Introduction: Why is change happening now?
In recent years, HMRC and government policymakers have been increasingly focused on tightening compliance within the temporary labour market. This is not without cause. The proliferation of non-compliant umbrella companies, disguised remuneration schemes, tax avoidance structures, and hybrid employment models has undermined both worker protections and the integrity of the UK tax system.
Recruitment agencies have found themselves caught in the middle of a complex web of intermediaries, often unknowingly facilitating arrangements that fall outside of HMRC’s expectations. At the same time, genuine providers operating responsibly have been disadvantaged by a lack of enforcement against bad actors.
To address this imbalance, the Finance Bill 2025 introduces two significant reforms that will come into effect from 6 April 2026. These changes are designed to clean up the supply chain, enforce accountability across all parties involved, and ensure taxes are properly paid. HMRC’s underlying objective is to modernise legislation to reflect how labour is supplied in today’s economy, and to close the compliance gaps that have allowed risk and liability to accumulate unchecked.
This guide is written specifically for recruitment agencies to understand what these changes mean in practice, what risks they may now carry, and what steps they should consider in response.
Mandatory registration for tax advisers
Under the Finance Bill 2025, a new legal requirement will be introduced for all businesses and individuals who assist with a client’s tax affairs to register with HMRC. This includes activities such as providing tax advice, preparing, or submitting tax-related documents (e.g., VAT returns, PAYE submissions), or representing clients in communications with HMRC.
The relevant legislative detail is contained in Part 1 of the Finance Bill 2025 (Sections 1–22). This new registration regime applies broadly to anyone submitting tax information or advice on behalf of clients
To register, firms must meet certain conditions:
- Be up to date with all tax filings and payments
- Have no tax avoidance sanctions or relevant criminal convictions
- Be registered with an approved anti-money laundering (AML) supervisory authority
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See Government guidance here: Modernising and mandating tax adviser registration with HMRC
Joint and Several Liability for umbrella company PAYE failures
Perhaps the more impactful change for recruitment agencies is the new Chapter 11 inserted into ITEPA 2003 via the Finance Bill 2025. This section introduces Sections 61Y, 61Z and 61Z1, which radically shift the tax risk profile of umbrella company arrangements.
Under Section 61Y, where an umbrella company fails to operate PAYE correctly, HMRC will now have the power to hold any “relevant party” in the contractual chain jointly and severally liable for the unpaid tax. This means that recruitment agencies, and in some cases the end client, can be pursued directly by HMRC for the shortfall, even if they were not the party responsible for calculating or submitting the payroll.
A “qualifying umbrella company payment” is broadly defined and includes any earnings paid to a worker for services delivered to a client via an umbrella company. Where there is a contractual chain, for example, a client hiring through an agency who in turn contracts with an umbrella, the agency may now be exposed to liability if that umbrella fails to meet its PAYE obligations.
Section 61Z defines “relevant parties” who can be held liable, including:
- The recruitment agency, if they contract with the umbrella
- The end client, if they are directly involved in the chain or the agency is offshore or connected to the umbrella
- Any UK-based intermediary in the contractual supply chain
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This reform is intended to stop the blame from falling solely on non-compliant umbrellas and instead force everyone in the chain to take responsibility. Recruitment agencies should take this as a clear sign that their supply chain diligence must go far beyond pricing and commercial terms. HMRC will now follow the money and hold whoever is reachable and UK-based accountable.
Targeting hybrid and disguised umbrella models (section 61Z1)
In addition to joint liability, Section 61Z1 introduces anti-avoidance rules designed to combat the use of so-called “purported umbrella companies”. These are structures where the worker is not genuinely employed by the umbrella but is paid in a way that mimics employment to disguise the true nature of the relationship.
A key example is the use of hybrid models, where the umbrella engages the worker under a “contract for services” (as if they were self-employed) but treats them operationally as employees. This might be done to avoid National Minimum Wage compliance, pension contributions, or other employment protections, while still deducting PAYE.
From April 2026, if HMRC determines that the arrangement has the characteristics of employment, regardless of how it is contractually framed, they will treat the worker as employed. This means:
- PAYE must be accounted for in full
- All parties in the supply chain can be made jointly liable for unpaid tax
- Any structure designed to avoid tax or employment duties will be disregarded
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In practice, this means hybrid models will not survive scrutiny. Recruitment agencies relying on umbrella providers operating these models risk being financially liable if HMRC intervenes.
Implications of NMW breaches in hybrid models
One of the most serious consequences of reclassification under Section 61Z1 is exposure to National Minimum Wage (NMW) breaches. If HMRC treats the worker as employed and the pay does not meet NMW thresholds, the umbrella company is in breach of the National Minimum Wage Act 1998.
This breach can result in HMRC issuing penalties of up to 200% of the underpayment (capped at £20,000 per worker), alongside requirements for back-pay to the affected worker. Where deductions such as admin fees have reduced take-home pay below NMW, those deductions may also be deemed unlawful.
In scenarios where the umbrella provider is unable to meet these liabilities, HMRC may pursue recruitment agencies or end clients under the joint and several liability rules set out in Section 61Y. This introduces a new level of financial risk, even if the agency did not directly employ the worker.
