A Rainy Day for Umbrellas
The UK’s Crackdown on Non-Compliance in the Payroll Market
The landscape for UK Contractors continues to shift at pace, as the Spring Statement looms on March 26th 2025 and the Government shows no signs of slowing down its continued focus on the UK Contractor Market.
The last few weeks have seen updates to IR35 rules as well as the conclusion to the HMRC-led consultation titled "Tackling Non-Compliance in the Umbrella Company Market."
This initiative sought industry feedback on proposed measures to combat tax avoidance and strengthen worker protections within the umbrella sector.
The consultation was comprehensive with 16 stakeholder round table events and seventy-five responses from a range of stakeholders, including KPMG and other Big 4 accountancy firms, job portals, accreditation bodies and umbrella companies.
Key Objectives of the Consultation were
Enhance Worker Outcomes
Ensure that individuals employed through umbrella companies receive their rightful employment rights and protections.
Promote Fair Competition
Establish a level playing field by curbing non-compliant practices that disadvantage compliant businesses.
Safeguard Public Revenue
Address significant tax losses resulting from non-compliance, thereby protecting taxpayer interests.
Primary Proposals Discussed
Legal Definition of Umbrella Companies
Introduce a clear statutory definition to facilitate effective regulation and oversight.
Mandatory Due Diligence
Implement compulsory due diligence requirements for employment businesses and end clients
engaging workers through umbrella companies, with penalties for non-compliance.
Transfer of Tax Debt
Empower HMRC to transfer unpaid tax liabilities from non-compliant umbrella companies to other entities within the labor supply chain.
Deemed Employment for Tax Purposes
Consider treating the employment business supplying the worker to the end client as the employer for tax purposes, thereby shifting Pay As You Earn (PAYE) responsibilities.
Outcomes and Next Steps
Legislation to Define and Regulate Umbrella Companies
An amendment to the Employment Rights Bill will establish a legal definition for umbrella companies, bringing them under the purview of the Employment Agency Standards Inspectorate (and subsequently, the Fair Work Agency).
- Debt Transfer: The proposal to shift debt for unpaid dues was unanimously considered to be unworkable by all bodies, including HMRC themselves who acknowledged that there would still be potentially protracted legal battles with Umbrella Companies to establish the debts and inability to pay. Agencies pointed out that the potential for debts to appear many years down the line was unworkable.
- Shift in PAYE Responsibility: HMRC therefore took the view that if debt transfer is undesireable then the obligation to account for PAYE will have to move from the umbrella company employing the worker to the recruitment agency supplying the worker to the end client. In scenarios without an agency, this responsibility will fall to the end client.
Further consultation on expected legislation changes
But the consultation stopped short of giving any detail around how the agency would be expected to “account” for PAYE. Instead it kicked this particular issue down the road with an action that draft legislation would be realesed in time for a further specific consulation on it’s content. It is anticipated that this would commence in the next few months if it has any hope of being included in the next Finance Bill and meet HMRC’s desire to commence enforcement from April 2026.
All this continued uncertainty will no doubt continue the ongoing question that you may have as to whether working as a Contractor under a Labour Government is actually worth it.
FAQ
What is the UK government’s crackdown on umbrella company non-compliance?
The UK government, through HMRC, is implementing stricter regulations to tackle tax avoidance and unethical practices within the umbrella company market. This includes a legal definition of umbrella companies, mandatory due diligence requirements, and potential shifts in tax liability.
What is the main goal of HMRC’s consultation on umbrella companies?
The consultation aims to enhance worker protections, promote fair competition, and safeguard public revenue by addressing non-compliant practices in the payroll market.
What changes have been proposed for umbrella companies?
Key proposals include:
- A legal definition of umbrella companies for regulatory oversight.
- Mandatory due diligence requirements for recruitment agencies and clients.
- Potential transfer of tax debt from non-compliant umbrella companies to other supply chain entities.
- Shifting PAYE responsibility from umbrella companies to recruitment agencies or end clients.
Will umbrella companies be directly regulated?
Yes. The UK government plans to bring umbrella companies under the Employment Agency Standards Inspectorate (later to be part of the Fair Work Agency) to ensure better oversight.
What does the shift in PAYE responsibility mean?
Instead of umbrella companies managing PAYE for contractors, the recruitment agency or end client may be responsible for PAYE compliance. This ensures tax obligations are met even if an umbrella company ceases operations.
How will these changes impact contractors?
- Contractors working through umbrella companies may see:
- Stronger employment rights and protections.
- Changes in how tax is deducted based on PAYE responsibility shifts.
- Stricter compliance from umbrella companies to avoid tax issues.
When will these changes take effect?
Draft legislation is expected in the next few months, with HMRC aiming for enforcement by April 2026.
What was the reaction to the tax debt transfer proposal?
The proposal to transfer tax debt to other supply chain entities was widely criticized, even by HMRC. The government is now reconsidering this approach.
How can contractors prepare for these changes?
Contractors should:
- Stay updated on legislation and compliance requirements.
- Review contracts with umbrella companies or recruitment agencies.
- Consider transitioning to a limited company for more financial control.
Where can I learn more about setting up a limited company?
If you’re considering switching from an umbrella company to a limited company, Go Limited provides resources and guidance. Visit our Resources Section to learn more or contact us for expert advice ahead of the April 2026 deadline.
At Go Limited, these changes are very much what has been expected in the umbrella market, with the real impact becoming more evident as the draft legislation emerges on how much work employment agencies will need to do to comply by April 2026 deadline.
In the meantime, if you're considering going limited with your contracting business to navigate the regulatory uncertainty surrounding umbrella companies, we’re here to help. Check our expanding Resources section here to read up about limited companies and how to transfer from umbrella to limited or let us know if you would like to know more ahead of April 2026.
