The government has published its response to the consultation 'Tackling non-compliance in the umbrella company market'. From April 2026, recruitment agencies will be responsible for PAYE, instead of umbrella companies. The Employment Rights Bill will also be amended to bring umbrella companies within the definition of employment business to ensure workers receive similar rights to those of direct employees.
Background
The Consultation, which closed on 29 August 2023, focused on proposals to regulate Umbrella companies in relation to employment rights as well as addressing non-compliance issues.
These issues were first highlighted by the responses to the 2021 Call for Evidence which explored umbrella companies’ role in the labour market and their interaction with tax and employment rights.
The government aims to tackle non-compliance and ensure that workers receive comparable rights and protections when working through an umbrella company as they would when taken on directly by an employment business.
Responses
The consultation received 75 responses.
- No consensus was reached on the options for defining an umbrella company to regulate them for employment rights. However, respondents supported the principle that the Employment Agency Standards (EAS) Inspectorate should be responsible for enforcing regulations.
- Most agreed that mandating due diligence for businesses that use umbrella companies would have a postive impact on non-compliance.
- Respondents had mixed views on introducing a power to transfer tax debts that cannot be collected from an umbrella company, with concerns that the approach would encourage umbrella companies to be non-compliant.
- Respondents agreed that moving the responsibility to account for Paye As You Earn (PAYE) to the recruitment agency that supplies the worker, rather than the umbrella company that employs the worker would improve compliance.
- Most noted that the VAT Flat Rate Scheme and Employment Allowance are abused by umbrella companies, with some splitting businesses into multiple smaller companies to ensure no employer NICs are paid.
Next steps
Following the consultation:
- The government has decided to amend the Employment Rights Bill to define and regulate umbrella companies. This will bring umbrella companies within the definition of employment businesses for employment rights and within the scope of the Employment Agency Standards Inspectorate’s (and subsequently, the Fair Work Agency’s) remit.
- Umbrella companies will be regulated in a similar way to the existing Conduct Regulations. The government will consult again before any amendments.
- From April 2026, where an umbrella company is used in a labour supply chain to engage a worker, the responsibility to account for PAYE:
- Will rest with the recruitment agency that supplies the worker to the end client, rather than the umbrella company that employs the worker.
- Where there is no agency in a labour supply chain, this responsibility will sit with the end client.
- This measure was announced at the Autumn Budget 2024 and brings the tax position for umbrella company workers into line with other agency workers. The government will consult on draft legislation this year.
- The government will update its guidance for workers employed by umbrella companies to make clear what these changes mean for them, focusing on the implications of having different employers for tax and rights purposes.
- The government has decided not to take forward targeted measures to address VAT and Employment Allowance abuse due to the anticipated impact of the umbrella company measures. In addition, the government will not take forward its proposals to introduce a mandatory due diligence requirement.
Useful guides on this topic
Starting Work 5. Agency or Umbrellas
Working via an agency: how to spot whether you are being paid correctly. This guide shows you what to expect.
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: PSCs & Public Sector Engagers
The 'Off-Payroll Working' rules move IR35 and 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
What is IR35? How does it work? How is the deemed payment calculated? What expenses are deductible?
Flat rate scheme
What is the VAT Flat Rate Scheme (FRS)? Who can apply? How do you apply? What are the rules? What are the rules for capital expenditure and pre-registration VAT?
Employment Allowance
The Employers' National Insurance Contributions (NICs) allowance or Employment Allowance is an allowance given to qualifying employers to offset against their annual Employers' National Insurance liabilities.
External links
HM Treasury: Consultation outcome: Tackling non-compliance in the umbrella company market: Government response
