How the changes on 6 April 2026 could affect your labour supply and jeopardise your construction project

The government has been tackling issues with the temporary labour force in the form of the Finance Act 2026 and the Employment Rights Act 2025. This new legislation hopes to tackle non-compliance in an effort to support the initiative to ‘make work pay’, and cannot be overlooked against the host of other reforms to employment regulation, especially for the construction sector. Below, we consider how this affects construction specifically.

Umbrella companies

Use of temporary and agency workers is a hallmark of the construction industry, which often requires reactive labour supply, considerable resourcing-up following successful tenders, quick plugs to any skills gaps and support to meet sudden demands or accelerations in developments. The sudden need for resource could be a stumbling block for construction companies if they are not aware of the recent changes in law.

The construction industry will often use umbrella companies to maintain continuous employment across multiple contracts and to protect the end user of the labour from PAYE liabilities and the responsibility of running a payroll.

There is a difference between using an agency worker and a worker employed by an umbrella company; which is that an agency will be responsible for PAYE and NICs for the duration of a contract term with usually one employer, whereas by using an umbrella company, a contractor can work on various projects at once with the PAYE and NICs payment falling as the responsibility of the umbrella company.

According to HMRC, the temporary labour force does not only offer a great source of labour which is amenable to the kind of boom and bust economy which the construction sector runs on, but it can also facilitate tax avoidance or even white collar crimes such as fraud. HMRC is also concerned that the use of umbrella companies makes it difficult for workers to establish what employment rights they have and against whom. This can lead to workers suffering deductions from pay and being unable to challenge this due to a lack of transparency over wages and deductions.

Tax liability

The new tax legislation imposes joint and several liability across the supply chain for the umbrella company’s PAYE liabilities in respect of wages paid to the worker.

This means that even where the default in tax payment is not the end user’s fault, HMRC can approach anyone in the supply chain where there is unpaid PAYE and NICs, including the ‘end user’ (by which we mean an employer in the construction sector engaging any labour where there is an umbrella company in the supply chain).

End users can also include recruitment agencies sitting in the chain involving the supply of labour via an umbrella company.

This extended liability will apply to the extent that the end user becomes liable to HMRC for the full amount of outstanding PAYE or NICs further down the chain.

The assumption of joint and several liability can also exist if the end user or agency reasonably assumes that an umbrella company employs the worker – HMRC will deem this to be employment and taxable as such.

The new legislation means that an assurance of having paid all due tax from an umbrella company supplying labour will not be enough to shield the end user from liability to PAYE, making it even more important to ensure your labour sources are both reputable and compliant.

This legislation applies to workers paid on or after the 6 April 2026, therefore it is important that our construction sector clients review their labour supply chains and carry out relevant due diligence as they will face tax implications if the chain has not properly complied with obligations for PAYE or NICs.

For employers or contractors intending to hire temporary labour, consideration must be given the added costs associated with making the wrong choice in supplier. This is essential to ensuring effective cost control.

At procurement stage, employers and contractors should not only consider the risk of their own labour force and the potential tax implications, but also carry out appropriate due diligence and checks at tender stage on tax arrangements for potential contractors and subcontractors, who may be unaware of their obligations when using temporary employees, and could pose a risk to the project overall when faced with these tax liabilities they have not accounted for.  Employers should negotiate contractual indemnities to recover losses where possible.

Employment regulation of umbrella companies

The changes to the regulation and enforcement of employment rights by umbrella companies are out for further consultation until 1 May 2026.

It is proposed that umbrella companies will be regulated in a similar way to employment businesses (also known as ‘recruitment agencies’ or ‘temp agencies’).

The new regulations are expected to strengthen job security for agency workers, provide greater transparency on pay, contracts, and employment rights, and empower workers with greater choice in how they are engaged and paid.

The government will finalise these new laws after the consultation closes and aims bring them into force in 2027.

The combination of the tax and employment regulation changes could lead to a reduction in the use of umbrella companies in the construction sector.  Some construction employers may conclude that bringing payroll in-house is the most effective way to manage costs and control liabilities.  The unfortunate impact of this would be loss of business for umbrella companies and additional burdens for small construction businesses who currently outsource payroll obligations.

If you are embarking on a project where you know a temporary labour force will be used, our Employment and specialist Construction and Engineering teams can offer you the advice you need.