Tackling non-compliance in the umbrella company market
The Autumn Budget 2024 is potentially one of the most consequential budgets ever. The government is delivering significant policy changes in the form of tax rises, spending and changes to tax legislation. As always, the documents that follow the budget are far more important than the speech delivered in parliament.
Autumn Budget 2024
At para 5.26 of the Autumn Budget 2024 document the government turns its attention to umbrella companies. It aims to tackle 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.”
Decoding How The Government is Tackling non-compliance in the umbrella company market
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 Are Responsible
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.
Responsibility in the Supply Chain
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.
Liability for PAYE Shortfalls
Any shortfall will rest with the agency.
When No Agency is Involved
If an agency isn’t involved in the supply chain, then the end client would be responsible for all the above.
Use of Umbrella Companies
Businesses can continue to use umbrella companies but ultimately the responsibility for PAYE would lie with the agency or end client business.
Importance of Due Diligence
The expectation is for businesses to take steps to ensure all requisite obligations are met which could include due diligence.
Government’s Ongoing Approach to Non-Compliance
The policy paper shows the general direction the government wants to take. They aim to address the ‘non-compliance’ in the umbrella sector. End-clients, recruitment businesses and umbrella companies should remember that this is not a new course of action.
Familiar Territory: Section 44 ITEPA
The suggested course is one that those in the sector will be very familiar with. It comes in the form of Section 44 ITEPA, which determines tax liability for the incorrect engagement of operatives on a self-employed basis.. It places liability on ‘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.
Lack of Clarity for Business Decision-Making
What we do not have right now is enough detail for businesses. This makes it almost impossible for businesses to determine the appropriate course of action with any certainty.
Uncertainty of Legislative Outcomes
We’ve seen in the past that even when a policy reaches the draft legislation stage (which this one has not yet), it can be the subject of significant change and render preparations businesses have made defunct.
What This Means For Businesses
It is also important that businesses do not look at this potential change in isolation. Avoid any ‘quick fixes’ that are likely to spring up during the period between now and the final legislation.
Not a Simple Change
The policy paper does NOT represent a simple payroll change. When the government publishes the draft legislation it will likely represent significant legal changes that require legal expertise.
The Correct Approach To Take
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.
Impact on Businesses
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. Affecting both in the labour supply sector and beyond.
Potential changes will likely include a requirement for legal and tax advice. As well as drafting changes, contractual advice as well as the consideration/adoption of audit measures.
If you have any questions or queries, contact us.
FAQ: Tackling Non-Compliance in the Umbrella Company Market
1. What is the government trying to change?
The government wants to stop tax avoidance and fraud in the labour supply market. It plans to make agencies—or end clients—responsible for PAYE from April 2026.
2. Who will be responsible for PAYE?
If an agency is involved, it will handle PAYE. If there’s no agency, the end client will be responsible. The goal is to make sure PAYE is paid correctly, no matter how workers are engaged.
3. Can businesses still use umbrella companies?
Yes. Umbrella companies can still be used. But the PAYE responsibility stays with the agency or end client.
4. Is the new rule already in law?
No. There is no legislation yet. A draft will come with the Finance Bill in 2025. The current policy paper gives only a broad outline.
5. Should businesses act now?
Yes, they should prepare. Get legal and tax advice. Review contracts. Be ready for big changes by 2026.
