On 30th October government published a policy paper which concluded the consultation on “tackling non-compliance in the umbrella company market.”
The proposed new measures were the culmination of an extensive consultation between the previous government and stakeholders in the labour supply industry. This collaboration was an important factor in leading HMRC to acknowledge, from the consultation responses and its own compliance activities, that compliant umbrella companies have a positive role to play in the temporary labour market going forward.
The proposals in more detail
Additional engagement with HMRC will take place before new measures are included in the draft Finance Bill 2025 for effect from April 2026. The intention of these new measures is to clamp down on non-compliance in the sector that causes harm to workers, Treasury and compliant umbrella companies.
The conclusion of the consultation includes a government and HMRC commitment to work in partnership with business, the recruitment sector and compliant umbrella companies that want to clean up the market, to get everything in place for the 2026/7 tax year.
These measures bring the tax position for workers employed by umbrella companies in line with those engaged directly by the agency. The measures move the responsibility for PAYE and NI liability to the agency closest to the client in the supply chain. This means that although agencies will still be able to outsource the operation of its payroll, the agency will remain ultimately responsible if the umbrella company operating the payroll on their behalf fails to remit to HMRC all properly due PAYE and NICs.
Although further guidance is needed to clarify wording within the policy paper itself, we understand that agencies (and where no agency exists in the supply chain - clients) will feasibly have three options:
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To continue working with their existing umbrella. By far the easiest and least disruptive route for agencies and workers alike, with the caveat of ensuring due diligence processes are up-to-date and effective to protect themselves against non-compliant umbrella companies entering the supply chain and exposing them to PAYE/NICs risk; or
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To take on the responsibility for deducting PAYE and NICs as part of an in-house standard payroll operation. This is no easy feat and is likely to increase overhead costs in running complex payrolls; whilst at the same time, the Employment Rights Bill layers in additional risk and cost associated with employing workers; or
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The policy paper also suggests an option for the agency to withhold PAYE and NICs prior to making payment to the umbrella company, however, this may prove impracticable and challenging to administer. Further clarification is required from government here.
Next steps for agencies
The following are PayStream’s initial recommendations which we feel are crucial for agencies managing this new umbrella landscape:
- Check your supply chain: You need to fully understand who is in it, what their role and function is and who they are. Be particularly alert if you have a long supply chain, where small or unknown umbrella companies appear or where there are overseas involvements. Challenge and carry out due diligence checks where you are unsure.
- Review and consolidate your current Preferred Suppliers List (PSL): You should review your PSL and identify the umbrella companies in whom you have most trust, who have a long -established track record of compliance and a good reputation within the industry.
Also look at where your referrals to umbrella companies are actually going to ensure everyone in your organisation is only using the PSL. This should also involve checking your payroll processes to monitor which umbrella companies are in receipt of your funds, ensuring you are only paying PSL-approved companies. It can be easy to get drawn into using a non-compliant provider because of their beguiling offers and promises of higher take-home pay.
- Review and carry out due diligence checks: This is at the heart of successfully operating with compliant umbrella companies. It provides mutual comfort and reassurance on both sides and is a continuing theme of HMRC’s exhortations in the selection of an umbrella company.
Reputable and well-established umbrella companies, like PayStream, encourage agencies to carry out appropriate due diligence checks on their organisation and services. They will happily open their doors for a review and audit of their systems and processes. Remember too that due diligence checks should not be one-offs, but both ongoing and varied in their focus.
- Contractual indemnities and financial strength: Government anticipates that agencies and businesses that continue to outsource their payroll operation to umbrella companies will take steps to ensure that their PAYE/NICs obligations will be correctly met on their behalf.
The expectation is that due diligence checks are instituted but furthermore, you should review any PAYE/NIC legal indemnities within your contracts – this is already commonplace with compliant umbrella companies. We further recommend that agencies choose financially strong umbrella companies as PSL partners under the new regime, giving more weight to any indemnity.
If you would like to explore any of the issues raised by the government’s proposed new measures, please don’t hesitate to contact your Key Account Director.
