Labour replies to ‘Tackling umbrella company non-compliance’, but stops short of clarity

The Labour government has replied to the Tory consultation “Tackling non-compliance in the umbrella company market.”

Despite the changeover at No 10, the reply focuses on four umbrella regulation areas contractors already knew to expect from April 2026.

Labour’s March 9th reply modifies those four areas, including a very uncertain part of huge “impact,” and adds only two new points.

‘Supplying employed persons’

The first of the four umbrella regulation areas already expected but now modified is a new, statutory definition of an umbrella company.

An umbrella company will be an entity that “is in the business” of “employing” persons “with a view to them being supplied to a hirer.”

The definition of a UK umbrella company will go on to say the entity ‘pays for, receives, or forwards payments’ for those persons’ services.

‘Umbrella company definition is key takeaway’

UmbrellaSure says that out of all the details in Labour’s 75-page reply, the new words to define an umbrella are “the key takeaway”.

Director Sam Cox observes Labour must define ‘umbrella company’ because it will regulate them via an Employment Rights Bill revision.

Law firm Chartergates says: “[Labour] has eschewed the two options previously put forward and opted for a new definition centred on ‘employment arrangements’.

“This focuses on the main operations of an umbrella company -- namely employing individuals or being in the business of paying for, receiving or forwarding payment for the services of those individuals.

‘Not a bolt out of the blue’

“As with [other aspects of the consultation reply], this is familiar terminology in parts and therefore not a bolt out of the blue.”

The second of the four umbrella regulation aspects already previously tabled but now confirmed is the key mechanism to regulate umbrellas.  

As Autumn Budget 2024 said, PAYE accounting responsibility will shift from umbrellas to agencies contracted to supply the workers to hirers.

‘Responsibility for PAYE accounting’

Confirmed in the reply is that if the chain is agency-free, “this responsibility” for accounting for PAYE will shift to the hirer.

Clarity Umbrella will this week explore the impact of Labour’s plan, including making agencies deemed employers, exclusively on ContractorUK.

In short, though, agencies or end-clients will become the employers for tax purposes; whereas umbrellas will be the employers for employment purposes, says Clarity’s Lucy Smith.

‘Agencies as deemed employers to take effect from April 2026’

The government continued at 3.126 of its reply: “The measure will take effect from April 2026.

“The government will consult on draft legislation this year, ahead of introducing legislation to parliament.”

While both details may appear minor, they aren’t, as the former rejects the FCSA’s call, and the latter vow opens the door for tweaks.

‘Potential for deemed employer elements to change’

In fact, the Freelancer & Contractor Services Association had called HMRC and HM Treasury to delay umbrella regulation until 2028.

As to Labour vowing to consult, Chartergates says “the potential for elements to change” will therefore exist “until legislation is enacted.”

A window of opportunity to influence the final legislative wording should please Liquid Friday, NumberMill, My Digital and Adepto.

The two umbrellas, the umbrella software firm and the recruiter, respectively, are concerned about the opaqueness of the proposal.

‘Umbrella contractor industry must have clarity’

Liquid Friday CEO Joe Taffuerlli says: “We must have clarity on what the government means when it discusses the agencies being ‘responsible’ for ‘accounting for’ the PAYE and NICs.

“My understanding is that the umbrella will [be] responsible for the ‘doing’ here, and agencies would be liable to any shortfall. If any.”

My Digital CEO Daniel Moss says umbrellas and others must propose a “data-driven strategy” to colour how the proposal is “implemented”.

‘Huge impact on whole contractor umbrella industry’

Ray Walker, an adviser to SMEs, says it is “clear” to him that agencies will hold liability, but he took to LinkedIn with a question:

“Will the worker have to be employed under the agency’s employer reference number, or can they be employed by a brolly and their employer reference number?”

Boss of contingency workforce advisory 4 Quarters Consultancy, Walker added: “That clarity will have a huge impact on the whole industry.”

‘As always with the government and umbrellas, it’s still not clear’

Louise Rayner, NumberMill’s founder says: “Some [people] are saying that the recruitment agency will be the employer for tax purposes.

“I don’t think this means that they will do the calculations -- I think it just means they will have responsibility. [But] not be the ‘do-er.’

“So they [agencies] can still use umbrellas. That would make more sense in terms of practicality. As always, it’s still not clear.”

‘Timely government action’

Adepto (Technical Recruitment) director Lee Knowles is also scratching his head at the ‘deemed employer’ proposal too.

It was originally ‘option 3’ in the Tory government’s June 2023 consultation, even though Labour claims in its Tuesday reply (one year and nine months later) that it appreciates “the need for timely government action”.

“If by 'deemed employment' the government is referring to the recruitment agency (or hirer) actually making the payments of tax/NICs while the umbrella pays the 'income' portion, I can't for the life of me see how that increases compliance,” Knowles posted.

“It will do the opposite, I suspect. And create a whole heap of work and expense for small agencies already buckling under the strain of ever-increasing compliance requirements”.

