HMRC’s umbrella tax liability shift: why IT recruitment agencies face new financial risk

HMRC’s April 2026 tax liability shift, confirmed on 21st July, represents the biggest change in umbrella sector accountability. This new legislation is coming, and IT recruitment organisations that work with umbrella companies need to act now or face the consequences.

Currently, umbrella companies are responsible for their own tax compliance failures. But the new rules will make IT agencies liable for umbrella company tax failures that they didn’t directly cause.

The current legislative landscape has corralled IT contractors into umbrella companies, often where their clients determine that their role is inside of IR35 (the off-payroll tax regime) – but the upstreaming of tax compliance risk for umbrella companies will now mean that agencies must be more selective about their partners and have appropriate processes in place for compliance.

In this exclusive guide, Matt Fryer, Managing Director at Brookson Group, a People2.0 company, explains that IT recruitment agencies must get on top of new compliance obligations by September 2025 to ensure new engagements which run beyond April 2026 remain compliant with the change in the law.

Understand your growing tax exposure

The liability and financial exposure for IT recruitment agencies will continue to grow, with companies about to become liable for the tax portion of transactions between them and umbrella companies, despite not controlling tax calculations or payments.

Tax rates for payments to umbrella companies – including National Insurance Contributions and the Apprentice Levy – are around 45% for basic rate taxpayers, and up to 60% for higher rate taxpayers. HMRC can pursue historical liabilities going back several years (up to 20 years if fraud is proven).

With multiple IT contractors over extended periods, agencies could start to accrue millions of pounds in potential tax risk from April 2026.

A recent HMRC consultation revealed that only one-third of agencies said they already complete an audit of the umbrella companies they work with. This suggests that a worrying two-thirds of the IT recruitment market is behind the curve when it comes to mitigating this new risk.

Partner with compliant providers

Market consolidation is likely as IT agencies become more selective about which umbrella companies they work with. Agencies are likely to reduce the number of umbrella companies that they work with, focusing on long-established, trusted partners who hold industry-recognised compliance accreditations.

When it comes to choosing an umbrella company to partner with, IT agencies should look beyond the lowest margin or the most attractive rebate, as this may indicate insufficient investment in compliance infrastructure. For IT contractors who often command premium rates, partnering with non-compliant providers creates significant downstream risk.

Implement rigorous audit procedures

IT agencies will need to strengthen their compliance strategy, implementing thorough due diligence over prospective umbrella company partners, as well as continuing to audit over time. Currently, due diligence for many firms goes as far as an annual questionnaire exercise, however this should be adapted to more frequent reviews and auditing focused on tax calculations and payments.

These reviews should entail ensuring that umbrella company contracts are compliant, as well as regular payslip checking and calculation audits. There should be confirmations that the umbrella company partner – which will ideally be accredited by an industry-recognised body, such as the FCSA – physically pays taxes to HMRC on time.

Review contractor IR35 status

Another aspect to consider relates to the 2021 adaptation to IR35 in the private sector, which shifted tax responsibility from contractors to end clients and agencies. This is particularly relevant for IT recruitment agencies, as the technology sector has been heavily impacted by IR35 determinations and universal decisions not to engage self employed workers outside of the IR35 legislation.

If IT agencies are placing genuinely self-employed contractors who have been forced to work in umbrella companies by end clients imposing blanket bans on PSCs or blanket inside IR35 determinations – that in fact may pass an IR35 test – now is the time to reassess them.

Because the umbrella risk sits inside IR35, if IT contractors are working autonomously outside of IR35 (compliantly), agencies can move away from the new tax risk placed on them. Many IT professionals working on specialised projects with clear deliverables may qualify for outside IR35 status, providing an escape route from the new umbrella company risks.

Prioritise strategic partnerships

While risks are increasing for IT recruitment agencies, the solution lies in strategic partnership selection rather than abandoning established employment models.

Compliant umbrella companies remain highly beneficial partners when it comes to employment risk management, encompassing holiday pay, sick pay and other statutory payments.

In addition, established providers greatly reduce the administrative burden of payroll, benefits and compliance management. They are especially valuable for IT contractors with multiple concurrent assignments who value tax certainty with a consistent provider across different projects and clients.

The key is for IT recruitment agencies to diversify their candidate payment options while prioritising compliance-focused partnerships.

Being model-agnostic and remaining open to all relevant payment models and in-depth knowledge of various ways of engaging off payroll workers is essential, but agencies must ensure each partner meets rigorous compliance standards.

Now that we have some clarity on the draft legislation which was released on 21 July, IT recruiters should waste no time in defining and rolling out their policies and procedures for mitigating this new risk through strategic partner selection and enhanced due diligence processes.

HMRC noted in their Transformation Roadmap July 2025 that there are already a number of resources available to recruiters and workers to prevent non-compliance and HMRC are actively looking to engage with businesses prior to 6 April 2026 to ensure they are ready for the new rules.

It is therefore important to get your house in order as soon as possible and be ready for the change in the law.