities on recruitment agencies and end clients, with wide-reaching implications for how contractors are engaged and paid.

At Champion Contractors Limited, we've reviewed the full details of the policy paper, and we're here to break down the key points — and what they mean for you.

Why Are These Changes Happening?

The government's objective is clear: to eliminate tax non-compliance, protect workers from financial harm, and ensure a fairer, more transparent temporary labour market.

According to HMRC, some umbrella companies are facilitating:

• PAYE and NIC tax avoidance
  
• Tax fraud linked to organised crime groups
  
• Employment rights violations

These practices have left workers exposed to large, unexpected tax bills and have allowed unscrupulous operators to undercut compliant businesses.

The Legislative Headline: Joint and Several Liability

What's Changing?

A key feature of the new legislation is the introduction of joint and several liability, meaning that:

• Recruitment agencies will not be deemed to be the employer of the worker, meaning that umbrella companies can continue to use their Employer Reference Numbers (ERN) for employment and tax purposes.
• HMRC will invest £260,000 in their IT systems to help avoid costly ERN and employee contract changes for agencies and umbrella companies.
• Umbrella companies will be widely defined to include employment businesses and intermediaries directly engaging workers.
• Definitions will also include “purported umbrellas", which is likely aimed at closing compliance loopholes such as mini-umbrella companies and other fraudulent arrangements.
• Recruitment agencies will be held jointly responsible for ensuring PAYE and NIC are correctly accounted for when an umbrella company is engaged in the supply of workers.
• Where no recruitment agency is involved, end clients will assume that responsibility.
• If a non-compliant umbrella fails to pay the appropriate tax and NICs, HMRC can recover it from the agency or end client, even if they were not directly at fault. Agencies and end clients will have no statutory excuse.
• Legislation will be amended to prevent fraudulent documentation from constituting as evidence against a HMRC claim against a jointly and severally liable party.
• Where there are multiple agencies in the supply chain, such as with an MSP model, likely, only the top agency in the chain (the one with the contract with the end client) will be liable.
  

What Does This Mean for You?

• From April 2026, the financial risk of engaging with a non-compliant umbrella company will sit with agencies (or end clients).
• Agencies and end clients will need to carry out robust due diligence on all umbrella partners throughout the supply chain. Pleading ignorance will no longer count as an excuse.
• Agencies will need to have 100% confidence in the compliance processes operated by their umbrella payroll suppliers.
• Agencies will need to review all commercial agreements and contracts to ensure that they reflect their new responsibilities.
• End clients will likely scrutinise supply chains closely when engaging with agencies and contractors directly or indirectly.
• Internal training and policies will be essential to ensure that all agency employees are aware of the associated risks.

Our Thoughts

This policy change is more than a compliance issue; it's a chance to cleanse and elevate the umbrella sector and protect workers from unscrupulous operators.
As an FCSA-accredited and SafeRec-certified umbrella company, Champion remains committed to protecting our contractors, agency clients, and the wider supply chain from risk.
We will continue to monitor developments and will issue further updates and client guidance as more details emerge from HMRC and the Finance Bill.
If you have any questions or want to discuss how this change may affect your business, please get in touch with our team. We're here to help you navigate this transition with confidence.
Contact us on 0161 703 2549 or email info@championcontractors.co.uk.

Umbrella Companies — Tackling Non-Compliance in the Umbrella Company Market - https://www.gov.uk/government/publications/umbrella-companies-tackling-non-compliance-in-the-umbrella-company-market/umbrella-companies-tackling-non-compliance-in-the-umbrella-company-market