Labour’s naïve umbrella regulation plan uses a bulldozer to crack a nut

The extremity of the measures that the government appears to want to take to regulate UK umbrella companies appears to have been underestimated, writes Lucy Smith, founder of Clarity Umbrella.

Not what it says on the tin

At the same time, there’s a feeling that the ‘proposals’ (they only become ‘measures’ once they pass into law) are a bit, well, off-target.

After all, the whole point is meant to be the regulation of umbrella companies, but the lashings of red tape and raft of (proposed) rules are incoming for recruitment agencies, not umbrellas.

Little wonder, perhaps, that more recruiters than umbrellas responded to the ‘Tackling non-compliance in the umbrella company market’ consultation. And the current government’s response to the consultation (published under the previous government) was unveiled on March 4th 2025.

No pivot = no debt transfer

The response to the consultation that I and others in the umbrella space anticipated was that the government would pivot, and look at ‘debt transfer’ down the chain.

But no, rather than go with ‘option 2’ as it originally was (which the consultation reply acknowledges the majority of respondents said would reduce tax non-compliance in the umbrella company market), the government is forging ahead with ‘Option 3.’ 

It’s the ‘deemed employer’ mechanism.

Introducing your employer for tax; and your second employer for rights

Under the mechanism, the government is going to require umbrella companies to work off the agency PAYE references for any payments. In essence, the agency or end-client faces becoming the employer for tax purposes, whereas the umbrella company will become the employer for employment purposes.

How this will work, in practice, and the potential knock-on effect throughout the chain, is somewhat of a conundrum at present. Problematically for those of us who like to prepare, the actual details of the ‘deemed employer’ mechanism won’t be clear until, anecdotally, around mid-to-late August 2025, ahead of the proposal passing into law on April 6th 2026.

‘Worker understanding’ matters to this government. Apparently

Despite this conundrum, in chapter 2 of the consultation reply (‘Regulating umbrella companies for employment rights’) where a statutory definition of an umbrella company is toyed with but not (yet) fixed, it says:

“Responses indicated a consensus that the government should concentrate on addressing financial detriments, worker understanding of the umbrella arrangement and ensuring genuine businesses operate in the umbrella market.”

Well, worker understanding, umbrella understanding, and agency understanding are all at pretty low levels right now, because the practical details of making agencies or end-clients liable for PAYE taxes remain under wraps.

The backfiring effect of worker status

If part of this umbrella company regulation exercise (in Labour’s mind) is to provide stability and understanding for the workers, the government could find that it backfires.

If agencies respond to the currently rather opaque ‘deemed employer’ plan by choosing to take their payroll in-house, then the employment status of contractors would soon be replaced with “worker” status, leading to a bigger loss of employment rights for their assignments.

Come on contractors; not *everyone* thinks it’s a bad idea!

The government probably won’t instil much confidence by then following up with:

“Not *all* [my emphasis] respondents thought that these changes to the way labour is engaged would represent a bad outcome. Some thought that they would improve compliance.”

Another interesting point is raised at chapter 1.3 of the consultation outcome.

HM Treasury says: “The use of employment intermediaries – whether employment agencies, employment businesses, umbrella companies or a combination of one or more – has made the landscape of employment relationships increasingly more complex for workers to navigate.”

Deemed employer is complexity heading for an already overly complex landscape

Even without its key practical details, the newly proposed central plank of umbrella regulation surely serves to add to that already overly confusing landscape, given that it will create one employer for taxes and another employer for employment rights.

At odds with all this, chapter 1.9 states:

“The government will act to ensure that workers get comparable rights and protections when working through an umbrella company as they would when taken on directly by an employment business.”

Defer (beyond April 6th 2026) to avoid disruption

My reading of Labour’s intended actions on umbrella companies is that they risk creating the absolute opposite, and if the government sticks with the April 6th 2026 introduction date, I fear there will be complete disruption to the entire supply chain.

As of March 2025, the government has committed to “defining umbrella companies,” by tabling an amendment to the Employment Rights Bill. Defining umbrellas properly is going to take time, so as not to open up unintended loopholes whereby companies can effectively write their business around and outside the scope of the definition.

Employment Agency Standards Inspectorate hasn’t got enforcer-level resources

We’re told that the Employment Agency Standards Inspectorate (EAS) will be tasked to regulate the umbrella industry.

However, I’m picking up on well-placed concerns that EAS does not currently have the manpower to be enforcers. 

It seems a tall order to make EAS’s first enforcement brush with umbrellas revolve around this complex ‘deemed employer’ mechanism, which even those of us with many years’ experience in the brolly market are already a bit flummoxed by.

From April 2026, due diligence on umbrella companies won’t be an agency requirement

Labour last week dismissed ‘due diligence’ as a requirement,  in favour of ensuring that HMRC can recoup unpaid taxes directly from agencies with the amendment to the PAYE references. And that’s probably a fallout from the Ducas case, which seems to highlight the inability to recoup the costs further down the chain.

This all begs the question of how much employment for contractors will be further complicated, because Preferred Supplier Lists may be closed down, due to ‘deemed employer’ likely limiting the volume of umbrella companies that agencies will work with. Or the agencies may bring the work they once gave to umbrellas in-house -- albeit at substantial cost to their recruitment operations.

Unintended consequences (cont.)

Many contractors could see themselves with dual employment statuses (and not out of choice, given the likelihood is agencies will limit the choice of umbrella even further). Tax codes risk not recognising earnings, and I fear we’ll see potentially more complex under or overpayment of taxes to HMRC, which will have to be resolved via self-assessment at the end of the tax year.

These issues, collectively, indicate a year’s delay in tax amendments could be on the cards.

But I’ve saved the biggest, most concerning issue until last.

Labour’s consultation reply casts umbrellas as rogues, by and large

Despite a few gesture-type claims to the contrary in the consultation reply, this government seems to be of the opinion that “umbrella companies” are all “rogue.”

That’s even though the biggest chunk of the umbrella market is compliant and reputable, so why does it seem like compliant umbrella companies are being faced with being tarred by the same brush as “avoidance schemes”?

The Treasury says: “Whilst many umbrella companies operate diligently, supporting their employees and providing convenience and administrative benefits for agencies, too many are used to facilitate non-compliance including tax avoidance and tax fraud.”

What are umbrella companies?

Umbrella companies are not avoidance schemes.

We are employers who do not cause issues to the government coffers, and yet Labour’s narrow-minded, lead proposal will undoubtedly have a huge, adverse effect throughout the supply chain.

Goodbye Mini Umbrella Companies, hello Mini Recruitment Companies

My concern is that this very naïve proposal will simply push issues further down the supply chain, with ‘Mini Umbrella Companies’ being replaced with ‘Mini Recruitment Companies,’ because the inventors of MUCs will reposition themselves to continue abusing the exchequer.

Labour’s Spring Statement 2025 must U-turn umbrella company regulation

We can but hope that this Labour government makes a similar U-turn as the last government did with the IR35 off-payroll working rules.

Whether it comes at Spring Statement 2025 or not, we must see, at the least, a deferral of the introduction of this ill-thought out ‘deemed employer’ proposal, to allow the full implications across the supply chain to be fully considered, ensuring that workers and genuine umbrellas are not adversely impacted.

After waiting an entire age for successive UK governments to grasp the nettle of umbrella companies, we now have a very short period to lobby the government away from their clumsy approach, so we can fully explain the sheer naivety of their central proposal and find by consensus a better way to regulate companies for all affected parties.