Tackling Non Compliance in the Umbrella Market Help needed

[lucyclarityumbrella]

As many of you may or may not have seen, the Government have made a concerted effort to move forward with regulation of the industry. In June 2023, HM Treasury, HMRC and DBT published a joint consultation on Tackling non-compliance in the umbrella company market. In October 2024, the Labour Government announced their intention to legislate to change to Option 3 - Deemed employment. The Government also announced that there would be no further consultation on this option and the measure would be operational in April 2026.

Having read the proposals in full detail, as an industry we have many concerns over the implications on businesses and workers alike. This current government appear to be of the impression that all umbrella companies are fraudulent and believed that the changes they are proposing will help eliminate any tax avoidance in the marketplace. So in a nutshell, they are proposing that rather than regulating the industry, they are looking to place the tax liability on each recruiter, leading to an arrangement that places the recruiter (or end client) as the employer for tax purposes and the umbrella company the employer for employment purposes. IMO a complete mish mash, and massively missing the point of what they want to achieve potentially leaving the government to track 40,000 recruiters rather than 600 umbrella companies. The potential impact is that of moving the current "avoidance tactics" further down the chain, possibly even leading to "mini recruitment companies".

If you want to read a little more on this, then please read details from the FCSA here.

Please understand this isn't a post for moans about umbrella companies as I know that a lot of you have been forced in this direction through no choice of your own, but from me personally, a call for some backing from workers who could be negatively affected; so from one hit of inside IR35 assignments, to a potential of multiple employers, lack of consistency for pensions, data concerns and potential worker rather than employee status from recruiters, further minimising rights for you.

We really want the Government to sit up and take note that the consequences of this are far wider than they believe, so if you can spare a moment to write to your local MP then we would love to have some feedback from "workers" who will be affected by these changes, rather than simply an industry trying to shout. The intentions of the proposal could see hundreds of thousands of umbrella employees affected, so if you would be prepared to a write to your MP explaining the situation, we have provided a template letter to get you started here.

If you want to know more, please do not hesitate to reach out to me personally and I would be more than happy to explain in more detail. Thank you in advance for any support you can offer.

[hobnob]

In broad terms, I agree with you that this sounds like a bad idea. However, I'd be reluctant to send in the draft letter without significant alterations, and I'm not sure how much this would actually affect me (i.e. how much I have to complain about on my own behalf).

The letter talks about a hypothetical contractor who has several clients at once but all the money is being paid via a single umbrella company. Is that common? I know there have been some discussions here before about doing 2 contracts at once (with the general advice being "don't!"), but I'd guess that most people working through umbrella companies are doing a bum on seat, 40 hours per week contract for a single client. Even if a contractor does have multiple clients, I don't know whether they'd be able to use the same umbrella for everything (since lots of recruitment agencies impose their own shortlist). Putting that another way, if I had a side hustle (going direct to end clients outside IR35) then I'd have that money going to my limited company, not to an umbrella.

It will be impossible not to over/underpay tax, which could lead to financial instability for both me and the businesses engaging me.

Looking at my SATR tax returns from the past few years, when all my income has come from a single umbrella, I've overpaid twice and underpaid once. It's never been exactly correct, i.e. I had to claim a rebate or make an extra payment each year. That's not been a huge problem for me, but I don't think I'd be any worse off if I got paid by the recruitment agency instead.

I am not self-employed, and I do not wish to be – my income would appear disjointed without my Umbrella.

I'm not sure what you mean by "disjointed". If I'm between contracts then I won't have any income at all. If I take time off during a contract, it depends whether the holiday pay is rolled up or accrued, but most people have it rolled up. That means that the income from the umbrella company will fluctuate from week to week (e.g. when there's a bank holiday).

I suspect going forward, I may only be offered work on a “Contract for Service” basis as an Agency Worker, as opposed to being on a “Contract for Employment” basis as an Employee, and I’ll therefore lose my employment rights altogether and will force me to most likely become a permanent employee PAYE in the workforce which will have a negative impact on the tax and national insurance contributions I make to the economy local and nationwide and I see this would have a negative impact on my skills and expertise not to mention the mental health toll of being with a single employer in terms of end clients.

That's a heck of a long sentence! I'm not sure about saying "Being a permanent employee would be terrible for my mental health", because there are plenty of permies who do ok. Putting that another way, I'm not sure my MP is going to agree that being a permanent employee is inherently bad, especially when the Labour government are trying to get as many people working as possible.

