Tackling non-compliance in the umbrella company market

 

Government has now published its response to the consultation, ‘Tackling non-compliance in the umbrella company market’.  This is the latest publication in a long-running saga which commenced way back in November 2021 with a call for evidence on the umbrella sector and has since seen two consultations and a policy paper on the subject.  This is all indicative of the complexity of this arena and so, it shouldn’t come as a big surprise that this response abandons some of the issues that were vaunted.  It is hoped that the move to transfer liability for the operation of PAYE from the umbrella company to the agency (the entity making the supply to the end hirer, or the end hirer itself if there is no agency) will lead to an environment where companies will self-police their suppliers. 

 

 Amendment will be made to the Employment Rights Bill to;

• Define an ‘umbrella company’; and

• Allow for regulation of umbrella companies

The new legislation will come into effect in April 2026.

 

Notable points;

• Regulation will fall under the remit of the Employment Agency Standards Inspectorate (EASI) which will be part of the planned new Fair Work Agency

• The Regulation is likely to come via amendment to the Conduct of Employment Agencies and Employment Businesses Regulations 2003 (“The Conduct Regs”)

• Government has stopped short of imposing a mandatory due diligence requirement and instead “believes that all businesses should take steps to assure themselves that their suppliers will comply with their tax obligations and tret the workers they supply fairly.”

• Transfer of debt considerations were considered impractical and so, are not taken forward

• Government will legislate to move the responsibility for accounting for PAYE from the umbrella company to the agency that contracts with the end hirer (or, if there is no agency, to the end hirer itself)-

• Targeted options to address tax non-compliance in regard to the VAT Flat Rate Scheme and Employment Allowance were abandoned although perceived abuse will continue to be monitored

 

Measures that will now be subject to further consultation on the draft legislation;

• Amendment to Conduct Regs

• Legislation to enact the movement of responsibility for accounting for PAYE

 

 

Only time will tell if the transfer of the responsibility for accounting for PAYE from the umbrella company to the agency that contracts with the end client will be the silver bullet that government appear to perceive it to be.  

 

It is 10 years since comparable action was taken with the amendment to section 44, Chapter 7, Part 2, Income Tax (Earnings and Pensions) Act 2003 to transfer responsibility for the taxation of sole traders to the agency.  That change saw many agencies change tack, stipulating that workers previously classified as self-employed be transferred to an employment contract to be paid via PAYE.  There was an increase in revenue to the exchequer and the industry self-policed the matter in a cost efficient way for HMRC.  Could this attention on PAYE responsibilities promote a return to the use of more self-employed labour?

 

This change is likely to put an agency’s confidence in its relationship with its umbrella company suppliers into sharp focus.  The options open to them will be dictated by their confidence in their umbrella supplier, their ability to bring payroll in-house and the cost profile of alternative measures such as the use of a bureau service.  However, it shouldn’t be forgotten that an umbrella company does a lot more than simply running payroll.  The requirement to run an efficient HR service is also paramount in the temporary labour market.  That function will be even more important with the enhancement to other employment rights that government is introducing in 2026 such as day one Statutory Sick Pay, changes to unfair dismissal and the rights of workers on zero hours contracts.  HR administration requires time, expert knowledge and flexibility and so, it will be important for agencies to review the full gambit of service that they received from their umbrella company suppliers before they make any decisions.  

 

See the full consultation response here.

See our previous news here;