The UK Government’s August 2025 draft legislation on umbrella companies marks one of the most significant compliance shifts in the temporary labour market in over a decade. After years of ambiguity, grey areas, and patchy enforcement, we're now entering an era of formal regulation, shared liability, and crystal-clear expectations.
Here’s what’s changing — and what it means for you.
Key Highlights from the August Draft Legislation
As mentioned in our June episode of the Friday Payroll Club Podcast, here are the key highlights expected from the draft legislation and what was confirmed on 23 July 2025:
1. Umbrella Companies Defined
For the first time, umbrella companies will be formally defined in UK legislation, ending years of uncertainty around their role in the labour supply chain.
✅ Confirmed: FCSA confirmed that Umbrella companies are being defined broadly to include employment businesses and intermediaries that employ and supply workers under assignment contracts. This helps distinguish them from staffing agencies and closes off loopholes where entities fell between definitions.
2. Joint and Several Liability Introduced
The draft proposes that agencies and end-clients will share responsibility for unpaid PAYE and NIC under a Joint and Several Liability (JSL) framework.
✅ Confirmed: A new Chapter 11 of ITEPA will come into effect from April 2026, holding end clients and recruitment agencies liable for tax shortfalls when due diligence has not been properly undertaken.
3. Due Diligence Becomes a Legal Obligation
Due diligence is no longer optional — it will be a legal requirement across the supply chain.
✅ Confirmed: Agencies and clients will be required to carry out and document compliance checks, such as:
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Verifying PAYE status
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Ensuring proper holiday pay accrual
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Onboarding checks
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Including specific compliance terms in contracts
Read more on GOV.UK
4. Enforcement by the New Fair Work Agency
Oversight will now sit with a central enforcement body: the Fair Work Agency, replacing the Employment Agency Standards Inspectorate (EAS).
✅ Confirmed: FCSA confirmed that The Fair Work Agency will be empowered to regulate umbrella companies, investigate complaints, and enforce compliance — similar to how agencies are currently regulated under Conduct Regulations.
5. HS2 Fraud Cases Accelerated Reform
High-profile fraud linked to umbrella providers in the HS2 supply chain was a key catalyst for reform.
✅ Confirmed: The government acknowledged these cases exposed structural weaknesses in the umbrella model and fast-tracked the proposed legislative changes to restore supply chain accountability.
As a reminder, you should be:
- Mapping your supply chain – know who you’re working with and why.
- Strengthening contracts – clearly define responsibility and risk.
- Building a clear, recordable due diligence process.
- Staying informed – monitor official guidance and sector insights.
This legislation creates a fairer, more transparent market — empowering compliant operators while making it clear that non-compliance will no longer be tolerated.
For agencies, payroll providers, and end clients, the focus should now be on proactive preparation — not just to protect your business, but to build stronger partnerships across your labour supply chain.
Supply chain due diligence
Ensuring due diligence is vital to shield your business from exploitation, fraud and tax evasion, all of which may lurk beneath the surface of a supply chain.
When assessing due diligence in the supply chain, you should follow HMRC's principles of Check, Act and Review to assure credibility, legitimacy, legal and tax compliance of your suppliers.