A legal shift impacting the relationship between construction firms, their recruitment agencies and payroll suppliers could destabilise the multi-billion-pound sector if stakeholders are unprepared, warns construction recruitment expert Dan Eley.
In April 2026, HMRC is cracking down on rogue providers in the outsourced payroll space by shifting responsibility for making the correct tax deductions from contract workers’ payslips away from these payroll suppliers, known as umbrella companies, and onto the recruitment agencies.
This shift, which applies across all sectors for assignment-based workers, is designed to tighten up the supply chain and push out non-compliant payroll operations, with disguised remuneration tax avoidance schemes estimated to cost HMRC around £500m a year.
However, Eley, who has almost three decades of experience in construction, warns that sector awareness of these activities is low and if too many suppliers are caught in the crossfire of HMRC’s crackdown, the impact could be catastrophic for construction.
Dan Eley, a newly appointed Board Director at the Payroll Compliance Authority (PCA), a not-for-profit accreditor of umbrella companies, and head of construction at national recruitment firm Pearson Whiffen, said: “With a workforce of approximately two million people, construction relies on a busy contract worker supply chain, supplied by more than 800 recruitment agencies. These agencies, along with any payroll suppliers they engage, provide the scaffolding to keep the industry going from project to project.
“The majority of construction site workers, and a significant proportion of other workers in the industry, are paid by umbrella companies. However, there is little general awareness of the tax avoidance taking place. Many firms and workers may be caught up in schemes without even knowing it. Next year, HMRC will likely come down hard on any agencies mixed up in illegal operations, whether they were aware or not, and if too many end up under investigation, or close down as a result, this could seriously destabilise the worker supply chain and cause a genuine risk to the UK construction industry, which is a key focus for the current government.”
Lack of regulation of umbrella companies has led to a proliferation of fraudulent schemes and activities by a minority of umbrella companies, including incorrect tax deductions, pay skimming, and withholding of holiday pay. These activities put workers and agencies at risk of unexpected bills or punitive action if they are caught up in illegal supply chains. Recruitment agencies of all sizes must prioritise compliance and carry out extensive due diligence on any potential suppliers to protect themselves.
Mr Eley adds: “In my experience, the bigger recruitment agencies, those with more resources, are often complacent and overestimate their ability to adapt to change. Add this to the fact that our industry also comprises of literally hundreds of smaller and medium sized recruitment agencies and my concern is that businesses will be too late to realise that they, and indeed their end-user clients, are potentially exposed, or know how to safeguard their compliance.”
Eley urges recruitment firms to review all their suppliers and use government guidance for spotting signs of illegal payroll operations to tighten up on contractor supply chains. For umbrella companies, the coming months will be vital to demonstrate complete compliance with all tax and employment legislation, with membership of a reputable accreditor a recommended step.
Mr Eley concludes: “Agencies should be checking and rechecking every supplier they work with and tightening up on due diligence. Now is the time for umbrella companies to do all they can to unequivocably prove their compliance and remain a viable payroll partner.”