How the Finance Act 2026 could impact contractor engagement across the life sciences sector

The Finance Act 2026 introduces new rules aimed at tackling tax avoidance and non-compliance in labour supply chains, particularly where umbrella companies are used.

The rules apply to payments made on or after 6 April 2026, and could significantly increase the tax risks faced by businesses that engage contractors.

Although much of the discussion around these changes has focused on recruitment agencies and umbrella companies, the rules are also highly relevant to the life sciences sector. Many life sciences businesses rely on contractors and specialist consultants to support clinical trials, research programmes, regulatory projects, manufacturing operations, and commercial launches.

Importantly, the new legislation may affect not only workers supplied through umbrella companies, but also contractors operating through their own personal service companies (PSCs).

Background

An umbrella company is a business that employs workers and supplies them to client organisations, often through a recruitment agency. The umbrella company is responsible for running payroll and deducting tax and National Insurance.

Umbrella companies have become a popular way of engaging temporary workers because they provide flexibility and help businesses manage employment tax obligations.

However, HMRC has identified cases where some umbrella companies have failed to pay the correct tax or have been involved in tax avoidance arrangements. To address this, the government has introduced new rules that place greater responsibility on everyone involved in the labour supply chain.

The key change: joint and several liability

The most significant change is the introduction of joint and several liability for unpaid PAYE tax and National Insurance contributions.

This means that if an umbrella company fails to pay the correct tax, HMRC can recover the debt not only from the umbrella company, but also from the recruitment agency involved or the end client in certain circumstances.

HMRC can pursue any of these parties for the full amount of the unpaid tax.

As a result, businesses can no longer assume that payroll tax compliance is solely the responsibility of the umbrella company.

The hidden risk for PSCs

One of the less well-known aspects of the new legislation is the introduction of the term ‘purported umbrella company’.

This definition is broad and may include contractors who provide their services through their own PSC (a company that they own at least 5% of the shares in).

Where a contractor works through their PSC and there is no agency in the supply chain, the end client could potentially become liable for unpaid tax and National Insurance if:

• the contractor would be treated as an employee for tax purposes if the contractual chain excluded the PSC; and
• the PSC has not paid the correct PAYE and National Insurance.

It is common for individuals who operate through PSCs to pay themselves largely in dividends from the PSC rather than operating PAYE on all payments under the contract.

Therefore the second test above should be presumed to be met and consequently potential liability arising for an end user if the relationship should properly be categorised as employment for tax where the existence of the PSC is ignored.

In practice, this means the new rules extend tax risks beyond the current IR35 regime.

No exemption for small businesses

Under the current IR35 rules, small businesses are exempt from the off-payroll working requirements.

A business is considered small under the small company tests if it meets at least two of the following conditions:

• annual turnover of £15 million or less;
• balance sheet total of £7.5 million or less; or
• 50 employees or fewer.

Because of this exemption, many small businesses have not previously needed to assess whether contractors engaged through PSCs fall inside or outside IR35 as the PSC would be liable in the event that the incorrect amount of tax has been paid.

The new rules change this position. Even where a business is exempt from IR35, it could still be exposed to tax liabilities under the new labour supply chain rules.

No ‘reasonable care’ defence

Another important feature of the new regime is that there is generally no ‘reasonable care’ defence available.

Under IR35, medium and large businesses can avoid liability if they can show they took reasonable care when assessing a contractor’s employment status and preparing the required ‘status determination statements’, even where HMRC ultimately assesses the relationship as ‘inside IR35’.

Under the new regime, even if a business has carried out checks and acted in good faith, liability may still arise if the correct tax is not paid somewhere within the supply chain.

What should life sciences businesses do?

Life sciences businesses should review their contractor arrangements and understand where potential risks exist.

Key actions include:

• mapping labour supply chains to identify where umbrella companies and PSCs are being used;
• reviewing contractor employment status;
• carrying out due diligence on recruitment agencies, umbrella companies, and contractors;
• strengthening contracts with appropriate warranties and indemnities; and
• improving information sharing across the supply chain.

For life sciences businesses, this is particularly important due to the widespread use of specialist contractors and project-based workers.

Conclusion

The Finance Act 2026 marks a major shift in HMRC’s approach to labour supply chain compliance.

The new rules increase responsibility for businesses that engage contractors and create potential tax liabilities that extend beyond traditional umbrella company arrangements. They are particularly significant for small businesses that have previously fallen outside the scope of IR35.

For the life sciences sector, where temporary and specialist talent plays a critical role in innovation, research, manufacturing, and commercial operations, understanding these new obligations is essential.

Taking proactive steps today, will help reduce potential financial, compliance, and reputational risks under the new regime.