Act now to eliminate rogue umbrella companies from your PSL

This is a guest blog by Lynne Gowers, Senior Marketing Executive from REC business partner Liquid Friday 

Further to October’s Budget, it won’t have escaped anyone’s notice that the government’s commitment to cleaning up the umbrella company industry has finally switched up a gear.  

From April 2026, agencies that outsource payroll operations to umbrella companies will bear full responsibility for any unpaid PAYE tax liabilities if they partner with non-compliant providers. This landmark legislation, laid out in the government’s policy paper “Tackling Non-Compliance in the Umbrella Company Market” aims to level the playing field and eradicate rogue operators.  

Why it matters: the cost of non-compliance  

The umbrella company market plays a significant role in the UK economy, engaging over 500,000 workers annually. However, it also rife with malpractice. HMRC estimates that non-compliant practices cost the Exchequer millions annually, not only undermining tax fairness but also placing compliant businesses at a commercial disadvantage. 

For recruitment agencies, this regulatory change introduces a stark reality: the cost of partnering with non-compliant umbrellas will no longer be limited to reputational damage - it will now carry direct financial and legal repercussions. Agencies that fail to eliminate non-compliant umbrella umbrellas from their Preferred Supplier Lists risk significant liabilities. 

Compliance red flags: what to look out for 

Understanding what non-compliance looks like is an essential starting point. Even the most cursory due diligence may pick up these red flags:  

1. Disguised Remuneration Schemes - These schemes, including contractor loan arrangements, often promise higher take-home pay by side-stepping PAYE, National Insurance (NIC) and Employer’s NIC. Such models are direct tax avoidance and have been firmly in HMRC’s crosshairs for years. 

2. Mini Umbrella Company Schemes - These involve splitting a workforce across multiple small companies to exploit tax reliefs meant for small employers, including the VAT Flat Rate Scheme (FRS) and the Employment Allowance (EA). Mini umbrella companies pose a significant compliance risk and HMRC have said they are a priority crackdown target. In something of an own goal for the government, the huge increase in EA announced in the Budget (£5,000 to £10,500), is likely to make this model even more prevalent.     

3. Mismanagement of expenses -Some umbrella companies incorrectly process worker expenses, particularly when the worker operates under supervision, direction or control (SDC). Expenses incorrectly treated as tax-free can lead to substantial underpayment of tax. 

4. Non-full PAYE models - Any engagement where full PAYE, NICs and NIERs are not applied to the worker’s total assignment pay is non-compliant. Agencies should verify that umbrella company suppliers adhere to these obligations without exception. 

5. Indemnity demands from workers - Agencies requiring workers to indemnify them against potential tax liabilities signal non-compliance. Such practices are unethical and non-compliant under the upcoming regulations. 

Take proactive steps now 

The 2026 regulatory deadline seems far away, but it will come around fast, and agencies would be prudent to act now to safeguard their operations. Here’s how: 

• Audit your PSL: Review all umbrella company relationships and verify their compliance credentials. Look for robust systems and clear reporting that align with existing legislation. 
   

• Seek FCSA Accreditation: Partner with umbrellas accredited by reputable bodies like the FCSA, which enforce strict compliance standards. 
   

• Work with a trusted network: Focus on building and maintaining a tight circle of trusted, compliant suppliers. Prioritize quality over quantity, ensuring each provider demonstrates a consistent track record of ethical and legal practices. 
   

• Educate your team: Ensure all staff understand the implications of the new legislation and can spot non-compliance. 
   

• Implement robust due diligence: Regularly monitor your supply chain for adherence to PAYE and NIC obligations, maintaining transparency and accountability at all levels. 

The new regulations mark a turning point for the recruitment industry. By eliminating non-compliant umbrellas from your PSL today, you protect your agency from future liability and contribute to a fairer, more transparent marketplace. 
 

Why partner with Liquid Friday? 

At Liquid Friday, compliance isn’t just a box to tick—it’s one of the cornerstones of our business. As an FCSA-accredited umbrella company and REC business partner with a proven track record, we provide recruitment agencies with complete peace of mind. From robust PAYE processing to transparent reporting, we ensure full alignment with HMRC regulations, helping you eliminate risk and focus on what you do best: sourcing top talent.