HM Treasury have opened a consultation on ‘Tackling non-compliance in the umbrella company market’, also publishing responses to their 2021 Call for evidence on the Umbrella company market in general.

At a glance

This latest consultation seeks views on proposals to regulate umbrella companies and tackle non-compliance in the market. This is an issue highlighted by the responses to the 2021 Call for Evidence which took a more general look at umbrella companies, their role in the labour market, and how they interact with tax and employment rights.

Responses to the 2021 Call for evidence

The Call for evidence received over 400 responses, 354 of which came from individual workers but with only two from end clients.

  • Respondents using umbrella companies cited the following as reasons for using them:
    • The fact that the responsibility for complying with employment law would rest with the umbrella.
    • Ease when dealing with workers for short periods and workers inside IR35.
  • The main disadvantage highlighted by these respondents was non compliance with tax and employment rules.
  • Other areas of concern included pay and rate issues, the need to perform due diligence checks, and preferred supplier lists.
  • The majority of respondent workers using umbrellas said they had no option but to use them as it was a requirement of the end client or employment business.
  • Workers said they were confused about their pay, had trouble understanding their payslips and were unclear what their employment rights were. Again the use of preferred suppliers was cited as an issue which showed a lack of regards for worker preferences.
  • Though generally disliked by both businesses and workers, preferred supplier lists were seen as the best way to prevent non-compliant behaviour, alongside performing due diligence checks.

New proposals

The new consultation seek views on proposals to tackle non-compliance with both tax and employment rights by umbrella companies in line with the governments three main objectives for the umbrella company market which are to:

  • Deliver improved outcomes for workers.
  • Support a level playing field in the umbrella company market.
  • Protect taxpayers from the significant revenue losses that currently arise from non-compliance.

The proposals include:

  • Defining umbrella company arrangements as one of four methods of engaging and paying agency workers and make the dividing line between employment businesses and umbrella companies clearer, making it easier to ensure obligations crystalise on the right business at the right point in the supply chain.
  • Only permitting four methods of engagement and payment methods. The four methods that would be permitted are:
    • Model 1 – the employment business directly employs the individual work-seeker (under a contract of service), and no umbrella company is involved. This model is already covered by the current legislation.
    • Model 2 – the employment business directly engages the individual work-seeker (under a contract for services), and no umbrella company is involved. This model is already covered by the current legislation.
    • Model 3 (umbrella company model) – the employment business directly engages a corporate work-seeker (which will be an umbrella company) not controlled by the individual doing the work. This lack of control of the corporate work-seeker distinguishes it from model 4 below.
    • Model 4 – the employment business engages the individual’s Personal Service Company (PSC), which the government proposes to define narrowly for the purposes of this approach. A business would only be considered a PSC for the purposes of this option if it is under the control of the individual worker and that individual is the only person made available by the company. This model is already covered under current legislation.
  • Under each of these four models, only one person or business would be permitted in the supply chain between the employment business and the individual to be supplied to do the work.
  • Another approach considered would involve setting three tests, all of which must be met, for a business to be considered an umbrella company. An advantage of this is that it would enable government to be very precise about the businesses to be brought in scope and offer a clear way of targeting the subsequent regulations or standards to the right business at the right point in the supply chain. 
    • Condition 1 – there should be two separate businesses (an employment business and end client) involved in supplying the worker in addition to the umbrella company.
    • Condition 2 – the putative umbrella company has a direct contractual relationship with the individual to be supplied to an end-hirer that makes the umbrella company responsible for paying the individual the agreed rate. But the putative umbrella company is not responsible for providing work-finding services, which remains the function of the employment business.
    • Condition 3 – the putative umbrella company receives a form of commission or fee, often referred to as their “margin”, for the service they have provided as an umbrella company. This will most commonly be deducted from the individual’s gross pay by the umbrella company, which makes up part of the total gross amount it receives from the employment business, whether directly or indirectly. This should be indicated on the Key Information Document (KID) if this is to be the case.
  • Introducing a mandatory due diligence requirement with penalties for non-compliance.
  • Giving HMRC the power to collect umbrella company PAYE income tax and NICs debt from another business in the supply chain.
    • This approach would mirror the operation of the existing Agency Legislation in Chapter 7, Part 2 of the Income Tax (Earnings and Pensions) Act 2003. Under this legislation, where a worker is engaged via a series of employment businesses, with no umbrella company, it is the employment business holding the contract with the end client that is the deemed employer for tax purposes.
  • Deeming the employment business supplying the worker to be the employer for tax purposes which would in turn require a party further up the chain to operate PAYE.
    • It is the government’s view that the most appropriate party to act as the deemed employer would be the employment business which has a contract with the end client to supply the worker to them. This would mirror the existing agency legislation at Chapter 7, Part 2 ITEPA 2003. In the event that an umbrella company was engaged directly by the client, the client would be the deemed employer. Another party which could act as the deemed employer would be the employment business that has a contract with the umbrella company. This would be similar to the approach taken in the off-payroll working rules at Chapter 10, Part 2 ITEPA 2003. Under these rules, the intermediary that pays the worker’s Personal Service Company is treated as the deemed employer, assuming the end client and any other parties in the labour supply have met their obligations under the legislation
  • Mandating a UK director to be in place before the Employment allowance can be claimed.
  • Measures to prevent abuse of the VAT flat rate scheme.

See the Consultation Questions tab for the detailed list of questions asked. Responses should be sent to This email address is being protected from spambots. You need JavaScript enabled to view it. by 29 August 2023.

Useful guides on this topic

Starting Work 5. Agency or umbrella tax-avoidance risk
If you obtain contract work via an employment agency you could find yourself accidentally caught up in an illegal tax avoidance scheme. HMRC has now created a basic tool to help you detect whether you are in an illegal scheme. 

Spotlight 60: Umbrella companies and tax avoidance
HMRC have released Spotlight 60: 'Warning for agency workers and contractors employed by umbrella companies'.  This highlights features of umbrella companies which could indicate that the arrangements amount to tax avoidance schemes.

Spotlight 45: Umbrella companies
HMRC have published a tax Spotlight: ‘Umbrella companies offering to increase your take-home pay’. It highlights the fact that many employees and self-employed contractors are failing to realise that some staff agencies and umbrella companies are flouting tax anti-abuse rules.

Off-Payroll Working: public sector engagers
The 'Off-Payroll Working' rules move IR35: the responsibility to assess a worker's employment status and to deduct Pay-As-You-Earn (PAYE) and National Insurance Contributions (NICs) from a worker's fees, away from the worker's company to the End-Client in the labour supply chain.

Off-Payroll Working: PSCs & Private Sector Engagers
What is Off-Payroll Working? Who does it apply to? What are the rules?

IR35: Off-Payroll
What is IR35? How does it work? How is the deemed payment calculated? What expenses are deductible?

External links

2023 Consultation: Tackling non-compliance in the umbrella company market

2021 Call for Evidence: Umbrella company market: Summary of Responses

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