Tough new laws will allow the Treasury to claim hundreds of millions of pounds in tax that currently goes unpaid as the Government cracks down on an employment scam. It is targeting recruitment agencies that supply temporary staff for clients but fail to ensure employment taxes are handed over.

The scam involves using so-called umbrella companies, which act as the legal employer for workers supplied by the agency. These are also used by reputable firms but the Treasury warns that 275,000 workers every year are provided by cowboy operators using umbrella companies to commit fraud by failing to pay the correct taxes.

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As well as cheating the taxpayer, it leaves honest employers at a disadvantage.

From April 2026, recruitment agencies will be made legally responsible for making sure the correct tax is paid on workers’ wages and if there is no agency involved then company using the worker will be liable.

This means that if an umbrella company fails to pay the right tax, tax officials at HM Revenue and Customs can go after the agency or the end client.

The new rules are expected to raise nearly £900 million in the first year alone, and almost £3 billion over five years.

James Murray, Exchequer Secretary to the Treasury, said: “The days of using umbrella companies to wilfully avoid paying hundreds of millions of pounds in tax are coming to an end.

“Tax avoidance hurts everyone else who plays by the rules, and umbrella companies who dodge their responsibilities can leave working people in a difficult position. That is why, since we were elected last year, we have been go further and faster to make sure everyone plays by the rules and pays the right tax.

“The new law taking effect from next year will fix the broken system that has been exploited for too long. We will make sure those responsible for paying tax do so – helping to deliver our Plan for Change and the public services families rely on.”