Consultation outcome – Tackling non-compliance in the umbrella company market

With more of a whimper than a bang, the government has published its response to the consultation on tackling non-compliance in the umbrella company market. The consultation attracted input from a wide range of stakeholders, including recruitment agencies, umbrella companies, contractors, industry bodies and professional advisors, with a total of 75 responses submitted. 

While the response certainly acknowledges concerns and sets out next steps, there is a strong sense that it raises more questions than it answers.

Key areas of the consultation

The government identified significant non-compliance in the umbrella company market, resulting in worker exploitation, unfair competition and substantial tax revenue losses. To address these issues, it launched a consultation to explore regulatory measures aimed at improving compliance and protecting all stakeholders. 

The consultation invited responses in three key areas:

• Regulating umbrella companies for employment rights
• Tackling tax non-compliance in the contingent labour market
• Targeted options to address tax non-compliance

Government responses – key takeaways

Defining an umbrella company

The government recognises that a legal definition is needed to regulate umbrella companies effectively. A new definition of an umbrella company has been developed which focuses on two key elements indicative of an umbrella company – employing individuals for supply to a hirer and handling payments for their services.

Enforcement and oversight

A positive takeaway from the response is the government’s confirmation that the Agency Standards Inspectorate will be responsible for enforcing umbrella company regulations. This is a sensible and welcome decision, which all compliant umbrella companies will see as a step in the right direction for creating a fairer and more transparent market. 

Responsibility for tax compliance

One of the most notable aspects of the response is that agencies will be responsible for accounting for PAYE. This raises concerns due to the lack of clarity on what “accounting for PAYE” will mean in practice; leaving many unanswered questions about the potential impact on agencies and the supply chain. 

Worker rights and protections

The response reaffirms that umbrella workers should receive at least the same employment rights as direct employees, and be informed of these rights. The government will act on ways to ensure this, including using existing regulations such as the Agency Workers Regulations.

Mini umbrella company (MUC) fraud
The government acknowledges that MUC fraud, often involving misuse of the VAT Flat Rate Scheme and Employment Allowance, is an issue. However, disappointingly, it has chosen not to take any immediate action to tackle these specific abuses. Instead, it points to existing compliance measures and future legislative opportunities, offering little reassurance to compliant businesses that are being undercut by fraudulent operators.

Our thoughts…

At Liquid Friday, in common with many others in the industry, we’re of the opinion that this response says a lot without saying very much at all. While it is encouraging to see umbrella company compliance recognised as a priority, there’s a lack of clear, decisive action in several key areas.

We welcome the decision to place enforcement reinforcement with the Agency Standard Inspectorate – a move that should help ensure bad actors are held to account while allowing compliant umbrellas to operate with confidence.

The government must provide more clarity, particularly around what agencies being “responsible for accounting for PAYE” will actually look like. Without clear guidance, this could create uncertainty and unintended compliance risks for recruitment businesses.

It is disappointing that, despite recognising mini umbrella company fraud, the government has chosen not to act on the misuse of the VAT Flat Rate Scheme and Employment Allowance. This practice continues to distort the market, putting compliant providers at a disadvantage while enabling tax avoidance. More decisive action is needed to level the playing field.

As always, we will continue to monitor developments closely, provide industry commentary, and support our recruitment partners and contractors in understanding and complying with new legislation. Transparency and fairness are critical to ensuring a sustainable umbrella market that works for everyone.

For those who want to read the full government response, you can access it here.