We explore the UK Government’s upcoming changes to tax compliance rules affecting labour supply chains. How should brokers prepare?
The draft legislation, published in July 2025, shows a significant shift in how tax compliance is enforced across staffing supply chains. For businesses that engage temporary labour or outsource operational functions, the introduction of ‘joint and several liability’ represents a new compliance frontier – one that demands immediate attention and strategic response.
What’s changing?
From 6 April 2026, where a worker is supplied via an umbrella company, joint and several liability for PAYE liabilities will apply. This means that if the umbrella company fails to meet its PAYE obligations – including income tax, national insurance contributions (NICs) and the apprenticeship levy – HMRC will have the authority to pursue other parties in the supply chain for the unpaid amounts. This might include recruitment agencies and potentially end-users of temporary labour.
What was the position before?
Liability for PAYE failures used to rest solely with the umbrella company. If the company engaged in tax avoidance or failed to operate PAYE correctly, HMRC’s enforcement powers were limited to that entity. This created a gap in accountability, particularly when non-compliant umbrella companies were dissolved, operated offshore or used complex structures to avoid detection.
End clients and recruitment agencies were generally shielded from direct liability, provided they could demonstrate reasonable care in their engagement practices. But this approach wasn’t enough to tackle widespread non-compliance. HMRC estimated that over a third of umbrella company arrangements involved some form of tax avoidance and that this has resulted in significant tax leakage.
The new legislation removes this buffer. It places direct financial risk on all parties in the labour supply chain, regardless of their level of involvement or intent.
Who will this affect the most?
While the impact of this reform will be felt across many sectors, recruitment agencies and managed service providers (MSPs) are likely to be the most directly affected. That’s because they typically sit at the centre of labour supply chains and often have contractual relationships with umbrella companies. This means they’ll face the greatest exposure to enforcement action and will need to overhaul their compliance frameworks, supplier vetting processes, and contractual protections.
But end-users of labour, too, – including businesses throughout the insurance industry – are far from insulated. Even without direct contractual ties to umbrella companies, businesses may still be held liable under the new rules. The consequences of failing to manage supply chain risk are significant. So businesses must now take proactive steps to protect themselves.
Why does this matter for insurance intermediaries?
It’s quite common for intermediary businesses to rely on temporary staff to manage seasonal demand, temporary cover or project-based work. These arrangements often involve recruitment agencies or outsourced service providers who, in turn, may engage umbrella companies to employ the workers.
If those umbrella companies are non-compliant – whether through deliberate tax avoidance or poor governance – the end-user business could face substantial financial exposure, reputational damage and increased scrutiny from HMRC.
What are the key risks?
The introduction of joint and several liability brings several specific risks that insurance businesses must now actively manage:
1. Use of offshore or disguised employment models
Some umbrella companies operate through offshore entities or use structures such as ‘mini umbrella companies’ to fragment employment and reduce tax liabilities. These arrangements are often opaque and designed to avoid scrutiny. Businesses that unknowingly engage workers through such models may still be held liable for unpaid taxes. This applies even if the umbrella company is based outside the UK.
2. Limited visibility of the labour supply chain
Businesses may not have direct contractual relationships with umbrella companies, especially when staffing is arranged through third-party agencies. This lack of transparency can obscure non-compliant practices and make it difficult to assess risk. Without clear supply chain oversight, businesses may be unaware of who is ultimately responsible for PAYE compliance.
3. Inadequate due diligence on staffing partners
Standard checks, such as verifying accreditation or registration, are no longer enough. Businesses must now conduct enhanced due diligence, which could include the validation of PAYE remittances, reviewing employment contracts and assessing operational controls.
4. Contractual weaknesses and lack of indemnities
Many arrangements operate under legacy contracts that don’t address tax compliance properly or indemnify against third-party failures. Without robust contractual protections, businesses may be caught out if an umbrella company defaults on its obligations.
5. Exposure under the senior accounting officer (SAO) regime
For businesses that are part of larger corporate groups, the SAO regime imposes additional responsibilities for ensuring tax compliance across the organisation. The use of non-compliant umbrella companies could trigger SAO reporting failures, leading to penalties and reputational harm.
What does the future hold?
Further regulation is expected under the Employment Rights Bill, due to take effect in April 2027. It will introduce oversight via the Fair Work Agency. This signals a broader shift toward transparency and accountability in employment practices.
So it’s important to act now and review staffing arrangements, strengthen controls, and engage with trusted partners.
How can we help?
Our Employment Tax team works closely with insurance sector clients to help them prepare for these changes. Our services include:
- Labour supply chain audits to identify exposure to umbrella company risk.
- Contractual reviews to strengthen indemnities and compliance clauses.
- Real-time PAYE validation and payroll assurance checks.
- Governance and control enhancements for SAO compliance.
- Strategic advisory on alternative engagement models, including direct employment and fixed-term contracts.
- Training and briefings for HR, finance, and compliance teams to build awareness and readiness.
For more information, please contact Liam Condron.
