HMRC Tightens Agency Legislation Compliance: Key Changes & How to Prepare
February 26, 2025
HMRC’s Increased Scrutiny on Agency Legislation: What Employment Agencies Need to Know
On 24th January 2025, HMRC issued new guidance indicating that they are intensifying their efforts to ensure compliance with agency legislation ahead of upcoming regulatory changes in April 2026. This announcement signals a stronger emphasis on diligence and accountability within the sector, with HMRC taking proactive steps to engage with employment agencies directly.
What Does This Mean for Employment Agencies?
HMRC’s Customer Insight Team will be contacting employment agencies to understand their experiences with applying the agency legislation, specifically Chapter 7 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003). This section of the legislation governs how agencies should handle tax and National Insurance contributions for agency and temporary workers.
These calls aim to assess compliance, gather insights on common challenges, and ensure that agencies fully understand their obligations. It’s an indication that HMRC is actively preparing for the increased regulatory scrutiny expected in 2026, and agencies should take this as an opportunity to review their internal processes.
Why Is HMRC Taking This Approach?
With the evolving nature of the temporary employment market, HMRC is keen to ensure that employment agencies are operating within the legal framework and correctly applying tax legislation. The upcoming regulatory changes will likely focus on reducing tax avoidance schemes, ensuring fair tax contributions, and closing any existing loopholes.
How Can Agencies Prepare?
Review Compliance Processes:
Agencies should ensure that they are fully compliant with the current agency legislation, particularly around how they classify and pay workers.
Stay Informed:
Regularly check HMRC updates to stay ahead of any upcoming changes or requirements.
Engage with HMRC:
If contacted, agencies should be open and transparent about their experiences, as these conversations could shape future regulatory guidelines.
Seek Professional Advice:
Consulting with payroll and tax experts can help agencies navigate any complexities in the legislation and avoid potential penalties.
Final Thoughts
HMRC’s increased focus on agency compliance is a clear sign that changes are on the horizon. Employment agencies should use this time to ensure they are meeting all regulatory obligations and preparing for the stricter enforcement coming in 2026. By staying proactive and informed, agencies can mitigate risk and ensure a smooth transition into the new regulatory landscape.
For more details, you can read the full guidance here: HMRC Guidance
The Construction Industry Scheme (CIS) is a set of rules HMRC uses to regulate payments from contractors to subcontractors in the construction industry. If you're a contractor, subcontractor, or a recruitment agency placing workers in construction, it's crucial to understand how CIS works and what it means for you. Let’s break it down in simple terms. What is CIS & Who Does It Apply To? CIS applies to contractors who hire subcontractors for construction work. This includes: ✅ Building and civil engineering work ✅ Site preparation, demolition, and repairs ✅ Installations like heating, lighting, and power systems ✅ Decorating and finishing work However, some activities don’t fall under CIS, such as: ❌ Architecture and surveying ❌ Scaffolding rental (if no labour is supplied) ❌ Material delivery Even if you’re not a construction company, you may still have to follow CIS rules if you spend over £3 million annually on construction work. For full details, check the official HMRC guidance: CISR14305 What This Means for Agencies & Contractors For Recruitment Agencies: If your agency supplies construction contractors, you need to know if CIS applies to them. If it does, payments must follow CIS tax deduction rules. Failing to deduct tax correctly can lead to serious HMRC penalties. For Contractors & Subcontractors: If you work in construction, CIS may apply to you. This means: If you're registered under CIS, contractors will deduct 20% tax before paying you If you’re NOT registered, contractors will deduct 30% tax—meaning you take home less You may be able to apply for "gross payment status" to receive full payments without deductions (but you must meet HMRC’s criteria) How TES Can Help At Trusted Employment Solutions (TES), we take the stress out of CIS compliance for both agencies and contractors: ✅ For Recruitment Agencies: We handle CIS payroll processing, ensuring your workers are paid correctly while keeping you compliant with HMRC. ✅ For Contractors & Subcontractors: We make sure your tax deductions are accurate and you receive the right payments on time. CIS can be confusing, but you don’t have to navigate it alone. Let TES manage your payroll, so you can focus on the job at hand.