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
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?
Umbrella fails to pay PAYE (under Section 61Y)
HMRC pursues umbrella
Umbrella collapses
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
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.