Also, most of the letter is talking about the problems of juggling multiple clients. If you're saying that people will give up on that and stick with a single employer then I can see the logic, but it feels a bit jarring here because it's talking about a different outcome. (Maybe that's just me?)

Having had discussions with an end client from their perspective, this policy places a significant administrative and compliance burden on businesses that simply want to engage my services.

I haven't had that conversation, so I won't claim that I have. More generally, if I'm working through a recruitment agency then they'd handle the payroll, so I assume that it won't make any difference to the end client. I.e. they'll get weekly invoices from the agency in exactly the same way that they do now.

Regarding jury duty:

If payroll responsibilities shift to multiple recruitment agencies or direct clients, I risk losing my contract entirely while on jury service. End clients and agencies may not hold positions open for me, and I will have no guaranteed right to resume my work post-service.

Is that any different to how things work now? I.e. if I get pulled into jury duty, the end client can ditch me, especially if it's likely to be a long trial. (There have been several previous discussions here saying that notice periods are irrelevant, because the client can just say "Don't come in" and then there's no work to claim for on the timesheet.) How does the umbrella company help with that scenario?

Furthermore, since I am not a permanent employee, I will not be entitled to paid leave for jury duty, and court reimbursements will not reflect my actual earnings, causing significant financial hardship. This, in turn, creates an unnecessary risk for businesses engaging me, as they may be left with gaps in their workforce.

Looking at the gov.uk website:
Jury service: What you can claim if you’re an employee - GOV.UK
Jury service: What you can claim if you’re self-employed - GOV.UK
I could claim the same amount in both scenarios, i.e. £64.95/day for the first 10 days and £129.91/day after that (plus a bit extra for lunch/dinner).

That's going to be significantly less than my normal daily rate, but I don't see how it's any worse without an umbrella involved. I also don't understand how this creates an unnecessary risk for the client. I.e. the risk of staff being called for jury service (and the business being shorthanded) is the same for direct employees and contractors/self-employed.

Coming back to pensions:

If payroll responsibility shifts to multiple agencies or end clients, my sensitive pension details will be unnecessarily shared across numerous organisations. This creates a serious risk of data breaches and a potential violation of data protection laws.

In practical terms, I think I'll have the same number of organisations involved as I do now, but it would just be an agency/client instead of an umbrella. So, I don't see any extra risk attached to that. Also, if the client/agency have their own "real" employees, and they handle payroll/pension for those people, they'll already have procedures in place. So, this is only a concern if I assume that the umbrella is super secure while the recruitment agency looks like swiss cheese.

I realise that this all sounds negative, but if I was an MP reading the letter then I'd have the same questions. If it can be re-written to pre-empt those concerns, it might be more convincing.

[jamesbrown]

Template letters really don't work with MPs and this one is pretty full/complete, rather than a loose framework. To have the remotest possibility of being effective and not immediately binned, it will need to be phrased by the individual and it needs to be brief and focused, so I would suggest a simpler template with the top handful of messages in a small number of words and emphasis on phrasing by the individual.

Also, I think you face an uphill battle for at least two reasons.

First, gov't almost never listens to representations on issues surrounding compliance, at least w/r to their preferred scheme or solution. Consultations are absolutely, always, and without exception, window dressing. At most, they may listen to representations about implementation details, providing they don't interfere with their pre-determined scheme/solution. Reversing a decision after "consultation" is never going to happen. I wouldn't even describe this as cynical, it's simply historically accurate.

Second, and to be brutally honest, it seems that the risks here are loaded more on the umbrella industry than workers. If an agency or client is responsible for PAYE and liable for mistakes, then there's less reason to bother with an umbrella or, rather, umbrellas will become a lot slimmer, looking more like payroll bureaus, I assume. For workers, the big picture is that the supply chain above them remains responsible and liable for tax compliance (and, in the long run, they would probably prefer simpler supply chains involving outside work or proper employment) - and, even if the changes are slightly effective, there may be somewhat less non-compliance if the supply chain comes under greater scrutiny - so it may be hard to motivate workers to act, which may be why the consultation had very few responses from workers.

The umbrella industry always looked to be on shaky ground, tbh - quite apart from non-compliance - and I suspect it will look very different in a few years.

