Any Umbrellas to Fix Today? Draft Legislation shakes up labour supply chains?
August 5, 2025
When the umbrella breaks, who gets soaked?
The UK government has published draft legislation that could dramatically reshape how umbrella companies and labour supply chains operate from April 2026.
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Sitting as a new chapter in Part 2 of ITEPA 2003, the proposed rules target tax non-compliance in the umbrella sector and bring strict liability to the top of the chain — including end clients, recruitment agencies, and Managed Service Providers (MSPs).
It’s a decisive move. And one that will force those involved in labour supply chains in the UK, especially in sectors like health, logistics, and IT, to re-evaluate how they engage workers and manage employment tax risk.
With less than a year to prepare, decisions will need to be made… and quickly.
What’s Changing?
In short, liability is shifting up the labour supply chain.
From April 2026, if an umbrella company fails to properly account for PAYE and NICs, the top agency (i.e. the agency holding the contract with the end client) or the end client, if no agency is involved, will be jointly and severally liable.
This applies even if you carried out due diligence, were misled, or only engaged with an umbrella through an MSP. There is no statutory defence.
The liability covers any employment intermediary, not just umbrella companies — including Employers of Record (EoRs), second-tier suppliers, and some consultancies.
What Does It Mean in Practice?
This is strict liability, not negligence-based. That means:
- It doesn’t matter if the end client or agency did everything “by the book.” If PAYE/NICs go unpaid, they’re on the hook.
- Even if a firm relies on industry accreditations, uses a “compliant” umbrella company, or performs real-time checks, it won’t be enough to avoid the tax bill if HMRC comes calling.
- The legislation also applies to ‘purported umbrella companies’, which are intermediaries that promise PAYE but instead pay workers gross, or via Personal Service Companies (PSCs).
Impact on Agencies and MSPs
MSPs in particular face tough questions. Many may now:
- Drop second-tier supplier models
- Push for direct contracts only
- Require PAYE-only solutions from their supply partners
Agencies reliant on umbrella support may find themselves squeezed off preferred supplier lists, especially if they can’t offer compliant PAYE alternatives.
Meanwhile, some umbrella companies may reposition themselves as payroll agents, handling money but not employing workers.
What About End Clients?
If there’s no agency between them and the umbrella, the end client becomes liable. That includes cases where they engage an EoR or consultancy. As such, end clients will now need to:
- Perform due diligence on every intermediary that “employs” or “purports to employ” workers
- Review any “consultancy” arrangements that might conceal disguised umbrella models
- Consider insurance or indemnity solutions, while being alert to Managed Service Company (MSC) risks under the tax legislation
Who Is Caught – and Who Isn’t?
Caught:
- Anyone employed (or supposedly employed) by an intermediary supplying labour
- Employers of Record (EoRs)
- Benched consultancy workers on time-and-materials models
- Some “hire, train and deploy” schemes
- Government department secondments
Not caught:
- PSC contractors, provided IR35 is followed and they’re not paid via a ‘purported umbrella’
- Traditional agency workers paid under agency PAYE (though note: agency worker rules still apply)
- CIS subcontractors, unless working under supervision, direction, or control
Will Accreditation or Insurance Help?
New real-time accreditation models and umbrella compliance tools are emerging. Some come bundled with insurance policies that cover the agency or end client if the umbrella defaults.
This could be a helpful commercial solution, but it won’t eliminate liability.
Due diligence checks still matter, and accreditation alone won’t provide a statutory defence under the new law.
Users should ensure:
- Insurance policies are robust and not caught by MSC rules
- Procedures meet standards under the Criminal Finances Act, especially around facilitation of tax evasion
- GDPR compliance is managed if using platforms involving personal data flows between parties
Will This Lead to Wider Change?
Almost certainly. Some consequences to expect:
- Increased use of PSC models in sectors where IR35 enforcement feels low-risk
- Migration from umbrella to CIS self-employed models in construction
- Movement toward statement of work/output-based contracts, especially in consultancy-heavy sectors
- Shift to umbrella companies acting only as payroll agents, not full employers
- Greater pressure on asset-based lenders to underwrite agencies now jointly liable for tax errors
- Agencies relying on cashflow funding from umbrella companies may need new arrangements — e.g. invoice discounting or factoring — but these come with fresh credit risks if joint tax liabilities apply.
Final Thoughts
This is a seismic shift for the UK’s labour supply industry.
From April 2026, tax failures by umbrella companies won’t be a downstream problem — they’ll land directly with those upstream. No defences, no excuses, no safety net.
For end clients, MSPs, and agencies, now is the time to:
- Map labour supply chains
- Review who employs whom
- Evaluate whether current workforce models still make sense
- Consider the cost and risk of "cheap" labour
Because, from April 2026, when the umbrella breaks, those at the top will get very wet.
Need support understanding how this will impact your organisation?
Mosaic Chambers Group advises companies, agencies, and contractors on complex compliance, UK tax law, and labour supply chain structures. Get in touch for tailored support.
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