The umbrella company market in the UK has been under scrutiny for years due to concerns over non-compliance with employment rights and tax obligations. Whilst working with umbrella companies provides many benefits for contractors, these companies can also take advantage of their position and engage in tax avoidance practices or mistreat workers due to the lack of clear regulations.
To address these issues, the UK government launched a consultation in 2023 aimed at implementing measures to regulate the industry and ensure fair treatment of workers and increased umbrella company compliance. This consultation primarily focused on combating employment rights abuses and tax non-compliance associated with umbrella companies.
The 2024 Budget also introduced proposed legislation to tackle umbrella company non-compliance, shifting PAYE and National Insurance responsibilities to recruitment agencies. In her first Budget speech on 30 October 2024, Chancellor of the Exchequer Rachel Reeves announced plans for new legislation aimed at addressing non-compliance in the umbrella sector.
In response, HMRC released a policy paper (Tackling Non-Compliance in the Umbrella Company Market) to outline the proposed changes, set to take effect in April 2026. The key outcome of this legislation will be a shift in responsibility for accounting for Pay As You Earn (PAYE) when an umbrella company is involved in a labour supply chain to engage a worker.
In this blog post, we will explore the government’s initiatives, proposed policies and the responses they have generated regarding tackling non-compliance in the umbrella company market.
What is an Umbrella Company?
As part of the umbrella company compliance consultation process, the government proposed to establish a clear definition of umbrella companies. This step is crucial in distinguishing legitimate umbrella companies from those engaging in non-compliant practices.
At present, the umbrella company compliance policy paper defines umbrella companies as “employment intermediaries that employ workers on behalf of agencies and end clients”. As we draw closer to the 2026 deadline, it is likely that a more concise framework will be created and shared to help establish which businesses fall into the ‘umbrella companies’ category and therefore are affected by these regulations.
The Impact of Tackling Non-Compliance in the Umbrella Company Market
One of the key objectives of the government’s consultation is to introduce new regulations for umbrella companies. These regulations would address various aspects, such as employment rights, tax compliance, and transparency of financial arrangements.
By imposing stricter requirements on umbrella companies, the government aims to safeguard the rights of workers and minimise instances of non-compliance. This is not designed to have any negative impact on HMRC-approved umbrella companies who are already operating properly, but instead targets those who are using umbrella companies for tax avoidance and money-making schemes.
Another aspect of the government’s proposals is to reassess the incentives provided to umbrella companies. Currently, some incentives might inadvertently encourage non-compliant behaviours, leading to an increase in umbrella companies operating unethically.
By reviewing and revising these incentives, the government aims to align them with compliance and ethical practices. This approach seeks to promote a fair and level playing field for all stakeholders in the umbrella company market.
In terms of the impact of this umbrella company compliance policy on the recruitment industry, the due diligence process that recruitment agencies will normally follow when reviewing their supply chain will change dramatically. There will no longer just be a focus on tax, procedural and legal compliance, but also on the accuracy of the PAYE and NI figures, as the legal responsibility of those figures will sit with the recruitment agency.
The practical implementation of these changes remains uncertain, and further umbrella consultation may lead to amendments to the proposals. However, the anticipated impact is significant, placing considerable risk on recruitment agencies.
Who Will Be Affected?
Any recruitment agency using an umbrella company in their labour supply chain to engage a worker will face new legal responsibilities under the proposed changes. Umbrella companies will no longer be legally responsible for operating PAYE on payments to the temporary workers that they employ.
The agency supplying the worker to the end client will be held accountable for operating PAYE on the worker’s pay and will be liable for any shortfalls, regardless of whether they operate the payroll themselves or rely on the umbrella company for payroll services. Additionally, agencies will be responsible for paying the employer National Insurance Contributions (NICs).
If multiple agencies are involved in supplying a worker paid through an umbrella company, the agency that has a direct contractual relationship with the end client will be responsible for managing PAYE. In cases where there is no recruitment agency within the labour supply chain, the responsibility for PAYE will fall on the end client.
IR35 and Umbrella Companies
The introduction of the IR35 regulations has influenced the umbrella company market because of how it changed who was responsible for paying tax, depending on a contractor’s status. This led to many companies refusing to engage contractors who were outside IR35, meaning that the best way for a contractor to gain employment was either by becoming a proper employee or working through an umbrella company.
IR35 indirectly contributed to an increase in umbrella companies, and because the regulations didn’t outline how umbrella company compliance should work, this led to a range of unethical practices. The launch of the 2023 consultation aimed to tackle the loopholes that had been created, ensuring that umbrella employees were protected and regulated in the same way as everyone else.
Working with an umbrella company to hire and manage contractors can be a great way forward for recruitment agencies that don’t wish to employ these contractors directly. However, you must carry out appropriate due diligence on these companies to ensure that you’re going to be working with a business that is compliant with umbrella company regulations.
You can read more about this topic in our article on IR35 and Working with Umbrella Companies.
Responses to Tackling Non-Compliance in the Umbrella Company Market
The government’s initiatives have elicited mixed reactions from industry stakeholders. While some view these proposals as a positive step towards addressing compliance issues, others believe that more decisive action is required. Those who support the government’s efforts appreciate the focus on cleaning up an industry plagued by non-compliance. They see the umbrella consultation as a positive step in the right direction.
On the other hand, critics argue that the proposed measures might not go far enough to tackle the scale of the problem. They emphasise the need for more immediate and robust actions to protect workers and maintain fairness within the sector. These concerns highlight the urgency of resolving pressing issues and considering potential impacts on the wider recruitment industry.
Summary
The UK government’s consultation on non-compliance in the umbrella company market demonstrates its commitment to addressing employment rights and tax issues within the sector. Through measures such as defining umbrella companies, introducing regulations, and reassessing incentives, the government aims to ensure fair treatment of workers, create a level playing field, and protect taxpayers.
While the industry’s response to these proposals has been varied, the government will carefully consider feedback received during the consultation process to shape effective policies that strike a balance between regulatory oversight and supporting a thriving and compliant umbrella company market. HMRC will soon release an online tool to provide additional guidance, but the check employment status for tax tool on the UK government website should provide help in the meantime.
In the meantime, any recruitment agency impacted by these changes should begin reviewing its supply chain due diligence processes. It is essential that, by the time these changes come into effect, measures have already been implemented to ensure the accuracy of PAYE and National Insurance calculations, particularly when these are handled by the umbrella company.
If you are looking for support in managing payment and tax calculations for your recruitment industry, take a look at our Payroll Services for Recruiters or contact Marie Pegram.
