On 4th March, Government responded to the “Tackling non-compliance in the umbrella company market” consultation setting out its priorities and next steps in terms of regulating umbrella companies. Although some details were confirmed, such as the effective date of April 2026, the industry still requires a great deal of clarification in order to fully prepare for the changes.
Let’s take a deeper dive into the key points from the Government’s response.
What is an umbrella company?
We understand that Government is committed to defining an umbrella company and introducing specific regulations, likely through the Conduct Regulations, to regulate it properly. To do this, draft legislation proposes widening the definition of an “employment business” to capture umbrella companies within its reach. Moving forwards therefore, an employment business will be both a company that finds and places workers with clients; and also include a company that does not perform work-finding services but pays workers supplied to hirers. Government also indicated that the Employment Agency Standards (EAS) Inspectorate would be responsible for enforcing regulation of umbrella companies; and when formed, this responsibility will shift to the Fair Work Agency.
Option one, two or three?
Tabled from the original consultation were three options to tackle non-compliance. The first option suggested a mandated due diligence requirement. Due diligence should be a cornerstone for any business, and this is a message that has been reiterated many times across the industry to reduce risk in the supply chain. Government responded to say that although due diligence is supported and encouraged, they do not believe it would be sufficient to drive the behavioural change needed to reduce wide-spread non-compliance in the industry.
Option two involved a mechanism to transfer debt for outstanding tax and national insurance to another business in the supply chain, such as an employment business or hirer. Again, Government did not believe this would bring about sufficient behavioural change to stamp out non-compliance. Government was also concerned this option would involve a long and complicated process to recover the tax, which in the meantime, could cause a great deal of uncertainty for the agency involved.
Option three deemed the employment business which supplies the worker to the hirer as the employer for tax purposes. An employer for tax purposes is a new concept under UK law but as set out in Government’s October 2024 Policy Paper, entails the agency holding legal responsibility for any tax shortfall should an umbrella company fail to make all necessary tax and NI deductions. We understand that the employment of workers can continue to be held by umbrella companies, something that agencies should welcome considering the increasing complexity and cost of employing people. It’s clear from the Government’s response that they remain committed to moving forwards with this option.
Next steps
The Government’s response lacks detail with regards to how option 3 will operate in practice. It’s vital that industry stakeholders continue to engage and lobby Government to ensure the proposed changes are drafted in such a way as to avoid negative outcomes for compliant businesses and workers alike.
When we consider our internal standards of compliance and those of other compliant umbrella companies in the industry, we can liken this approach to a sledge-hammer to crack a nut. The lack of detail regarding the actual mechanics of option 3 is on first reading unhelpful. In hindsight though, it may indicate Government’s willingness to consult the industry on the best way to implement these measures, striking a balance that will reduce non-compliance whilst allowing compliant businesses to compete on a level playing-field; which in the end, is vital for a healthy economy.
Despite the current uncertainty, there are still several steps that agencies can take now to prepare, including:
- Review your supply chain
- Consolidate your PSL to only your most trusted and stable partners.
- Review and enhance where necessary your due-diligence controls.
- Review contractual indemnities weighted against the financial strength of your PSL partners.
You can find a more in-depth analysis of our recommendations here:
https://www.paystream.co.uk/blog/agency-info/umbrella-regulation-the-future-of-the-umbrella-company-landscape/
