We might have an autumn budget looming before we even get to 2025-26, but the recruitment and contractor services industry has been subject to continuous regulation for several decades.
It is important to keep up with all of the compliance changes, even those that are on the horizon, as ignoring them could cost businesses dearly.
Five contractor compliance challenges, as the new tax year comes into sight
Here, I will list 'five contractor compliance challenges' that the temporary labour supply chain should be aware of to avoid problems, and potential costs, either now or from 2025-26, writes Zeeshan Anwar, head of compliance at JMK Group UK.
1. Joint and Several Liability (JSL)
For people who work in the recruitment and umbrella sector, it is unlikely that news of the proposed Joint and Several Liability rules, introduced as part of the Finance Bill 2026, hasn't made its way into their inboxes.
These "umbrella company regulations" have been anticipated since late 2023, when the government published their intentions to tackle the perceived tax avoidance in the umbrella market.
Earlier this year, the government decided that the best way to stop unscrupulous activity in this sector was to hold the recruitment agency (and even end-clients in some cases) 'jointly and severally liable' with the umbrella employer for any shortfall in taxes.
What the umbrella company JSL rules mean for recruiters
From April 2026, when the new 2025-26 tax year begins, the recruitment agency must therefore ensure that their chosen umbrella partner is a robust and reputable business.
Failure to do proper 'due diligence' could mean that a failure of the umbrella partner to pay the required PAYE to HMRC could shift that responsibility over to the recruitment agency.
Three JSL-induced things agencies should expect of umbrella company partners
If you're a contractor recruitment agency, I recommend that you make sure your umbrella partner has three things — as a minimum:
- Good financials;
- A solid / established accreditation, and;
- A means to demonstrate that they are correctly paying over taxes, ideally through regular visibility of their RTI reporting or pay slip auditing.
Now is a better time than ever to remove dodgy operators from the supply chain, i.e. before April 2026.
2. Fair Work Agency (FWA)
As part of the Employment Rights Bill, the government has confirmed the inception of the Fair Work Agency — in April 2026 — to ensure that employment protections are being upheld.
The FWA will have enforcement powers over areas such as:
- National Minimum Wage;
- Statutory Sick pay, and;
- Holiday pay.
The Fair Work Agency (FWA) will also oversee compliance within the recruitment and umbrella industry.
Further, the FWA is expected to receive new powers to issue and enforce penalties, and will be able to enter premises to inspect computer records.
Can businesses ignore the Fair Work Agency?
A failure to comply with the Fair Work Agency's requests could be a criminal offence.
Businesses should get their records in order now, as non-compliance stemming from inadequate records could lead to unlimited fines, as well as reputational damage.
3. Criminal Finances Act (CFA) 2017 – failure to prevent tax evasion
Known as the "corporate criminal offence", this legislation gave HMRC sharper teeth in its fight to prevent tax evasion.
HMRC has wide enforcement powers, and any business will be seen to be committing a criminal offence if it fails to prevent an "associated person," which could be an employee or any other party performing services for the business, from facilitating tax evasion by a third party.
HMRC just chalked up its first prosecution under the CFA 2017
Significantly, we have just had our first criminal prosecution (in August 2025), under this legislation. And, ironically, it's an accountancy practice that takes the unenviable title as the first to be prosecuted under the CFA 2017!
The practice was charged with tax credit repayment fraud, but the case is due to be heard in court in September 2027.
HMRC have been criticised in the past for not utilising these extensive powers at its disposal.
Open season?
However, behind the scenes, over 100 cases have now been investigated under the CFA since 2017.
For those found guilty, there are unlimited fines and severe reputational damage.
Given that HMRC has finally had success in this area, it is imperative to have strict preventative processes in place, as it is not necessary for senior management to be aware of tax fraud taking place under their noses for a charge to be brought.
4. Off-payroll working/IR35 rules
IR35 was headline contractor news for several years. First, the public sector reforms were introduced in 2017, and then the private sector went through the same motions in 2021 (subject to the 'small company' exemption).
Under the IR35 reforms, the responsibility for assessing IR35 status shifted to the engager (the end-client), but the liability for failing to pay the correct tax is with the closest intermediary to the engager (the fee-payer), which is generally the recruitment agency.
Many businesses were worried about the effects of incorrect IR35 status determinations, so they decided to 'blanket ban' limited company contractors. This, although not unlawful, wasn't within the spirit of the legislation and decimated contractor numbers in certain industries.
The correction to the OPW knee-jerk could come with consequences
The effect of blanketing can still be seen today, as 2025-26 comes into sight. Some say that such reactions to the off-payroll working rules are the reason behind the derailment of the HS2 project!
As of Q4 2025, some sectors are now starting to open up the outside IR35 limited company contractor route.
But the supply chain needs to be careful and ensure that all the correct steps have been taken, including accurate 'outside IR35' status determination statements, with contracts and working practices matching those of a true business relationship.
5. Holiday Pay
We've endured sweeping changes and uncertain times in relation to holiday pay, but it seems that we have finally reached a place of calm.
For many years, compliant operators were calculating holiday pay for agency workers as 12.07% of gross pay. Yet this was upended when the courts ruled in the Harpur Trust v Brazel (2022) case, saying that all employees were entitled to 5.6 weeks of holiday, even if they were part-year workers or worked irregular hours, and that the 12.07% calculation method was unlawful under the Working Time Regulations.
However, due to the complexity this produced in the temporary worker market, as holiday pay was now accruing from the time of registration to the point of termination, even if the worker wasn't actually in work, the government decided to reverse the ruling. And therefore, in 2024, employers were again able to use the 12.07% method for calculating holiday pay for part-year and irregular hours workers only.
Understand, update, itemise, and encourage
Employers should understand how to calculate holiday pay correctly, update policies and contracts of employment, and ensure that any "rolled up" holiday pay is clearly itemised on payslips, while also encouraging workers to take their full leave.
Getting this wrong could lead to claims for unlawful deductions from wages. Be aware, claims can cover up to 2 years of back pay, and must be made during the employment or within 3 months of the final payslip.
TLDR: 'Top 5 contractor compliance challenges…'
If you are a recruiter who just wants to stick to finding talent, and avoid the complexities of engaging and paying a temporary workforce, then it's vital for your bottom line that you choose a trusted, compliant partner to look after your workers.
Similarly, if you're a contractor services provider, then you need to stay abreast of the constant movements in this sector, meaning compliance needs to be at the forefront of everything you do.
Independent assessments and compliance accreditations should go some way to de-risking the supply chain in 2025-26, but it's also important to have informed, established and proactive advisers on hand to guide you through a multitude of ever-present pitfalls.