Beyond financial penalties, agencies using hybrid models may also face reputational damage, complaints to enforcement bodies such as the Employment Agency Standards Inspectorate (EAS), and increased scrutiny from clients and regulators.
In summary, once an arrangement is reclassified as employment, all associated statutory protections apply, including minimum wage. Agencies and clients working with non-compliant umbrella providers risk being swept into both tax and employment law enforcement processes.
A word on chapter 7A: the foundation, not the solution
Some agencies may assume that existing legislation already deals with worker misclassification, particularly Section 61B of ITEPA, which deems certain agency workers as employees for tax purposes. However, Section 61B is limited in scope. It applies only to traditional agency-worker scenarios and only assigns responsibility to the agency itself.
What Sections 61Y to 61Z1 introduce is an expanded enforcement power that applies specifically to umbrella company arrangements, and crucially, extends liability beyond the direct engager to include all relevant UK parties in the chain. It also adds anti-avoidance rules that give HMRC power to reclassify arrangements regardless of contractual wording.
Key dates to know
The following timeline illustrates when recruitment agencies should expect key events and enforcement to begin:
- Mandatory registration of tax advisers
- Joint and several liability for umbrella company PAYE
- Anti-avoidance provisions (Section 61Z1)
Visualising liability in the supply chain
To understand how liability may now be shared under these reforms, the following chart represents the recruitment supply chain and where HMRC can now direct enforcement:
Umbrella Insolvency: Implications for Agencies
A growing concern for recruitment agencies is what happens when an umbrella company becomes insolvent, especially if it fails to meet its PAYE obligations before doing so. While umbrella providers can enter liquidation, the implications of doing so with unpaid liabilities are significant.
Can an umbrella company liquidate with unpaid PAYE?
Yes. An umbrella can enter liquidation through:
- Creditors’ Voluntary Liquidation (CVL): when directors acknowledge insolvency
- Compulsory liquidation: via court petition, often led by HMRC
However, solvent liquidation (Members’ Voluntary Liquidation) is not allowed if there are outstanding PAYE debts.
What happens to the unpaid PAYE?
As of the Insolvency Act 2020, HMRC is a secondary preferential creditor. This means HMRC is near the top of the list to recover money from insolvent companies. Still, in many cases, PAYE debts go unrecovered.
If directors have traded while knowingly insolvent, they may face:
- Disqualification from acting as a director (up to 15 years)
- Personal liability if there is evidence of misconduct or phoenixing
How does Finance Bill 2025 change the risk?
From April 2026, the risk no longer ends with the umbrella company. Under Section 61Y of ITEPA 2003, HMRC can pursue:
- Recruitment agencies
- End hirers
- UK-based intermediaries
…for the full unpaid PAYE liability.
This means that umbrella insolvency will not shield the supply chain from risk. Agencies that fail to conduct proper due diligence, or knowingly continue to use unstable or non-compliant umbrellas, may be financially liable themselves.
Summary:
- Umbrella companies can liquidate with unpaid PAYE, but it triggers enforcement and creditor processes.
- HMRC is empowered to recover debts through joint and several liability.
- Agencies must protect themselves by regularly reviewing and validating umbrella providers’ financial and compliance standing.
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See further Government guidance here: Tackling non-compliance in the umbrella company market
Why QPS?
As recruitment agencies face increased scrutiny and accountability, choosing the right payroll and accountancy partner has never been more important. At QPS, we are uniquely positioned to help agencies navigate these legislative reforms with total confidence.
We hold full FCSA Accreditation, recognised as the gold standard for compliance in the umbrella and payroll sector. We are also SafeRec Certified, meaning our PAYE processes are audited in real time with live RTI and payslip validation technology.
In addition:
- We are formally registered with HMRC as a tax agent, enabling us to represent clients directly and compliantly.
- We are supervised by HMRC for AML purposes, meeting key eligibility criteria under the new tax adviser registration regime.
- Our infrastructure includes real-time reporting for RTI and PAYE submissions, giving agencies full visibility over their workers’ pay compliance.
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Our focus is not just on compliance but on building trust with agencies who want to do things the right way, while protecting their own reputation and liability.
Conclusion: What should recruitment agencies do now?
The intent behind these reforms is clear: HMRC wants to dismantle tax avoidance, increase transparency, and force accountability across the labour supply chain. For recruitment agencies, this marks the beginning of a new enforcement era where due diligence, supply chain integrity, and compliance documentation are not just good practice, but essential risk mitigators.
Agencies should:
- Start reviewing all umbrella and payroll providers immediately
- Avoid or disengage from providers using hybrid or self-employment-style models
- Update contractual terms to reflect risk-sharing and compliance expectations
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April 2026 may feel distant, but the preparation must begin now. These legislative changes are not just procedural updates—they represent a significant shift in liability, enforcement, and the way HMRC views risk in the recruitment sector.
The agencies that act early will not only protect themselves but will stand out as safe and trustworthy partners in an increasingly scrutinised market.
