HM Treasury has published a summary of responses to its consultation on tackling non-compliance in the umbrella company market.

The consultation's main objective was to seek stakeholder views to establish the best way forward for addressing employment rights and tackling tax non-compliance in the sector, and associated regulation.

Here the Payroll Compliance Authority sets out a brief summary of this lengthy document, including next steps.

Context for the consultation

HM Treasury's deep dive into the umbrella company market began with a call for evidence from stakeholders in November 2021.

In the same month that responses to this were published, in June 2023, the department launched a consultation on tackling non-compliance in the umbrella company market, which closed in August 2023.

The responses to this consultation have now been published, some 18 months later, in March 2025. The consultation received 75 responses from a range of stakeholders, with further feedback obtained via 16 roundtable events chaired by HMRC or HM Treasury officials.

What is an umbrella company?

The consultation put forward two suggestions for defining umbrella companies, to be able to regulate them and address employment rights. These included the option for a set definition with 'limiting acceptable engagement structures', or, instead, a definition by applying three tests.

It is no surprise that responses could not agree on a fitting solution that encapsulates the multitude of different umbrella company arrangements. Overall, the first option was preferred by a dominant 30%.

Among concerns expressed were that this approach would reduce flexibility in the recruitment sector. Other concerns related to the impact on the rights of the growing number of freelancers in the market, and that limiting the definition, whilst regarded as more future-proof, would not capture all the ways in which individuals might be engaged by umbrella companies and that some widely used models would become unlawful.

Having considered these responses, the government has tabled an amendment to the Employment Rights Bill to define umbrella companies and allow for their regulation. A new definition has been developed taking a 'simpler approach' focusing on two key elements that are indicative of an umbrella company, namely that:

• an entity is in the business of employing a person with a view to them being supplied to a hirer; and,
• that an entity is in the business of paying for, receiving or forwarding payment for the services of persons with a view to them being supplied to a hirer.

A proportion of responses supported regulation by the Employment Agency Standards (EAS) Inspectorate, in relation to employment rights. As part of its Make Work Pay manifesto, the government committed to setting up a single enforcement body, Fair Work Agency (FWA), and it has confirmed that the EAS's functions will fall within the new FWA's remit, which will be responsible for enforcing relevant regulations, once it has been set up.

Improving tax compliance

The consultation set out three options for tackling tax non-compliance in the umbrella company market, which it sought views on. These included to:

1.     Mandate due diligence

2.     Transfer tax debt that cannot be collected from umbrella companies to another party in the supply chain

3.     Making the employment business supplying the worker the 'employer' for tax purposes, moving responsibility to operate PAYE to them from umbrella companies

There were mixed opinions in response to all three options, however, overall, the third option was most widely believed to offer a pathway to better compliance.

Consequently, the government announced this pathway to legislation at the Autumn Budget 2024 and states that it will 'consult on draft legislation this year, ahead of introducing legislation to Parliament'.

It is worth noting that in its response, the government says that beyond these measures, HMRC will continue to monitor the temporary labour market, and that it may yet 'consider further strategic policy options to crack down on tax non-compliance in the temporary labour market'.

Mandating due diligence was believed by a proportion of respondents not to go far enough, and that varying degrees of due diligence is in fact already carried out by most agencies when engaging umbrella companies. Whilst the government strongly supports due diligence in labour supply chains, it equally states that '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'.

Transferring debt was the least favoured option, with respondents believing it not to be effective and that it could even embolden umbrella companies to be non-compliant. Many agencies responding were also concerned with acquiring debt that they had taken every possible step to guard against. The government also believes this avenue could create a 'protracted and complicated process'.

What about VAT and The Employment Allowance?

The consultation also sought views on addressing the abuse of specific tax reliefs by some umbrella companies, namely the VAT flat rate scheme and Employment Allowance. Mini umbrella companies have reportedly abused both schemes to benefit from lower levels of VAT and employer NICs.

Responses were limited for many of the questions asked in relation to these tax reliefs, and the government believes that the solution lies in its approach to legislation. Businesses that continue to use umbrella companies will take steps to prevent non-compliant operators from entering their supply chains, including those umbrella companies that abuse the VAT flat rate scheme and Employment Allowance.

What's next?

As outlined above, the next steps to address tax non-compliance are for the government to consult on its draft legislation this year, ahead of introducing legislation to Parliament.

The measure will move the responsibility to account for PAYE from the umbrella company that employs the worker, to the recruitment agency that supplies the worker to the end client. Where there is no agency in a labour supply chain, this responsibility will sit with the end client.

This will take effect from April 2026, and it is expected that this legislation will raise £500m in 2029 to 2030.

In relation to employment rights, the government will amend the Employment Rights Bill to define umbrella companies and allow for their regulation within the Employment Agency Standards Inspectorate's remit. 

The PCA will continue to monitor and discuss developments in the umbrella company market and any updates or clarifications around legislation.

Click to read the full consultation response.