Off-payroll working

Off-payroll working: government pledges to tackle non-compliance in the umbrella company market

The Government has recently confirmed its intention to legislate to tackle non-compliance in the umbrella company market. Unlike regulated employment agencies, unregulated umbrella companies legally ‘employ’ individuals and supply them to work for end clients. However, an umbrella company is not an employer in the traditional sense of the phrase. They don’t usually provide any work for the ‘employees’ to do, who often find their own work opportunities and regard themselves as either ‘self-employed’ or a ‘freelancer’. Nor do they usually exercise any ‘control’ over the worker’s activities, in the same way as a standard employer would control its employees’ activities. 

The growth in the umbrella company market was largely accelerated by the introduction of the off-payroll working rules in the public sector in 2017, and private sector in 2021. In the years that have followed the introduction of off-payroll working, there has been a massive growth in umbrella companies acting as intermediaries in labour supply chains. For example, HMRC analysis shows that umbrella companies were used to engage at least 700,000 workers in 2022-23. 

HM Treasury has recently published ‘Tackling non-compliance in the umbrella company market’, the new government’s response to the previous government’s Summer 2023 public consultation. Whilst noting some umbrella companies are legally compliant, the response goes on to conclude that “too many are used to facilitate non-compliance including tax avoidance and tax fraud”. The response goes on to note that some umbrella companies abuse tax reliefs and allowances, including employment allowance (which is a relief against employer’s NIC that is targeted at small employers). Therefore, the government has confirmed its intention to tackle non-compliance in the umbrella company market by taking two key steps:

1. The government will regulate the conduct of umbrella companies: government amendments to the Employment Rights Bill, currently progressing through parliament, will define umbrella companies legally for the first time and include them within the definition of an ‘employment business’ for the purposes of Employment Agencies Act 1973. Thus bringing them within the scope of the Act and, subject to a further consultation, the associated Conduct of Employment Agencies and Employment Business Regulations 2003.This will in turn bring them within the scope of the Employment Agency Standards Inspectorate’s remit (and subsequently within the Fair Work Agency’s remit once this comes into existence). 

2. The government will regulate the tax position of umbrella companies from April 2026: new legislative provisions in the Finance Bill 2025 will bring umbrella companies under a tax regime which will operate in a very similar way to the current off-payroll working rules from April 2026. Where an umbrella company is used in a labour supply chain to engage a worker, responsibility to operate PAYE and account for tax will move away from the umbrella company that ‘employs’ the worker, onto either the employment agency that supplies the worker to the end client (where there is such an agency in the labour supply chain), or where there is no employment agency in the labour supply chain to the end-user client. 

With around a year to prepare for these changes, employers should begin to consider:

• Conducting an audit of any current off-payroll workers, to identify whether there is an umbrella company involved in the supply chain; and

• The risks associated with entering into new contractual arrangements involving umbrella companies, especially where the contracts will extend beyond the end of March 2026. 

We will report any developments in due course.