[eek]

Template letters really don't work with MPs and this one is pretty full/complete, rather than a loose framework. To have the remotest possibility of being effective and not immediately binned, it will need to be phrased by the individual and it needs to be brief and focused, so I would suggest a simpler template with the top handful of messages in a small number of words and emphasis on phrasing by the individual.

Also, I think you face an uphill battle for at least two reasons.

First, gov't almost never listens to representations on issues surrounding compliance, at least w/r to their preferred scheme or solution. Consultations are absolutely, always, and without exception, window dressing. At most, they may listen to representations about implementation details, providing they don't interfere with their pre-determined scheme/solution. Reversing a decision after "consultation" is never going to happen. I wouldn't even describe this as cynical, it's simply historically accurate.

Second, and to be brutally honest, it seems that the risks here are loaded more on the umbrella industry than workers. If an agency or client is responsible for PAYE and liable for mistakes, then there's less reason to bother with an umbrella or, rather, umbrellas will become a lot slimmer, looking more like payroll bureaus, I assume. For workers, the big picture is that the supply chain above them remains responsible and liable for tax compliance (and, in the long run, they would probably prefer simpler supply chains involving outside work or proper employment) - and, even if the changes are slightly effective, there may be somewhat less non-compliance if the supply chain comes under greater scrutiny - so it may be hard to motivate workers to act, which may be why the consultation had very few responses from workers.

The umbrella industry always looked to be on shaky ground, tbh - quite apart from non-compliance - and I suspect it will look very different in a few years.

The thing I don't get here is that no matter how dodgy umbrella firms are at least they minimised the scale of the market HMRC need to watch to 600 or so companies instead of 20,000 employment agencies many of whom already play tax avoidance games to keep their costs unfairly lower to other agencies. And the umbrella industry is getting itself organised between SafeRec and VeriPaye end clients and agencies can be sure workers are being paid correctly with all tax paid..

What is ironic here - is that the new scheme simply won't work and we will be back here in 2 years as HMRC desperately tries to shift the responsibility on to the end client.

[lucyclarityumbrella]

Thank you all, and whilst it may look like on the surface that there will be little impact for the worker, this is really not the case as fundamentally their status may change, and access to flexible pensions etc will go. The template is absolutley up for amends, this is justa sample and the intention is that it is amended to suit each individual.

Whilst I see that many of you may not see any impact coming your way, and I am not naive about the potential impact on umbrella's which is obviously my bag, the likelihood is you will be made to change employers again, forced into working with either a monopolised market or under PAYE with the agency as an agency worker and not an employee.

The items mentioned in the letter are examples that workers may want to consider, I will update it slightly to make it visible that these are items to update and suit your circumstances.

Many of you know me, and yes of course I am asking something that it seems no other umbrella has the nerve to do because of the bad reputation of some and the negativity towards this industry, but if I didn't try, I would kick myself.

With regards to the MPs, if nothing is said, nothing is done, so to me not bothering because they tend not to listen is not an option and I am pleased to say my MP is onboard and listening. We may not be able to reverse the decision, but we may be able to delay it giving everyone time to get this right, to get details in Oct 25 with implementation in Apr 26 is asking the impossible.

As eek said the new scheme simply won't work and we need them to recognise it.

[Protagoras]

I’ve been following this topic for a while and agree that this looks like yet more legislation that won’t benefit anyone or achieve its supposed objective.

I appreciate that this is potentially devastating for umbrella companies. I can also see that those working for multiple clients where the umbrella company provides a consolidation role will lose out.

And I’ve been wondering, ‘what does this mean for me?’

Personally, I don’t see any practical difference between being an umbrella company employee and an agency worker. I don’t think that there are any ‘rights’ impacted that matter to me. Even as an umbrella employee, I miss out on employer-paid training and expenses (paid from gross) so I don’t really see an umbrella company as a ‘real’ employer anyway. But they generally do what they say on the tin, and that’s okay.

Given the wholly inadequate Jury service compensation rates, I’d suggest that most of us insure / self-insure that risk anyway, along with long-term sickness etc.

Which leaves my main concern, the operation of pension salary sacrifice. This is the key facility that I think makes umbrella company working tenable and attractive. I wonder whether an agency (or potentially its outsourced payroll company) would offer salary sacrifice? I suppose also that an agency might not view employer’s NI as a pot from which salary sacrifice could be paid. It really is a mystery to me how this would work in practice, but I think it’s unlikely to be to my benefit.

