Accountants for Recruitment Agencies
From 6 April 2026, your agency can be made to pay someone else’s PAYE bill. If an umbrella in your chain keeps that PAYE instead of paying HMRC, HMRC can collect it from you. That makes accountants who specialise in recruitment a risk control, not an overhead. Merit is an accountancy firm that works with recruitment and staffing agencies, led by Chartered Tax Advisers, with professionals in the team who have worked inside HMRC. So how much of your supply chain risk now sits on your balance sheet?
Who is liable for PAYE on umbrella workers from April 2026?
Chapter 11 of Part 2 of ITEPA 2003 (sections 61Y to 61Z2), inserted by section 24 of the Finance Act 2026 with effect for payments made on or after 6 April 2026, makes a “relevant party” jointly and severally liable with the umbrella company for the PAYE it should have accounted for. The equivalent National Insurance liability is imposed by the Social Security Contributions (Umbrella Companies) Regulations 2026 (SI 2026/388). Umbrella company joint and several liability works like this.
- The relevant party is the agency holding the contract with the end client.
- With two or more agencies in the chain, only that one is caught. Second tier agencies below it are not.
- Where there is no agency, or where that agency is non UK resident or connected to the umbrella, liability shifts to the end client or the nearest UK agency.
| Umbrella PAYE at risk | Per worker, per week | 40 workers, one quarter |
|---|---|---|
| Income tax | £112 | £58,100 |
| Employee National Insurance | £45 | £23,200 |
| Employer National Insurance | £106 | £54,900 |
| Total | £263 | £136,200 |
Over a year that is about £545,000, before interest and penalties.
What due diligence do you now need on your umbrella suppliers?
HMRC now expects evidenced, repeated checks.
- Cut your supplier list to umbrellas you can verify: VAT registration, Companies House filings, PAYE reference, directors.
- Reconcile the umbrella’s Real Time Information submissions and HMRC remittances to the rates you paid.
- Read payslips for loans, advances or expenses that are not real.
- Keep a dated file. An indemnity from an assetless company is worth nothing. Your file is not.
Who decides IR35 status in an agency supply chain?
Under the off payroll working rules for agencies, it turns on the end client’s size.
- Medium or large client: the client decides status and issues a Status Determination Statement, which must pass down the chain.
- The fee payer, usually the agency nearest the worker’s company, operates PAYE on the payment, plus employer National Insurance and the Apprenticeship Levy.
- Small client: the personal service company decides status and you pay it gross.
The small client test loosened for financial years beginning on or after 6 April 2025: any two of turnover £15m or less, balance sheet £7.5m or less, 50 employees or fewer, against £10.2m and £5.1m before. Because the test looks at a client’s accounts with a time lag, the new figures cannot affect status before 2027/28 for a normal 12 month year. When they do, more clients will fall outside the rules, and the decision will pass to the worker’s own company rather than to the client.
What is the agency legislation and when does it apply?
Section 44 ITEPA 2003, in Chapter 7, Part 2. Where a worker personally provides services to your client under supervision, direction or control by any person, you treat that worker as your employee and operate PAYE. Unlike IR35, there is no company size test and no client determination, and control is a lower bar than full employment status.
Could your payroll arrangements trigger the managed service company rules?
The managed service company rules in Chapter 9, Part 2 ITEPA 2003 catch a contractor’s company where a provider is involved with it. Every payment out of it then becomes employment income subject to PAYE. For an agency the risk is influence: owning part of a contractor accountancy business, or being paid to steer contractors to one provider.
How do you fund a growing temp book?
You pay temps weekly. Clients pay on 30 to 60 day terms. Every placement consumes cash before it produces any.
Our management accounts and KPIs for recruitment businesses track gross margin by client and debtor days every month, so a growing temp book does not quietly turn into an overdraft.
Temporary worker payroll funding closes it two ways.
- Factoring: the provider runs your ledger and collects from your clients, so they know.
- Invoice discounting: you keep the ledger and the client relationship, confidentially.
Invoice finance typically advances 80 to 90% of the gross invoice within a day, so roughly £135,000 to £152,000 on the figures above. Cost is a service fee on invoiced turnover plus a daily discount charge over the Bank of England base rate, priced on debtor quality, client concentration and days to cash. A recruitment specific funder prices weekly billing and disputed timesheets properly, so it advances more.
Why does VAT hurt so much on temp supplies?
