Staffing agencies, MSPs and end users look for answers as UK 'umbrella' reforms approach in April

With just over two months remaining before the new umbrella legislation comes into force on 6 April, staffing agencies, managed service providers (MSPs) and end users will need to finalise their plans amid widespread confusion about the new regime.

Participants across the supply chain are looking for full detail on how the new 2026 UK umbrella regime will work, what effect it will have on agencies, MSPs and end users, what needs to be done, and how it will affect the market.

And there are a number of common questions and concerns that are being raised among agencies, MSPs and end user as they look to address the confusion that persists in the run up to 6 April.

Compliance checks

One of the main questions frequently asked about the new regime is: what supply chain compliance checks will ensure staffing companies, MSPs and end users have no umbrella liability?

The answer in short, as the new regime is "strict liability", is that supply chain compliance checks cannot ensure that there will be no joint and several liability. This means that even if parties tried their best to check that an umbrella was paying relevant tax or used market-leading checking services, they will still be liable if the umbrella in fact does not pay the relevant tax.

Some checking services may provide reassurance that an umbrella company is not currently operating tax avoidance schemes – or worse – in relation to their workers. However, the legislation applies even if the umbrella simply doesn’t pay HMRC. Non-payment might not be because of current use of a "dodgy" scheme. An umbrella might fail to pay all tax due to HMRC because of trading difficulties or because of sudden closure due to past misdemeanours. The checking arrangements that many are adopting are not set up to protect against these scenarios.

There are measures that can be taken to reduce risk for those that wish to continue using umbrellas. Some may decide to take control of payments to HMRC. Others may think it enough to adopt a policy of dealing only with umbrellas that have strong balance sheets and strong compliance track records over a long period while conducting regular financial and compliance checks on those umbrellas. 

The case for diligence

Another frequently asked question is: why bother at all with supply-chain compliance checks? Well-informed compliance checks provide an important way of reducing risk, weeding out obvious bad actors and spotting many types of questionable schemes.

Perhaps more importantly, conducting appropriate checks will constitute a defence to "failure to prevent the facilitation of tax evasion"' offence under the Criminal Finances Act (CFA) 2017. The penalty for a CFA offence is an unlimited fine accompanied by  a corporate conviction which may disbar an affected company from public sector client contracts and potentially cause problems with banking arrangements.

That is a good reason in itself to do checks. Undertaking checks will also help in a more general way with HMRC: in a world where the tax authority does not have the resources to pursue everyone, a diligent end user or agency beingis less likely to face pursuit. For larger groups, such diligence will help satisfy HMRC when it carries out its business risk reviews and help satisfy senior accounting officer requirements.

Agency engagement

Can end users or MSPs be liable under this regime in relation to payments to workers directly engaged and paid by agencies rather than via umbrellas?

HMRC's stated position is no. However, end users and MSPs will want to check that agencies are genuinely engaging workers on contracts for services rather than contracts of employment. This is because an agency that "employs" workers – rather than engaging them under the contract for services model traditionally used for most agency workers – may be deemed to be an umbrella, triggering potential joint and several liability risk for end users or MSPs.

Some agencies that hitherto employed their agency workers may be moving over to a contract for services model to avoid this joint and several liability risk for their clients and MSPs. Agencies using the contract for services model will, however, still need to comply with the existing agency-worker tax regime. That regime deems the agency to be the employer for tax purposes unless the agency can "show" that the worker is not subject to supervision, direction or control by anyone. 

Historic liabilities 

The new umbrella regime is not the only concern in relation to the use of umbrellas. HMRC is already taking action against umbrellas for failure to pay all PAYE and National Insurance contributions in the pre-2026 period and, in some cases, may involve relevant agencies and end users in related proceedings.

There are existing tax measures that HMRC can use to make claims against agencies and other users of umbrellas and to prosecute where there has been non-compliance. The new umbrella legislation just gives them an extra and, in some ways, simpler line of attack.