Which brings me to my last point. If this doesn’t work financially for contingent workers, then this will inevitably lead people to retire, work abroad etc. I expect I’ll be one.

I may be motivated to contact my MP, but I'll need to understand the personal impact.

[eek]

As eek said the new scheme simply won't work and we need them to recognise it.

I’m not saying it won’t work - I’m sure it will work brilliantly

but as a way of ensuring HMRC recover the money they (inaccurately) claim is being lost - the proposed approach is go in to increase those loses 3-5 fold rather than reduce them.

plus if it’s the agency not paying the worker correctly you can’t blame the worker for joining a tax avoidance scheme the way HMRC currently do.

so the approach is going to be far bigger loses and far harder to recover lost tax revenue. But hey this was pointed out last year and they can’t even hide beyond Treasury North suggested this because I pointed out the problem there

[lucyclarityumbrella]

Which leaves my main concern, the operation of pension salary sacrifice. This is the key facility that I think makes umbrella company working tenable and attractive. I wonder whether an agency (or potentially its outsourced payroll company) would offer salary sacrifice? I suppose also that an agency might not view employer’s NI as a pot from which salary sacrifice could be paid. It really is a mystery to me how this would work in practice, but I think it’s unlikely to be to my benefit.

The likelihood is that most salary sacrifice pensions will go, the majority of agency workers only get the AE option with tax releif at pension paying to the agency workplace pension, so contractors are likely to miss out on this as a substantial benefit.

Which brings me to my last point. If this doesn’t work financially for contingent workers, then this will inevitably lead people to retire, work abroad etc. I expect I’ll be one.

I think you are right, it could see many opting to move on with this step as one last push too much post IR35 changes.

I may be motivated to contact my MP, but I'll need to understand the personal impact.

I have lifted the following from a policy response that may help a little...

IMPACT ON WORKERS
The Policy Paper suggests that “Workers will continue to receive their pay net of income tax and NICs following the introduction of the measure, although the business providing their payslip may change. By reducing non-compliance in the umbrella company market, this measure will prevent workers from being engaged by non-compliant umbrella companies. This means that they will no longer be party to non-compliant tax arrangements that could otherwise have left them facing large, unexpected tax bills.”

The reality may be very different. The worker may lose their employment with the existing Umbrella Employer and be transferred over to the employment business as an agency worker on a contract for services. There may be a lack of continuity in their employment, and they may not know who their employer is if there ends up being a joint employment. They will lose the employment rewards such as credit rating, access to loans and mortgages, health care and other benefits.

DUAL EMPLOYMENT
There is the obvious problem of having a joint employer. It can be seen from the umbrella worker case law, that the worker finds it difficult to establish who is the employer for employment rights purposes. The cases have addressed the constant issue of the ‘assignment rate’ or ‘on an umbrella company basis’ claiming for an unlawful deduction of wages usually to recover holiday pay.

Which then raises the issues over dual employment, and correct allocations of tax codes, allowances and especially in circumstances where a contractor may have two assignments or a close cross over leading to potentially 2 employers of record and 4 employers in total. Get stuck on the wrong tax code, or the allowance is not split correctly then it could end up with either taxes due at the end of the year, or taxes that have been overpaid as the individual is over taxed through both employments.

I envisage a lot of cross over as agencies close their PSLs forcing only employment by their chosen one or two UCs, meaning more movement in employment than ever before.

[Stevep42]

Yeah, this whole thing feels like a mess. Instead of properly regulating umbrella companies, they’re just shifting the tax liability onto recruiters, which doesn’t actually solve the issue. If anything, it could create more loopholes and confusion, not to mention the headaches for workers dealing with multiple "employers" for tax and benefits.

[eek]

Yeah, this whole thing feels like a mess. Instead of properly regulating umbrella companies, they’re just shifting the tax liability onto recruiters, which doesn’t actually solve the issue. If anything, it could create more loopholes and confusion, not to mention the headaches for workers dealing with multiple "employers" for tax and benefits.

If they were shifting it to someone who actually cared I wouidn't be so annoyed but literally the worst offenders are agencies who currently use dodgy umbrellas because they have to but will now be able to come up with crap excuses and play the same games themselves (probably with the dodgy umbrella providers doing "consultancy" at high rates to explain how to "temporarily" get away with it.