Back to News

by

Umbrella Company Reform: What End Hirers Need to Know About the Draft Legislation

Published: July 2025 – Draft Legislation

The Government has now published draft legislation as part of its plan to tackle non-compliance in the umbrella company market. The changes are significant, with the supply chain facing direct financial risk from 6 April 2026 for tax debts arising from umbrella companies in their supply chain.

With over 275,000 workers employed by non-compliant umbrella companies, HMRC is closing in on what it views as a persistent tax risk. This blog breaks down what’s changing, who’s responsible, and the actions end hirers must take to prepare. With the consultation still open and the Bill going through Parliament we can expect more guidance, clarity and knowledge to be shared in the coming months, but this blog sets out what is currently known about the April 2026 changes.

The Context: Why This Reform Is Happening

Following IR35 reforms, many contractors shifted into umbrella arrangements. This led to:

  • A surge in new umbrella providers — many promoting non-compliant schemes.
  • Agencies drawn in by kickbacks or commission uplifts.
  • Contractors attracted by “boosted” take-home pay through artificial arrangements.

The Government is now clamping down, aiming to:

  • Shift liability for unpaid PAYE/NICs up the supply chain.
  • Clarify the definition of umbrella companies.
  • Force due diligence into the supply chain by end hirers and recruiters alike.

This reform is not just new rules — it’s new enforcement of existing obligations.

Key Changes in the Draft Legislation

Joint and Several Liability
From April 2026, HMRC will be able to pursue other parties in the labour supply chain for unpaid taxes that should have been paid by the umbrella company. Whoever contracts directly with the end-client will be joint and severally liable for PAYE taxes.

Broad Definition of “Umbrella Company”
The legislation uses the term “purporting to be the employer” — which means it doesn’t just apply to companies legally acting as an employer, but those that assume the role in practice. This could bring atypical models and edge cases within scope. Expect clarification in coming months on what “purporting” means in HMRC’s eyes.

What End Hirers Must Do?

  1. Audit Your Workforce
  • Categorise workers: PSC, Umbrella, CIS, or Agency PAYE.
  • Understand who you are paying, and how.
  • Identify where you may become the liable party.
  1. Review Engagement Models
  • Reassess your IR35 process.
  • Review your preferred supplier list and when you last carried out due diligence on them.
  • Be cautious about moving umbrella workers mid-assignment — it may create employment law risks.
  1. Strengthen Your PSL
  • Vetting matters: Ensure umbrellas are FCSA or Professional Passport accredited — but don’t stop there.
  • Perform ongoing due diligence:
    • Confirm PAYE/NIC compliance.
    • Review payslips for accuracy (not just one-off checks).
    • Ask about indemnities — if an umbrella won’t indemnify you, that’s a red flag.
    • Examine umbrella age, credit score, and the actual name paying the worker.
  1. Be Cautious With Compliance Tools
  • Payslip checking software can help confirm correct calculations — but won’t flag risks if no tax is being calculated, e.g., due to salary sacrifice or expenses misuse.
  • Insurance solutions may enter the market — but ensure:
    • They cover the right risks.
    • They work alongside due diligence processes.
    • They match any contractual indemnities agreed — otherwise you may be exposed.

What About Consultancies?

Be mindful of how “consultancies” operate:

  • If the consultancy is truly delivering a service (e.g., fixed fee/milestone-based), it may be the end client.
  • But if it’s supplying people on a time & materials basis, it may be acting as an umbrella, and therefore you have the joint and several liability.

What’s Not Going to Happen?

  • MSPs and Agencies won’t all rush to PAYE: With 2027 reforms to employment rights looming, many agencies will still want to outsource employment responsibility to umbrellas. Further is there a question mark over whether an agency will fall within the definition of an Umbrella Company.
  • Umbrella-free mandates are unlikely: Clients still need someone to absorb employment risk. Instead, we’ll see tightened PSLs and fewer umbrella partners.
  • IR35 complacency won’t fly: Expect HMRC enforcement activity in the private sector. Don’t shift to “Outside IR35” for convenience alone.

Final Thoughts: This Is About Governance

This legislation isn’t just about tax. It’s a wake-up call to review your hiring governance. You’re likely already under obligations via the Criminal Finances Act not to facilitate tax evasion — this reform just adds more accountability and a clear financial consequence.

Whether you’re a direct end hirer or working via an MSP or neutral vendor, the question is the same:

Are you comfortable with the tax risk your supply chain exposes you to?

How Brookson Legal Can Help

Don’t wait until April 2026. Assignments are already running into that window. Start locking down your PSL now — and make sure you’re only working with partners who can prove compliance.

Get in touch today to schedule a supply chain audit or discuss your PSL strategy.