Shared Liability Changes for Recruitment Agencies Using Umbrella Companies

Summary of Shared Liability Changes for Recruitment Agencies Using Umbrella Companies

Overview of the Change

From April 2026, the UK government plans to introduce joint and several liability (JSL) between recruitment agencies and umbrella companies. This means that if an umbrella company fails to pay the correct tax (such as PAYE or National Insurance), the recruitment agency that engaged them will also be held fully liable for any unpaid amounts—even if the agency was not directly responsible for the non-compliance.

Significance for the Recruitment Industry

This is a significant shift from the current model, where agencies can largely outsource payroll and tax responsibilities to umbrella companies.

Under the new regime, agencies will no longer be able to assume that compliance is solely the umbrella company’s responsibility. Instead, they will need to:

• Conduct much more rigorous due diligence on umbrella providers.
• Maintain clear, auditable records of compliance checks.
• Potentially face financial and reputational risks if their chosen umbrella company is found non-compliant.

There will be no statutory excuse for agencies; the liability is absolute, and even “reasonable care” will not protect them from HMRC claims.

Will This Encourage or Discourage Outsourcing to Umbrella Companies?

• Discouragement of Blind Outsourcing: The new rules are likely to discourage agencies from outsourcing payroll and compliance responsibilities to third-party umbrella providers without thorough vetting. Agencies will need to be far more selective and proactive in ensuring their umbrella partners are fully compliant with tax and employment law.

• Continued Use, but with Caution: Umbrella companies will remain a key part of the labour market. However, agencies will only be able to use them if they can demonstrate that the umbrella provider is compliant. This will likely lead to a consolidation in the market, with agencies favouring larger, more reputable umbrellas that can provide robust compliance evidence.

• Increased Due Diligence and Compliance Costs: Agencies will invest more in compliance tools, legal advice, and ongoing monitoring of umbrella providers. This may increase operational costs but is seen as necessary to avoid significant tax liabilities.

Industry Response

There is some relief in the industry that agencies are not being asked to directly operate PAYE for all contractors, but the shared liability model still represents a major tightening of the rules. Agencies that fail to adapt could face severe financial penalties, so proactive compliance is now a business-critical issue.

Conclusion

The introduction of shared liability is a significant change for the recruitment industry. It will not stop agencies from using umbrella companies, but it will force them to be much more diligent and selective.

Agencies must prepare now by strengthening due diligence processes, partnering only with compliant umbrellas, and staying ahead of legislative developments to protect themselves from new risks.