If, in the course of reviewing current umbrella arrangements, anything worrying is unearthed that is either going on now or that has gone on in the past, privileged advice from specialist tax disputes lawyers should be sought, even if external consultants or accountants are already assisting. Only legal advice can be privileged, meaning it will not be disclosable in legal proceedings, such as disputed HMRC assessments. Osborne Clarke's tax disputes team is already advising numerous agencies about potential claims by HMRC relating to historic umbrella arrangements.

The PSC alternative

Will it be safer to engage workers via personal service companies (PSCs) than as umbrella workers? The attraction might be that the IR35 tax regime applicable to PSCs has defences – such as a "fraudulent document" defence – not available in the umbrella regime, which to an extent may make IR35, and use of PSCs, less worrying for some than the new umbrella regime.

When the new private sector IR35 rules were introduced in 2021, many end users (and some agencies) elected to ban use of PSCs. Many PSC contractors were, as a matter of caution, effectively forced into umbrella contracting.  

Now, faced with concerns about joint and several liability relating to umbrella arrangements, some end users and agencies may reconsider their "no PSC" policies and allow some PSC contracting, especially where assignments can be structured on a "defined deliverables" rather than "time spent"  basis such that there is a good chance they are outside IR35.  However, in many cases it will not be easy for umbrella workers to meet the requirements for being determined as outside IR35.  

As part of a perfect storm for agencies, MSPs and end users getting ready for the new umbrella tax regime, HMRC is expected to issue the first IR35 assessments under the 202 IR35 regime and generally step up enforcement as the fourth anniversary enforcement deadline approaches for HMRC relating to the 2021 IR35 regime.

Experience in the public sector under the 2017 public sector IR35 regime – where, for example, the Ministry of Justice received a £72.1 million tax bill plus £15 million fine and the Department of Work and Pensions received a £87.9 million tax bill – suggests these assessments under the 2021 private sector IR35 regime could be large. In more extreme cases, HMRC may be tempted to use criminal sanctions including under the CFA. Consequently, the use of PSCs as an alternative to umbrella arrangements is unlikely in many cases to be an easy safe harbour unless the relevant assignment can be structured on a genuine "defined deliverables" basis.

However, the new agency worker guaranteed hours rights in 2027 under the Employment Rights Act 2025, together with the increasing statutory costs of "employment" generally and inevitable delays in the government's "employment status" consultation may lead to a growth in interest in self-employment models in the coming years, including via PSCs.

Osborne Clarke comment

Even if some end users and MSPs conclude that the safest approach is to bar agencies from using umbrella arrangements, we doubt that widespread use of carefully selected umbrella companies will end.  

Umbrella arrangements have proved to be very popular over a long period. Many umbrellas operate payroll and other employment arrangements for contingent workers far more efficiently than most agencies or end users could hope to achieve, and these appear ideally suited to help organisations operate in the growing world of gig and fractional working. Continued reliance on umbrellas therefore seems likely. 

Further, if the detail of the regime giving guaranteed hours rights to agency workers and zero-hours workers in 2027 effectively forces one entity or another in the supply chain to "employ" affected agency workers after whatever qualification period is fixed, might this prompt greater interest in evolved versions of umbrella arrangement ?

Perhaps the main impact of the new umbrella tax regime will be that many agencies, MSPs and end users will decide only to use, or allow use of,  those umbrellas with a good track record, transparent engagement and payment arrangements, and demonstrable balance-sheet strength. Other agencies, MSPs and end users may decide to continue to work with umbrellas but change the model so that they take control of all payments to HMRC.

Whatever the case, a major shake-up in the umbrella and staffing markets is likely. We anticipate some participants significantly growing market share at the expense of companies that have not been able to handle the commercial consequences of the coming changes quite so well. If that happens some of the "losing" umbrellas may – however compliant they have been –  cease trading owing significant sums to HMRC for which, in most cases, their agencies, MSPs or end clients will be jointly and severally liable on a strict liability basis.

Read our detailed 2026 UK umbrella briefing for a full analysis of how the new regime will work and what effect it will have on agencies, MSPs and end users, as well as what needs to be done and how it is likely to shape the market.