In October 2024, the government released a policy paper concluding the consultation on “addressing non-compliance in the umbrella company market.”

The proposed measures are the result of a thorough consultation process involving the previous government and various stakeholders within the labour supply industry. This collaborative effort was crucial in prompting HMRC to recognize, based on feedback from the consultation and its own compliance initiatives, that compliant umbrella companies can play a beneficial role in the temporary labour market moving forward.

Details of the Proposals

Further discussions with HMRC are planned before the new measures are incorporated into the draft Finance Bill 2025, which is set to take effect in April 2026. These measures aim to address non-compliance in the sector, which adversely affects workers, the Treasury, and compliant umbrella companies.

The conclusion of the consultation reflects a commitment from both the government and HMRC to collaborate with businesses, the recruitment sector, and compliant umbrella companies that are dedicated to improving market conditions in preparation for the 2026/27 tax year.

These measures will align the tax treatment of workers employed by umbrella companies with those directly engaged by agencies. The responsibility for PAYE and National Insurance liabilities will shift to the agency closest to the client within the supply chain. Consequently, while agencies may still outsource payroll operations, they will ultimately be accountable if the umbrella company managing payroll on their behalf fails to remit the appropriate PAYE and NICs to HMRC.

Although additional guidance is required to clarify certain terms within the policy paper, it is understood that agencies (and clients in the absence of an agency within the supply chain) will likely have three options:

• To maintain operations with their current umbrella, agencies and workers can choose the most straightforward and least disruptive option, but they must ensure that due diligence processes are current and effective to safeguard against non-compliant umbrella companies.
• Alternatively, agencies may assume the responsibility of deducting PAYE and NICs through an internal payroll system. This approach can be challenging and may lead to increased overhead costs due to the complexities of payroll management, especially with the additional risks and expenses introduced by the Employment Rights Bill.
• The policy paper also suggests that agencies could withhold PAYE and NICs before making payments to the umbrella company. This seems impractical and difficult to implement, so further clarification from the government is needed here.

Next Steps for Agencies

We recommend the following initial actions for agencies adapting to the new umbrella landscape:

Review Your Supply Chain: Maintain a thorough knowledge of your supply chain partners and their identities. Pay special attention to smaller or lesser-known umbrella companies and overseas entities that may present higher risks. Conduct detailed due diligence checks whenever uncertainties arise.

Review Preferred Suppliers List (PSL): Take the time to review your PSL to pinpoint the umbrella companies you trust most, particularly those with a strong track record of compliance and a solid industry reputation. All referrals to umbrella companies should be directed exclusively to those on your PSL, and your payroll processes should be reviewed to ensure payments are made only to PSL-approved entities.

Conduct due diligence checks to collaborate effectively with compliant umbrella companies: This practice builds mutual trust and aligns with HMRC’s ongoing recommendations for selecting an umbrella company. Reputable umbrella companies encourage agencies to conduct comprehensive due diligence checks and audits of their systems and processes. The due diligence process should be continuous, with varying focus over time.

Contractual indemnities and financial stability: The government expects agencies and businesses that outsource payroll functions to umbrella companies to ensure that their PAYE/NIC obligations are fulfilled accurately. Due diligence checks are anticipated to be implemented, and it is advisable to examine any PAYE/NIC legal indemnities included in your contracts, as this is standard practice among compliant umbrella companies.

If you wish to discuss any of the topics related to the government’s proposed new measures, please feel free to contact your designated SmartWork business manager.