Labour’s plan to regulate umbrella companies: a closer look

As the dust settles on the first Labour budget in 14 years, the finer details are being reviewed and analysed – and it is bringing to light a number of interesting new plans, writes Tania Bowers, a director at APSCo.

We know from the chancellor’s speech itself, and indeed the Employment Rights Bill, that the UK is facing a period of employment reform. What was not immediately clear from the chancellor on October 30th, though, was the extent of some of these changes.

Clear blue water on umbrellas

Based on the information inside Autumn Budget 2024, the Labour government has identified plans to alter regulations governing umbrella companies in a way that the previous Conservative administration had not.

As most contractors will know, following the umbrella consultation of 2023, three options were put forward to better regulate the umbrella market and reduce tax avoidance:

1. Introducing mandatory ‘due diligence,’ with end-clients and employment businesses facing penalties for non-compliance.

2. Allowing debt transfer from the umbrella to others in the supply chain.

3. Deeming agencies supplying the worker as the employer for tax purposes.

Unfortunately, all these options had the potential to place a significant burden on the staffing business in the supply chain.

As we highlighted in our response to the consultation, all three options had limitations that could impact how contingent resources are engaged.

Britain should go Dutch on umbrella companies

Instead, our organisation argued that more active involvement from government bodies in the form of a registration or licensing scheme for umbrellas, to hold these businesses more accountable, would be a better approach. Such a scheme could also protect contractor funds.

Indeed, if we compare the UK with the Netherlands (where temporary labour is widely utilised and is a popular working model for citizens), umbrella companies are highly regulated.

Dutch umbrella companies have to define their requirements in relation to taxes, social security contributions and employment rights, limiting the risk to workers and end-hirers alike.

Reeves doesn’t want to go Dutch on umbrella companies

Regretfully in the UK, this option was not pursued in the consultation response.

And while the previous administration had outlined plans to implement ‘option one’ of the consultation (‘due diligence’), chancellor Rachel Reeves intends to primarily focus on the latter two.

What Labour plans on umbrellas

In the Autumn Budget policy paper, ‘Tackling Non-Compliance in the Umbrella Company Market,’ the government confirms it will legislate to make staffing businesses that engage with workers employed by umbrella companies responsible for remitting income tax and NICs payments to HMRC. 

If a recruitment firm is not involved in the supply chain, the responsibility will fall to the end-client.

Recruitment businesses and engagers will still be allowed to contract with umbrella companies in the standard way. But if the umbrella fails to remit the correct tax and NICs to HMRC, then the recruiter or end client will be liable.

The beneficiaries of Labour’s legislation for brollies are the UK’s 700,000 contractors

This will impact umbrellas and recruitment businesses from the commencement date of the legislation -- April 6th 2026 and likely before, in the run-up.

But for the UK’s 700,000 umbrella contractors, it should reduce the risk of non-compliance through unscrupulous umbrella businesses.

And it should minimise the variations in take-home pay that can be promoted by the industry.

The government states in its policy paper: “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.”

Cause and effect: what umbrella regulation is (potentially) going to trigger

Over the coming months, it is likely that staffing firms and end-hirers will be scrutinising contracts where umbrellas are used -- in much more detail than ever before.

So be prepared for an increase in queries and questions, if you’re reading this and fall into this category.

But without further details from the government, it’s still tricky to say how the umbrella sector and end-clients will react to the new legislation which, technically speaking, will not be consulted on.

‘Feedback,’ not a ‘Consultation’

In fact, the government hasn’t used the ‘C-word’ once since October 30th, instead preferring the ‘F-word.’

In particular, the government says stakeholders will have the opportunity to provide “feedback” on the government’s draft legislation.

We also know that despite no incoming consultation, an HMRC impact assessment is going to be published, alongside “full details” of how the measure is intended to operate.

‘More MSPs?’ and other questions

One possible effect of the government’s umbrella regulation plan is potentially more recruitment firms and Managed Service Providers (MSPs) running their own payrolls. Or we could see more direct engagement with end-clients.

However, given that skills shortages are rife across the UK, employers will still need to engage those wanting to work temporarily as contractors. What we may also see is closer collaboration between contractors, staffing companies, umbrella businesses and end-clients, as all stakeholders will need to plan for these future, unconsulted-upon changes.