Umbrella Companies | Government Proposals to Tackle Non-Compliance
Previous articles on our website have explained the effectiveness of umbrella companies in facilitating the management of contingent workers. These companies manage administrative responsibilities including handling payroll, National Insurance Contributions (NIC) and tax deductions.
Additionally, we have focused upon the ongoing scrutiny of the industry arising from compliance, tax evasion schemes, worker exploitation and regulatory loopholes.
Whilst many umbrella companies provide a legitimate service, some are used to facilitate non-compliance including tax evasion and fraud.
As part of its efforts to tackle the issues, the Government conducted a consultation to assess the problems and explore regulatory solutions which ran from June to August 2023. The consultation sought input from businesses, recruitment agencies, trade bodies, and workers to better understand these issues and identify effective measures to address them.
Whilst the Autumn Budget 2024 announced a significant change to tackle non-compliance which will impact end clients and recruitment agencies using umbrella companies for employment and payroll services, it appears that much of the information gained from the consultation is still receiving consideration.
In her budget speech the Chancellor, Rachel Reeves stated that the Government would move against umbrella companies which ‘exploit workers.’
Hamraj Kang of KANGS briefly comments on the Government’s proposals as indicated to date.
The Extent of the Umbrella Company Problem
HMRC states that:
- umbrella companies engaged at least 700,000 workers in 2022 - 2023,
- at least 275,000 of that number, and probably significantly more, were engaged by umbrella companies which failed to fulfil their tax obligations,
- more than £500million was lost to the Revenue by way of disguised remuneration tax schemes, almost all of which was facilitated by umbrella companies,
- hundreds of millions of pounds were lost to fraudulent attacks by people using umbrella company structures,
- this behaviour results in unsuspecting temporary workers receiving substantial unexpected tax bills and being deprived of basic entitlements.
Umbrella Companies | Definition and Regulations
The Employment Rights Bill is to be amended to define and regulate umbrella companies. A new definition of an umbrella company has been developed focusing upon two key elements indicative of an umbrella company being in the business of:
- employing a person with a view to them being supplied to a hirer and
- paying for, receiving or forwarding payment for the services of persons with a view to them being supplied to a hirer.
Umbrella companies are to be regulated in a similar way to the existing Conduct Regulations putting them alongside existing employment businesses.
Responsibility for PAYE
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 be that of the recruitment agency supplying the worker to the end client. This means that compliance will no longer sit with the umbrella company that employs the worker.
- where no agency is engaged in the supply chain, will be that of the end client.
The intent is to avoid practices which appear to be rife in the industry, including:
- fraudulent, misleading documentation: such as documents produced to falsely create the impression that an umbrella company is operating in a compliant manner whereas, in reality, it may be presenting payroll submissions and payslips which do not tally.
- workers not being paid their legal employment entitlements: such as holiday pay or pension entitlements,
- incorrect treatment of expenses,
- tax avoidance by utilising such vehicles as loan schemes or option grants,
- a multitude of non-transparent and confusing pay practices.
Workers will continue to receive pay after deduction of income tax and NIC deductions, although a different company may provide their payslip. The new arrangements will prevent workers from being engaged by non-compliant umbrella companies, preventing them from unknowingly being involved in non-compliant tax arrangements which may have resulted in a large, unexpected tax bill.
The Autumn Budget 2024 states that moving PAYE obligations to agencies or end users:
‘…will protect workers from large, unexpected tax bills caused by unscrupulous behaviour from non-compliant umbrella companies.’
Implications for Businesses and Recruitment Agencies
The Government’s proposed measures will require businesses and recruitment agencies engaging with umbrella companies to reassess their compliance strategies. One of the most significant changes will be the need for increased due diligence when selecting umbrella firms. Companies must ensure they only work with compliant providers to avoid legal and financial repercussions.
Non-compliance could result in severe penalties, reputational damage, and financial liabilities. Businesses may be held accountable for tax avoidance schemes or worker exploitation within their supply chains. To mitigate these risks, firms will need to implement stronger internal compliance policies, such as regular audits and contractual safeguards.
Recruitment agencies, in particular, will face stricter responsibilities when ensuring that worker’s rights are upheld. This will include proper holiday pay, pensions, and compliance with employment laws for instance. Stricter regulations may also introduce additional administrative burdens, which requires recruitment agencies to track compliance more rigorously.
Additionally, contract structures and payment processes may need to be revised to align with the new Regulations. Companies will have to make sure that the workers are paid fairly following the PAYE rules.
Overall, businesses and agencies must take proactive steps to adapt to these changes, prioritising compliance to avoid legal risks and protect workers’ rights.
How Can We Assist?
We have significant experience in acting for companies and recruitment agencies involved in the supply of temporary workers which have become the subject of a HMRC investigation in relation to VAT, PAYE and NIC.
Our expertise extends to representing numerous labour supply and recruitment companies served with Kittel Notices and VAT Assessments.
If you are involved in or anticipate a dispute with HMRC, it is essential that you seek expert advice. Our team at KANGS provides a wealth of experience and would be delighted to support you throughout the entirety of any HMRC investigation including proceedings before the Tax Tribunal.
If we can be of assistance, please do not hesitate to contact our Team using the contact details below:
Tel: 0333 370 4333
Email: info@kangssolicitors.co.uk
We provide initial no obligation discussion at our three offices in London, Birmingham, and Manchester. Alternatively, discussions can be held through video conferencing or telephone.
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