Contract as principal, as most employment businesses do, and VAT is due on the whole charge including the worker’s pay, not your margin. Adecco UK Ltd v HMRC [2018] EWCA Civ 1794 settled that in the Court of Appeal in 2018.
Are you covered against the Criminal Finances Act failure to prevent offence?
Since 30 September 2017 your company commits an offence where an associated person, meaning an employee, consultant or agent, criminally facilitates tax evasion. The penalty is an unlimited fine, liability is effectively strict, and the only defence is reasonable prevention procedures.
For an agency that means a documented risk assessment covering umbrella and self employed supply, board sign off, consultant training on take home pay illustrations, and an escalation route whenever a rate is said to be payable “more efficiently”.
What Corporation Tax will your agency pay?
Corporation Tax is 19% up to £50,000 of profit and 25% above £250,000, with marginal relief between, giving an effective 26.5% inside the band. Both thresholds divide by your associated companies, so a perm company, a temp company and a property company cut £50,000 to £16,667 each.
Why recruitment agencies choose Merit
We are dual qualified, Chartered Certified Accountants and Chartered Tax Advisers. In most cases, the tax we save our clients exceeds the fee they pay. Our lead adviser has worked inside HMRC, which matters now your agency is a PAYE collection point. Our partners have built their own businesses from nothing to over £1m in turnover, so weekly payroll pressure is familiar.
- Running contractor payroll: weekly Real Time Information, holiday pay, pension auto enrolment.
- Three offices in Manchester, London and Hertfordshire, fixed fees, free first meeting.
Recruitment tax: your questions answered
Does the April 2026 umbrella rule apply if I place through a second tier agency?
Only the agency holding the end client contract is a relevant party. Sit below it in the chain and you are not jointly liable. Hold the client contract and place through a second tier agency using an umbrella, and you are.
Can I avoid umbrella liability by paying workers on my own payroll?
Yes, your own PAYE scheme removes the umbrella from the chain. You then carry employer National Insurance, holiday pay and pension directly. On 40 workers at £800 a week, employer National Insurance alone is about £106 each a week, close to £220,000 a year.
What if my umbrella supplier is liquidated owing PAYE?
HMRC can issue a determination against you covering income tax, Student Loan deductions and both employee and employer Class 1 National Insurance, plus interest. There is no statutory reasonable excuse or due diligence defence to the liability. You can appeal a determination on the ground that you are not the relevant party, or that the amount is wrong, but you cannot defeat a correct determination by showing that you took reasonable care or were misled. Your practical protections are supplier selection, reconciled remittances and a documented file.
Who is the fee payer under the off payroll working rules?
The fee payer, or deemed employer, is the qualifying party lowest in the chain but above the worker’s own company and holding the Status Determination Statement. Normally that is the agency paying the personal service company, which must be UK resident.
How does the agency legislation differ from IR35?
IR35 applies where a worker supplies services through their own company, and for medium and large clients the client determines status. Section 44 ITEPA 2003 applies where a worker personally provides services under supervision, direction or control, with no size test and no client determination.
Is VAT due on my full temp charge or just my margin?
Where you contract as principal, VAT is due on the whole charge including the worker’s pay. Adecco UK Ltd v HMRC [2018] EWCA Civ 1794 settled that in the Court of Appeal in 2018. On £141,000 of monthly invoicing that is about £28,000 of VAT, not £4,200.
How quickly can invoice finance be arranged?
Funders want current management accounts, an aged debtors listing, client concentration, your terms of business and recent payroll figures. Ready, and a facility moves quickly. Behind on bookkeeping, and that is the delay. We prepare the pack and model the cost.
Can you take over from our accountant mid year?
Yes. We handle professional clearance, collect records and pick up payroll, VAT and bookkeeping with no break in filings. Most agencies move at a month end or VAT quarter end. Your first meeting is free and costs you an hour.
Talk to a Chartered Tax Adviser about your supply chain
Your April 2026 exposure is measurable today, and so is your funding gap.
- List every umbrella in your chains, noting which end client contract you hold, and reconcile three months of assignment rates to umbrella payslips and Real Time Information.
- Check your five largest clients against the thresholds that actually apply to them for 2026/27, which for most will still be £10.2m and £5.1m.
- Work out your funding gap: weekly payroll multiplied by average days to cash, divided by seven.
Last reviewed: August 2026.
