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The previous government launched a consultation from June – August 2023 on tackling non-compliance in the umbrella company market. The consultation sought responses on the most effective way to address issues of tax and employment rights non-compliance by umbrella companies, based on evidence they deprive workers of employment rights, distort competition in the labour market and lead to significant tax loss.
In March 2025, the current government published its response to the consultation on proposals to tackle non-compliance. In this article, we look at what changes we can expect to see and analyse how businesses in this industry will be impacted.
What are umbrella companies?
Currently, there is no statutory definition of an umbrella company. However, they tend to be companies which operate as employment intermediaries, employing individuals on behalf of recruitment agencies and end clients. As the employer, the umbrella company is responsible for providing employment rights to the individuals and operating PAYE (accounting for income tax and NICs). They are generally unregulated.
The consultation’s headline changes
The government will:
- Define umbrella companies to bring them within the scope of the Employment Agency Standards Inspectorate’s (EAS) (and subsequently, the Fair Work Agency’s (FWA)) remit for regulation.
- From April 2026, shift responsibility to account for PAYE from the umbrella company that employs the worker, to the recruitment agency that supplies the worker to the end client. In cases where there is no agency in a labour supply chain, the end client will have responsibility.
Employment aspects
The government has tabled an amendment to the Employment Rights Bill to define umbrella companies and allow for their regulation. A new definition will focus on two key elements which are indicative of an umbrella company:
- The entity is in the business of employing a person with a view to them being supplied to a hirer.
- The entity is in the business of paying for, receiving or forwarding payment for the services of persons with a view to them being supplied to a hirer.
The government’s view is that umbrella companies should be subject to regulation in the same, or similar, way that employment businesses (ie recruitment agencies) are. This will require amendments to be made to the existing Conduct Regulations, but the government will consult again before any changes are made.
Responsibility for enforcing umbrella company regulations will fall to the EAS. Once the FWA is created, it will subsume the EAS’s functions and will become responsible for enforcing the regulations.
Tax aspects
HMRC data shows that £500 million was lost to disguised remuneration tax avoidance schemes in 2022 – 2023, almost all of which was facilitated by umbrella companies. As such, the government’s view is that there is a clear case for strategic action to tackle non-compliance.
The consultation considered various options for addressing non-compliance:
- Mandating that businesses who use umbrella companies carry out compulsory due diligence.
- Giving HMRC the power to transfer umbrella company tax debt from the umbrella company to other businesses in the supply chain in certain circumstances.
- Placing the responsibility to account for PAYE where an umbrella company is used with the agency that supplies the worker to the end client, rather than the umbrella company.
In the end, the government felt that option three was the most appropriate. This will mean that responsibility to account for PAYE will shift from the umbrella company that employs the worker, to the recruitment company that supplies the worker to the end client, or, where there is no recruitment agency, the end client. This will not prevent an agency/end client from using an umbrella company to operate payroll, but it will mean that they will be legally liable for any tax shortfall as a result of the umbrella company not making the correct deductions. The government will consult on draft legislation this year, with the measure taking effect from April 2026. This change will significantly increase the risk of using umbrella companies and agencies/end-clients will need to ensure they conduct proper due diligence for any umbrella company they continue to use.
End clients and agencies will be reminded of a similar approach by the government relating to the off-payroll rules. To drive compliance in the supply chain, the ultimate obligation to ensure tax is managed and paid over to HMRC correctly becomes the obligation of the receiver of the service: in the case of umbrellas, the end client or the agency. Having spent time getting to grips with the issues in the supply chain when dealing with the off-payroll rules, these new obligations feel less onerous and should slot into existing processes. If this is a new level of compliance for end users and agencies then it is worth using the next 12 months to consider the supply chain and developing processes for compliance.
It would be good to understand from the government as soon as possible how the mechanics of this new compliance activity will operate and we look forward to the relevant legislation.
What should you be doing now?
From a tax perspective, end clients and agencies should now be undertaking an audit of their contractor and part-time cohorts to identify any umbrella companies in their supply chain and then seeking information around their PAYE practices. Where not already in place, suitable indemnities from the umbrella companies should be sought so that end clients and agencies have a right of recourse should the umbrella fail to conduct its PAYE obligations in accordance with the law. Again, we await the government guidance which will shape the actions that need to be taken.
From an employment perspective, we will need to wait until the government consults on its proposed amendments to the Conduct Regulations before deciding immediate next steps. However, businesses should be in no doubt that the potential changes are likely to shake up the way in which umbrella companies operate, and so conducting an audit to identify any umbrella companies in the supply chain might be sensible so that businesses are ready to take action when the time comes.
To explore how the changes may impact your organisation, please contact Robert Forsyth or Cathy Bryant to discuss further.
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