Stricter Regulation of Umbrella Companies to Benefit Workers
From 2026, umbrella company employees will enjoy a fairer and less confusing landscape when the Employment Rights Bill comes into effect. The overarching aim of the Bill is to increase workers’ rights, encourage transparency and crack down on unfair working practices
Meanwhile, HM Revenue and Customs has published a warning to agency workers and contractors about the tax risks of moving between umbrella companies.
Changes on the horizon
Readers will remember that back in 2023, the government consulted on proposals to tackle what it said was widespread non-compliance in the umbrella company market. Umbrella companies are used by some recruitment agencies as a model to engage and pay temporary workers.
However, there has growing concern around umbrella companies ranging from the tax losses caused to the Treasury and denying workers their employment rights.
Three options were set out in the consultation, together with suggested alternative definitions for umbrella companies. The government published its response in March this year with its recommendations. We can report the latest changes as follows:
· The Employment Rights Bill has been amended to expand the current definition of an employment business under the Employment Agencies Act 1973. It will include other types of businesses (not currently included) that participate in arrangements under which persons are supplied by their employer to work for other persons - which will include the activities of umbrella companies. It means that umbrella companies will become subject to the Conduct of Employment Agencies and Employment Businesses Regulations 2003
· Umbrella companies are expected to come under strict formal regulation, falling under the Employment Agency Standards Inspectorate and then (when created) the Fair Work Agency
· Umbrella companies will be required to provide clear information on pay, annual leave entitlement and job roles from the start of someone’s employment
· PAYE responsibility is expected to be transferred from umbrella company employers to the agency supplying workers, or directly to the end-client if no agency is involved (under the Finance Bill 2025)
Clarity for anyone in their employment relationship is important. The impending measures will bring much-needed clarity and transparency, particularly for those workers not sufficiently protected under the existing rules.
HMRC warning
Umbrella companies have been known to encourage agency workers and contracts to use tax avoidance schemes. If a worker does use such a scheme (and the individual may not even know they are doing so), they could end up owing tax or not receive the benefits to which they are entitled.
HMRC has recently issued a notice (Spotlight 71) warning agency workers and contractors who are moved between umbrella companies on how to avoid being involved in tax avoidance schemes.
It warns that it’s the worker’s responsibility to ensure they know how much tax and National Insurance should be paid.
Businesses and individual are also reminded that if they are involved in promoting, enabling or supplying a tax avoidance scheme, they may be required to inform HMRC. For more information, read our article Promoters of tax avoidance schemes: updated HMRC guidance
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