Umbrella Regulations 2026 Update: Joint and Several Liability Model

In a significant development for the UK’s contingent labour market, the government has outlined its preferred approach to tackling long-standing non-compliance within the umbrella company sector. After extensive consultation with industry stakeholders, including the FCSA, Saferec, the Temporary Labour Initiative, and legal expert Rebecca Seeley Harris, HMRC is moving toward a Joint and Several Liability model, a measure that could dramatically reshape accountability in the labour supply chain.

The 3 Options considered

To address widespread issues in the umbrella company market, ranging from tax avoidance to the exploitation of workers, the government had considered three potential solutions:

1. Mandated Due Diligence:
While this remains a fundamental best practice, the government concluded it would not, on its own, deliver the level of behavioural change needed to eradicate non-compliance.

2. Debt Transfer Mechanism:
This approach would have allowed HMRC to reclaim unpaid tax and National Insurance from others in the supply chain. However, its complexity raised significant concerns, leading to the option being set aside.

3. Employment Business as Employer for Tax Purposes – The Chosen Approach
Government has opted for a version of this model, which makes the employment business supplying a worker (or the end-hirer if there is no employment business) responsible for tax liabilities if the umbrella fails to make the correct deductions. In effect, it introduces Joint and Several Liability, placing responsibility on those at the top of the labour supply chain.
 

What the Proposal includes

While not yet confirmed policy – pending final sign-off by the Exchequer Secretary, the current proposal includes several critical elements to account for:

• The Employer’s Reference Number (ERN) would remain with the umbrella company.
• The top of the supply chain -either the lead recruitment agency or end-client (if no agency is involved) – would carry strict liability for any tax shortfall.
• This would be a strict liability model, meaning there would be no statutory excuse available to those found liable.

This approach signals a major shift in how risk is allocated within supply chains. By making the top of the chain responsible, the government hopes to drive more rigorous due diligence and reduce the presence of non-compliant umbrella operations.
 

What This Means for Agencies and Umbrella Companies

For recruitment agencies, this proposed change could have far-reaching consequences:

• Greater accountability – agencies can no longer rely solely on contractual arrangements or surface-level due diligence to protect themselves. With potential liability for unpaid taxes, more thorough checks and ongoing monitoring of umbrella partners will be essential.
• Increased risk exposure – strict liability with no statutory excuse introduces significant legal and financial risk. Agencies must ensure their supply chains are watertight to avoid unexpected tax bills.
• Need for strategic partnerships – there will be greater value placed on working with accredited, transparent, and compliant umbrella providers. Aligning with organisations like those accredited by the FCSA and SafeRec may become a key risk mitigation strategy.

For Umbrella companies, the pressure is also mounting:

• Demonstrating compliance – Umbrella companies will need to be fully transparent in their operations, with clean audit trails, accurate tax reporting, and clear communication with agencies and workers.
• Building trust – Only those who can prove robust compliance and ethical business practices will maintain trusted partnerships with agencies looking to protect their liability.

Next Steps

While this proposal will not resolve every challenge in the sector, it is a notable step forward. It acknowledges the role that compliant umbrella companies and informed agencies play in upholding ethical labour practices and a functioning tax system.

Encouragingly, many of the recommendations from FCSA and other industry voices appear to be reflected in the proposal, suggesting that the government is listening. However, clarity is still needed on implementation timelines, enforcement mechanisms, and how this will interact with other legislative developments expected in the coming months.