From 6 April 2026, the UK tax authority (HMRC) will fundamentally change how payroll tax risk is allocated across labour supply chains.

In the UK, employers are responsible for withholding income tax and social security contributions from employee pay and remitting them to HMRC. This system is known as PAYE, and the social security element is referred to as National Insurance contributions.

Historically, where labour was supplied through third parties, this responsibility largely sat with the entity running payroll at the bottom of the chain.

WHAT IS CHANGING

Under the new rules, where labour is supplied through third-party arrangements, responsibility for unpaid tax and social security moves up the supply chain.

The intermediary contracting with the end client, or the end client itself where no intermediary exists, becomes the statutory backstop if payroll is not operated correctly.

The scope is deliberately broad. EORs, MSPs, agencies, umbrella arrangements and other outsourced staffing models are very much in HMRC’s sights.

Payroll liability no longer sits  with the local provider alone. If a downstream provider gets payroll wrong, the tax authority can recover unpaid tax and social security from the intermediary closest to the client, or directly from the client where no intermediary exists, together with penalties and interest.

WHAT’S THE IMPACT ON THE INTERNATIONAL STAFFING INDUSTRY

Most EOR, MSP and staffing models operating in or into the UK will be affected, whether directly or indirectly. Exposure depends on where you sit in the supply chain.

As intermediaries or end clients:

If you use a UK umbrella, EOR or local staffing provider, you now carry residual payroll tax risk if that provider fails to operate payroll correctly.

This applies even where you have carried out onboarding, used reputable or accredited providers, or had limited visibility into the underlying error.

As providers:

Expect increased scrutiny from agencies and end clients, including more detailed reviews of payroll processes and controls.

Contractual obligations are likely to tighten, with stronger indemnities, audit rights and reporting requirements becoming standard.

Providers that cannot clearly demonstrate robust, compliant payroll operations may find themselves excluded from supply chains.

THE PRACTICAL RISK

In reality, exposure rarely arises from deliberate wrongdoing. More often, it comes from routine errors that go unnoticed over time causing a deficit in tax and social security, including:

• Expenses and benefits treated incorrectly;
• Missed or incorrect deductions;
• Student loan repayments or other statutory deductions not being applied correctly;
• Small errors, such as applying the wrong contribution category or mis-treating specific payments, can shift liabilities significantly;
• Travel and subsistence errors, particularly in structures where contractors move between assignments;
• Wrong tax code errors.
  

Where benefits are not properly fed into payroll systems, discrepancies can build up over time and only surface on review.

Individually, these issues may appear minor. Across a workforce and over multiple years, they can become material.

DUE DILIGENCE WON’T REMOVE LIABILITY - BUT IT REDUCES RISK

Even where intermediaries or end clients have carried out thorough due diligence, relied on reputable providers, or were genuinely misled, there is no statutory defence. The tax authority in the UK can still pursue the party at the top of the chain for unpaid payroll taxes and social security.

HMRC’s published commentary makes this clear: liability does not disappear because the failure occurred further down the supply chain. Penalties and interest remain in scope.

What will change is behaviour. The policy is designed to force awareness, oversight and control at the top of the chain.

WHAT CAN YOU DO

If you are an intermediary or the end client, now is the time to reassess how you manage UK payroll risk. Contracts and indemnities matter, but they are a last line of defence. The real protection comes from active oversight: auditing payroll processes, testing compliance in practice, and ensuring providers are doing what they claim to be doing.

If you are a provider, preparation should start now. Review payroll operations in detail, close any gaps, and ensure your processes will stand up to scrutiny well before April 2026. Clients, and their clients, will ask tougher questions, and they will expect clear, evidence-based answers.

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