From 6 April 2026, the risk profile around umbrella company supply chains changed materially.
For years, many recruitment agencies have used umbrella companies to employ and pay temporary workers. The agency supplies the worker to the client. The umbrella company employs the worker, processes pay, deducts tax and National Insurance, and reports to HMRC.
That arrangement has been widely used, but it has also created a problem: where an umbrella company fails to pay the correct payroll taxes to HMRC, the agency may have limited visibility until the issue has already occurred.
The government's reforms are designed to reduce non-compliance in the umbrella company market and increase accountability across labour supply chains.
What has changed?
The key change is that liability for unpaid PAYE in umbrella company arrangements will no longer sit only with the umbrella company.
Where an umbrella company forms part of a labour supply chain and fails to account correctly for PAYE, HMRC may be able to pursue another party in the chain. In many agency-led supply chains, that means the agency directly above the umbrella company could become the first party HMRC pursues.
If an umbrella company fails to pay what it should, the agency may no longer be able to say, "That was nothing to do with us."
Why does this matter for agencies?
The issue is not only tax. It is control.
Agencies need to understand:
- who is engaging the worker;
- who is operating payroll;
- what deductions are being made;
- what evidence exists for each worker;
- how payroll outputs are checked;
- how risks are reported;
- how quickly issues can be identified;
- whether the supply chain is simple enough to audit.
The more distance there is between the agency and the payroll process, the harder it is to prove control.
The old comfort is weakening
Historically, some agencies took comfort from using umbrella companies that appeared compliant, were on a preferred supplier list, or provided basic assurances. From April 2026, that may not have been enough.
Do we have real visibility and control, or are we relying on someone else's promise?
This is why many agencies are reviewing whether direct engagement could offer a cleaner and more controlled route.
What is direct engagement?
Direct engagement means the agency keeps the worker relationship and operates more directly, rather than placing an umbrella company in the supply chain.
Kova supports this by running the operational workflow behind direct engagement, including onboarding, payroll process support, compliance evidence, reporting and worker communication.
The agency keeps:
- the worker relationship;
- the commercial terms;
- the data;
- the client relationship;
- the brand;
- the margin;
- the overall control.
Kova runs the structured operating process behind it.
Why direct engagement may be more attractive
Direct engagement can give agencies:
- fewer parties in the supply chain;
- clearer worker ownership;
- better visibility over payroll;
- stronger evidence trails;
- more control over worker communication;
- clearer commercial margin;
- stronger internal governance;
- a cleaner story for clients and workers.
It is not about avoiding responsibility. It is about accepting responsibility in a more controlled way.
The board-level question
What would we show HMRC, a client or an investor if we had to evidence how our temporary workforce is engaged and paid?
If the answer depends on multiple third-party assurances, fragmented data and limited visibility, that is a risk.
Practical first steps
- Map all current worker engagement routes.
- Identify which workers are paid through umbrella companies.
- Review supplier contracts and due diligence records.
- Check what payroll evidence is actually available.
- Review PAYE, CIS and IR35 decision processes.
- Test whether worker payslips and deductions are clear.
- Consider whether a controlled direct engagement pilot is appropriate.
Final thought
The April 2026 changes were not just a technical tax update. They were a signal that agencies need more visibility, stronger controls and clearer evidence across their labour supply chains. For agencies that want to move early, direct engagement may offer a cleaner and more transparent route.