The UK’s temporary employment sector is under the microscope as HMRC intensifies its enforcement of agency worker legislation under Chapter 7 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003). With sweeping changes expected in April 2026, now is the time for agencies and businesses to ensure they’re fully compliant.
By Cara Smith – Senior Client Manager
In January 2025, HMRC launched a targeted initiative to assess how employment agencies are applying Chapter 7 rules—particularly Section 44, which treats certain agency workers as employees for tax purposes.
HMRC Definition of an agency:
any person (or business) who:
- Is not the client receiving the services,
- Is not the worker providing the services,
- But arranges for the worker to provide services to the client under a contract with the client (or someone connected to the client).
This means the agency acts as an intermediary between the worker and the end client.
This move is part of a broader strategy to clamp down on tax avoidance, especially where workers are engaged through personal service companies (PSCs) or umbrella arrangements.
HMRC has signalled that new regulatory changes will take effect in April 2026, aimed at:
- Closing loopholes in the current agency legislation.
- Reducing false self-employment.
- Ensuring fair tax contributions from all parties in the labour supply chain
While the exact details are still under consultation, the direction is clear: greater accountability for agencies and end clients alike.
Agencies checklist – get ahead of the curve:
- Review Worker Classifications Ensure that all workers are correctly classified. If they’re under supervision, direction, or control, PAYE likely applies.
- Audit Your Supply Chain If you use intermediaries or umbrella companies, verify their compliance with PAYE and NIC obligations.
- Engage with HMRC HMRC’s Customer Insight Team is actively contacting agencies. Be transparent and use this as an opportunity to clarify your practices.
- Seek Professional Advice Consult tax and payroll experts to navigate complex arrangements and avoid costly mistakes.
- Stay Informed Monitor HMRC updates and prepare for the 2026 changes well in advance.
HMRC’s crackdown is not just a warning. It’s a call to action. Agencies that fail to adapt risk retrospective tax bills, penalties, and reputational damage. But those who take proactive steps now will be well-positioned to thrive in a more regulated future. Our team of specialists are on hand to help you get prepared and get compliant – do get in touch if you’re looking for advice on agency set-up, payroll services or tax.
