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The Umbrella Company Draft Legislation - April 2026

  • Magic Connect
  • Jul 24
  • 4 min read

The UK Government has published draft legislation introducing joint and several liability for unpaid PAYE and NICs in umbrella company arrangements. In this briefing, Kareena Prescott, an employment law specialist and adviser to Magic Connect and its clients, explains what the changes mean for recruitment agencies, the risks they face from April 2026, and practical steps to protect their business.

 

Summary of the Draft Legislation

 

Under the draft Finance Bill, amendments to ITEPA 2003 introduce Section 61Y(2), which makes agencies and other supply chain parties jointly and severally liable for unpaid PAYE and NICs where an umbrella company fails to account for tax properly.

 

HMRC will have the legal right to recover:

  • Unpaid PAYE/NICs

  • Statutory interest

  • Penalties for non-compliance

 

This applies even if the agency:

  • Paid all fees (including tax) to the umbrella

  • Believed in good faith that the umbrella was compliant

 

Sections 61Z1(1) to (3) capture scenarios where a business appears to operate as an umbrella company but does not meet the legal definition. In such cases, agencies remain liable for tax as though the umbrella company existed.

 

The legislation (see Section 61V(4A)) removes any protection where fraudulent documentation is provided by the umbrella. Even if an agency did not know the documents were fraudulent, this will not be a defence. HMRC expects agencies to conduct thorough, ongoing due diligence, and verify authenticity of all compliance evidence.

 

Agencies must assume ultimate responsibility for ensuring tax has been properly accounted for and remitted.

 

Risks for Agencies

  1. Financial Exposure:

  • Agencies may be pursued for 100% of the umbrella’s unpaid tax

  • Interest on late payments

  • Penalties under PAYE provisions (referencing PAYE Reg. 80(5A))

 

2.     Legal Liability

  • Agencies are treated as “relevant parties” under Section 61Z

  • HMRC can collect from agencies even if the umbrella is offshore or insolvent

 

3.     Reputational Damage

  • Association with non-compliant umbrellas risks agency credibility and client relationships

 

Timeline

  • 21 July 2025: Draft legislation published

  • April 2026: Joint and several liability takes effect

  • Agency Risk Defence Plan

 

Step 1: Audit Current Umbrella Partners

  • Check accreditations (FCSA, Professional Passport)

  • Request evidence of PAYE/NIC compliance

  • Independently verify any documents provided to reduce risk of relying on fraudulent paperwork (critical under Section 61V(4A))

 

Important Note: Accreditation alone (e.g., FCSA, Professional Passport) is not sufficient protection. Even fully compliant umbrellas can face financial difficulties, leading to non-payment of PAYE/NICs and potential winding up. Agencies should assess financial health and monitor for early signs of distress.

 

Step 2: Strengthen Contracts


  • Include indemnity clauses covering tax liability

  • Require umbrellas to provide RTI filings and HMRC payment receipts

 

Step 3: Ongoing Monitoring


  • Set up regular audits of umbrella compliance

  • Monitor for signs of financial instability or non-compliance

 

Step 4: Train Recruiters


  • Ensure staff understand risks of using non-compliant umbrellas and how to spot red flags in documentation

 

Step 5: Preferred Supplier List (PSL)


  • Limit relationships to fully vetted umbrellas

 

Due Diligence Checklist for Agencies

 

  • Is the umbrella FCSA or Professional Passport accredited?

  • Can they provide up to date RTI and HMRC receipts?

  • Are documents independently verified (SafeRec, veriPAYE) to avoid reliance on potentially fraudulent evidence?

  • Are all contractor payments run through PAYE?

  • Is the umbrella UK-resident for tax purposes?

  • Does the umbrella have a clean compliance history?

 

Risk Flowchart: Who Pays?

 

  1. Umbrella fails to pay PAYE (under Section 61Y)

  2. HMRC pursues umbrella

  3. Umbrella collapses

  4. HMRC pursues agency (under Section 61Z)


Result: Agency becomes liable for tax, interest, and penalties – regardless of whether fraudulent documentation was unknowingly relied upon.

 

Key Takeaways

 

  • Agencies must act now to audit their supply chains

  • Proof of payment to umbrellas will not protect you

  • Reliance on fraudulent documents – even unknowingly – is not a defence (Section 61V(4A))

  • Accreditation alone is not enough; even compliant umbrellas can face financial collapse

  • From April 2026, HMRC can enforce liability directly on agencies for umbrella non-compliance

 

Next Steps for Agencies

 

  • Review your umbrella arrangements immediately

  • Update commercial contracts

  • Implement a PSL and robust due diligence process

 

Visit the Gov.uk website for more information about the draft legislation here.

 

About the author


Kareena Prescott is an employment law specialist and adviser to Magic Connect and its clients.

 

The Founder of C2E Law, Kareena specialises in guiding companies through complex legal landscapes, focusing on the recruitment sector. A commercial Employment Law & Tax Adviser with over 20 years' experience, Kareena worked at a top 10 law firm for eight years. In particular, she provides specialist niche advice to the Recruitment and Umbrella sectors and other respondent businesses.

 

Kareena provides commercial, no-nonsense advice, and has extensive knowledge in tax and employment law and has represented both Respondents and Claimants in over 200 Tribunals.

 

About us

 

Magic Connect is an expert broker of workforce reward, pay and engagement solutions supporting businesses to manage and engage with their people better. Whilst Magic Connect primarily supports recruitment agencies and contracting intermediary companies in temporary labour supply chains to deliver efficient and compliant workforce remuneration solutions with a focus on enhancing the worker experience, it also supports traditional employment structures with partner solutions encompassing payroll, wellbeing and engagement products. Magic Connect has carefully selected a network of trusted experts with professional accreditations behind them, including a highly regarded ex GLAA inspector driving the most robust labour solution in the market, and Professional Passport accredited PAYE umbrella services. 

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