‘PAYE scheme is going to sit with the recruitment agency’

Rebecca Seeley Harris, founder of ReLegal Consulting (which responded to the consultation), tried to offer some answers.

“[Under the latest proposals] the recruitment agency would become the deemed employer for tax purposes.

“This means that the PAYE scheme would be with the agency and not the umbrella, thereby making them responsible for the tax.”

‘Agencies face being automatically tax-liable’

Seeley Harris added: “[So] the current thinking is that the PAYE Scheme will be with the agency and having ownership of that will mean that they are automatically liable for the tax.

“They can, however, outsource the function to an umbrella.”

It is this part of Labour’s reply to ‘Tackling non-compliance’ – specifically, the practicalities of the deemed employer proposal, that is the most uncertain and unsettling.

‘Are umbrella companies to be no more than payment bureaus?’

Feeling such uncertainty, Payments Pro managing director Dan Moss asked online: “When they refer to recruitment agencies 'accounting' for PAYE, does this mean [just] administratively?

“Or will [agencies] be 'paying over' the taxes, which surely results in the umbrella being no more than a payroll bureau?”

Much clearer in the government’s consultation reply is its stance on agencies undertaking “due diligence” on umbrella companies.

‘Due diligence will not be a mandatory requirement'

It’s the third area that contractors already knew about, but it won’t be a statutory requirement, as stated at 3.54 of the reply:

“The government strongly supports due diligence in labour supply chains and believes that all businesses should take steps to assure themselves that their suppliers will comply with their tax obligations”.

But crucially, the reply adds: “The government does not believe that such a requirement alone would be sufficient to achieve the behavioural change in the market necessary to significantly reduce the widespread non-compliance.

“The government therefore will not introduce a mandatory due diligence requirement”.

The fourth key area of Labour’s reply to the Tory umbrella regulation consultation that was already mooted but is now refired is the FWA.

‘Employment Agency Inspectorate, then Fair Work Agency, to regulate umbrellas’

Conceived as The Single Enforcement Body, Labour says the Fair Work Agency will regulate umbrellas, following initial enforcement by the EAS.

“The government notes there was support among respondents in the consultation for [The Employment Agencies Inspectorate] to be the body responsible for enforcing umbrella regulations and agrees with this,” stated Labour, which added:

“Through amending the Employment Rights Bill, the government intends to fulfil this commitment. EAS’s functions will fall within the new FWA’s remit, which will be -- once operational -- responsible for enforcing the relevant regulations.”

‘275,000 workers-plus engaged by non-compliant umbrella companies’

Last week’s reply to a consultative process that started four years ago (in late 2021), claims 275,000 workers have been engaged by non-compliant umbrellas.

The ‘275k workers’ stat represents one of the reply’s two new strands of information, but it relates to the 700,000 users of umbrella companies already totted up and previously disclosed.

Labour said on Tuesday: “HMRC analysis shows that umbrella companies were used to engage at least 700,000 workers in 2022-23.

“This analysis also shows that at least 275,000 of these workers, and likely significantly more, were engaged at some point in 2022-23 by umbrella companies that failed to comply with their tax obligations.”

‘Not taking forward targeted anti-avoidance options’

The second new piece of information on umbrella regulation is being condemned by the contractor industry, in numerous social media posts.

Despite seeking views on ways to tackle VAT Flat Rate Scheme abuse, and Employment Allowance exploitation, no action is to be taken.

Labour explained: “As a result of this anticipated impact [of proceeding with the deemed employer option], the government is not taking forward targeted options to address abuse of the VAT flat rate scheme or Employment Allowance at this time.

“The government will continue to monitor abuse in this sector [by Mini-Umbrella Companies] and will consider whether further action is required in future.”

‘Preparing for the inevitable regulation of umbrellas via agencies’

Genuine PAYE umbrella companies have long called for ‘MUCs’ to be eliminated by HMRC, for putting further pressure on their already tight margins.

But the government calling off measures to hit fraudulent mini-umbrella companies (after asking contractors for their ideas), also risks disengaging more parties from the consultation process.

Chartergates said on Friday: “We decided not to respond to the [umbrella regulation] consultation… [because] we considered [it] to be [a] foregone conclusion.

“[And] given the events of this week, we are pleased that we chose not to respond, as it allowed us to concentrate on preparing for the inevitable.”

‘Consultation outcome likely written before questions even posed’

Although his HMRC dispute advisory did respond, Graham Webber, founder of WTT Group echoed: “The [outcome] of this ‘consultation’ was probably written before the first questions were even asked.”

The volume of respondents indicates that as well as their advisories, contractors might be feeling detached from policy influencing too.

To the Conservatives’ umbrella company evidence-call which led to the creation of the three umbrella regulatory options – including the deemed employer proposal, there were 400 respondents, of which 354 were workers.

Labour said on Tuesday it received 75 responses, the highest number of which (14) were from recruitment agencies, representing twice the number of contributions sent by individual workers (seven).