Budget 2024: Tackling non-compliance in the umbrella company market

In one of the most consequential budgets ever, the government has delivered significant policy changes in the form of tax rises, spending and changes to legislation.  As always, the documents that follow the budget are far more important than the speech delivered in parliament.

At para 5.26 of the Autumn Budget 2024 document the government turns its attention to umbrella companies and tackling what it refers to as ‘tax non-compliance’.  It states:

“To tackle the significant levels of tax avoidance and fraud in the umbrella company market, the government will make recruitment agencies responsible for accounting for PAYE on payments made to workers that are supplied via umbrella companies. Where there is no agency, this responsibility will fall to the end client business. This will take effect from April 2026. The measure will protect workers from large, unexpected tax bills caused by unscrupulous behaviour from non-compliant umbrella companies. The government is publishing a policy paper alongside the Budget that provides further information on this measure.”

In short, the government of the day has decided that the agency, or end client, should be ‘responsible’ for the correct operation of PAYE for the workers that it engages with via an umbrella company.  More detail is referenced in the accompanying policy paper. 

So, to the policy paper…

As you would imagine, the paper is light with regards to detail on the most important elements of this measure.  Draft legislation is promised as part of the Finance Bill 2025 as well as the opportunity for stakeholders to provide feedback.  The details we do have though (none of which have been formally confirmed in legislation yet), provide for the following:

• Agencies will be responsible for making sure that the correct amount of income tax and National Insurance contributions are deducted from payments made to a worker and for remitting it to HMRC.
• In a supply chain it will be the agency that has a contractual relationship with the end client that will be the party responsible for all PAYE obligations.
• Any shortfall will rest with the agency.
• If an agency isn’t involved in the supply chain, then the end client would be responsible for all the above.
• Businesses can continue to use umbrella companies but ultimately the responsibility for PAYE would lie with the agency or end client business.
• The expectation is for businesses to take steps to ensure all requisite obligations are met which could include due diligence.

From the policy paper, we know the general course that the government wants to take in tackling the aforementioned ‘non-compliance’ in the umbrella sector.  It should be remembered by end-clients, recruitment businesses and umbrella companies that this is not a new course of action.  The suggested course is one that those in the sector will be very familiar with, in the form of Section 44 ITEPA, which places tax liability for the incorrect engagement of operatives on a self-employed basis, with ‘intermediary 1’, a party that, in a lot of supply chains, will not be the party that contracts with the operative.  So, the sector has responded to changes of this ‘type’ in the past and therefore has that experience to draw on.

What we do not have right now is the detail needed for businesses to determine the appropriate course of action with any certainty.  We’ve seen in the past, that even when a policy reaches draft legislation stage (which this one has not yet), it can be the subject of significant change and render preparations businesses have made defunct.

It is also important that businesses do not look at this potential change in isolation or be too hasty to adopt any ‘quick fixes’ that are likely to spring up during the period between now and the final legislation.  The policy paper does NOT represent a simple payroll change.  When the draft legislation is published it will likely represent significant legal changes, that require legal expertise. With the upcoming employment changes recently published in the Employment Rights Bill (much of which is also due to take effect in 2026 and also lacking essential detail at this stage), it is clear that businesses in the sector will need to take a rounded and deliberate approach. 

The above cautionary notes do not mean that affected businesses should do nothing.  The potential changes, both in this policy paper and the Employment Rights Bill, will necessitate significant changes in how businesses operate, both in the labour supply sector and beyond.  Potential changes will likely include a requirement for legal and tax advice, drafting changes, contractual advice as well as the consideration/adoption of audit measures.  As our readers will know, the areas that the legislative changes will most readily affect, are areas that Chartergates specialise in.  As such, you can all rest assured that we will be at the forefront of the advice, drafting, representation and audit services that businesses require, during this time of change.

If you have any questions or queries, get in touch with your usual contact at Chartergates or email, marktaylor@chartergates.com