Umbrella company reform: what businesses need to do now

From 6 April 2026, changes to the UK umbrella company regime will significantly alter how tax risk is allocated across labour supply chains. Where an umbrella company fails to operate PAYE correctly, HMRC will be able to recover unpaid tax not only from the umbrella company, but also from the recruitment agency and, in some cases, the end client. This liability applies regardless of fault or reasonable care.

These reforms are often framed as a payroll or employment law issue. In reality, they represent a shift in tax governance expectations. Organisations that engage contingent labour, particularly through agencies and umbrella companies, can no longer assume that using an umbrella company transfers tax risk elsewhere.

Why this matters?

For many years, providing services through an intermediary (such as a personal services company) was a common structure for contractors. However, the tightening of the IR35 rules in 2021 (designed to ensure that workers who provide services through an intermediary, but who would otherwise be regarded as employees, pay broadly the same tax and National Insurance contributions as direct employees) led end clients to look at alternative structures that would reduce or eliminate their IR35 risks.

Umbrella companies grew in prominence as a way of avoiding the need for end client IR35 status determinations by placing contractors directly on an umbrella company’s payroll. The tax compliance obligation sat squarely with the umbrella company, not the end client.

The 2026 reforms fundamentally change that position. From April 2026, the tax risk will follow the supply chain – this means that agencies and end clients will remain exposed to tax risk even where they have delegated payroll responsibility to an umbrella company. It is interesting that instead of regulating every umbrella company directly, HMRC has chosen to reallocate risk up the supply chain, placing responsibility on those best positioned to control it. This approach reflects a broader trend that we are seeing across the tax system - tax risk should be actively governed, not passively delegated or merely reacted to.

What has really changed?

The umbrella company reforms bring two key changes:

• joint and several liability for PAYE failures within umbrella company labour supply chains; and
• possibly the most important change, the expectation of oversight. From April 2026, organisations are expected to understand how tax compliance is achieved within their labour supply chains and to be able to evidence how risks are identified, assessed and managed.

Strong governance will not prevent liability arising. However, it does reduce commercial, reputational and enforcement risk, and places organisations in a far stronger position if issues arise years after decisions were taken.

Practical steps for action

Clients should focus now on structure, ownership and evidence, rather than technical payroll fixes.

1. Map your labour supply chain

Identify where umbrella companies are used, directly or indirectly, and understand who contracts with whom. Many organisations do not have a complete picture of their contingent workforce arrangements.

2. Allocate internal ownership of tax risk

Be clear which function owns umbrella company-related tax risk (for example tax, legal or finance), and ensure this is aligned with HR and procurement decision‑making. Diffuse responsibility is a key source of exposure.

3. Review onboarding and due diligence processes

HMRC’s “check, act and review” framework provides a practical structure. Due diligence should include understanding who employs the workers, how they are paid, and whether there are indicators of wider non‑compliance or exploitation. This is not a one‑off exercise.

4. Stress‑test contractual protections

Existing indemnities and warranties were often drafted on the assumption that tax risk sat with the umbrella company. These should be reviewed in light of joint and several liability, recognising that contractual protection does not prevent tax recovery by HMRC.

5. Document decision‑making

Organisations should be able to show why particular labour models were adopted, what risks were identified at the time, and what controls were put in place. This evidence will be critical if arrangements are challenged retrospectively.

Looking ahead

The umbrella company reforms are part of a wider shift towards shared responsibility for tax compliance across supply chains. For organisations that engage contingent labour, the message is clear: tax risk arises from commercial decisions and must be governed accordingly. Early, structured action now will materially reduce exposure later.

How can we help?

Our Incentives and Employment Tax team operates out of our offices in Bristol, London, Manchester and Belfast and works with a range of clients including FTSE, AIM and global companies, PE backed companies and start-up companies.

We have an in-depth knowledge of employee tax and can help you ensure your business complies with its payroll obligations. We can also advise you on how to protect your business, and comply with the relevant legislation, when engaging with individuals supplying their services through an intermediary or umbrella company.

If you are interested in discussing any of the topics covered in this article, get in touch with our Incentives and Employment Tax specialists below.