The truth of umbrella company regulation is being misconstrued

Ahead of us launching a little something that we believe could be seminal in our sector, it should be made clear that we welcome the government’s efforts to introduce regulation in the umbrella company market, writes Chris Bryce, CEO of the Freelancer & Contractor Services Association (FCSA).

As even the uninitiated to umbrella companies will know due to the sheer amount of noise it created at Autumn Budget 2024, the government plan to introduce legislation to tackle umbrella market non-compliance, albeit from April 6th 2026.

What an HMRC policy paper says about umbrella regulation 

From reading HMRC’s ‘Tackling Non-Compliance in the Umbrella Company Market,’ we are pleased to note that compliant umbrella companies will continue to play a vital role in the labour supply chain, and employment businesses can still work with umbrellas.

However, since the policy document’s publication on October 30th, there’s been a great deal of speculation on what’s in store for umbrellas. Not all of that speculation has been helpful.

There have also been inaccurate assessments of how the April 2026 legislation will affect the umbrella market and its 700,000 umbrella contractors.

Setting the record straight: how umbrella regulation will work

First, let me bite the head of the frog by addressing these inaccurate assessments.

At the very least, there is a lack of understanding of what the policy document states.

Some quarters (even legal quarters) are saying the legislation is to enable “transfer of debt” -- but that’s not what the government proposes.

Even if it is potentially well-intentioned, this lack of understanding is misconstruing the truth about umbrella company regulation.  

The reality is that the government has opted to make recruitment agencies liable for the debt arising from the operation of PAYE, and this responsibility will also apply to end-hirers in the instances where there is no recruitment agency in the chain.

Is legislation regulating umbrella companies even needed?

Our organisation has long advocated for regulation of umbrella companies to ensure a level playing field and protect workers and taxpayers.

The now-scheduled introduction of Labour’s legislation to regulate the brolly market reflects the need to address the harm to workers and others caused by non-compliant operators.

As the Freelancer & Contractor Services Association, we’ve been involved in that battle for more than 15 years.

It’s old ‘Option 3’ -- on steroids, and it goes way beyond ‘Option 1,’ too

But to others who have a good track record, or even just a good memory, we’d point out that the Labour government’s intended legislation goes much further than “option 3” of the 2023 consultation document published under the Conservative government.

Option 3 was a transfer of debt, but Labour’s umbrella legislation similarly goes much, much, much further than “option 1,” too, which was mandatory ‘due diligence.’

This latter option was the prior Tory administration’s preferred option.

The future for the average umbrella company under the April 2026 regulation

From some quarters, we’ve even heard that the incoming legislation will be the “death” of umbrella companies.

Nothing could be further from the truth.

The operation of PAYE for contingent workers is extremely complex and most agencies just don’t have the skill sets, experience, or resources to operate PAYE in-house.

Why recruitment agencies will still need brollies (cont.)

So we deduce that the role of umbrellas will become even more crucial to agencies, and end-hirers.

It’s clear that the HMRC policy document mandates the supply chain to take compliance and ‘due diligence’ very seriously, yet it also acknowledges the vital role of properly compliant umbrella companies.

Related, while the document focuses on compliance with tax regulations, it should be remembered that umbrella companies also ensure that their workers receive all the rights and benefits due to them under employment law and regulation.

This important function requires a level of expertise that many recruitment agencies simply do not have in-house.

Compliance doesn’t suddenly start on April 6th 2026

Elsewhere in the HMRC document, it’s made clear that the government’s legislative fix for bad brollies places responsibility on recruitment agencies and, in some cases, end-hirers to ensure compliance.

So there is a critical opportunity for stakeholders to adopt proper and continuous ‘due diligence’ practices.

We have long-provided tools and guidance in this area, so checks and written support to ensure compliance across labour supply chains can actually be made right now; nobody needs to wait.

Misconceiving and mischaracterising = more of the truth being misconstrued

Some online sources imply that umbrella companies frequently facilitate non-compliance.

While some rogue operators do indeed exist, the majority of brollies (particularly FCSA-accredited members) strive to maintain the highest standards of compliance.

Mischaracterising the entire sector risks deterring legitimate businesses from using compliant umbrellas.

Due diligence ought to be a 'statutory excuse'

We strongly support regulation and are pleased to see that the Autumn Budget policy document has tackled umbrella companies head-on.

I believe that the government wishes to weed out bad actors in the marketplace and create a level playing field for compliant organisations.

But we also note that the policy document encourages recruitment agencies and end-hirers to conduct thorough due diligence. And we’d like to see this embedded as a “statutory excuse”.

Our existing tools, including FCSA Accreditation and Diligence Hub, plus what I mentioned at the very top -- a new service powered by the FCSA -- are aimed at ensuring transparency, accountability and compliance across the whole supply chain.

Finally, the taxman can’t be left to the legislation on his own…

However, we do recognise that the government’s intended path gives rise to many questions and substantial complexities, and so we will need to work with HMRC and other stakeholders to refine and implement the intended umbrella company regulation effectively.

In the meantime, we encourage the government to continue engaging with compliance-focused organisations to ensure that the reforms achieve their intended goals without penalising compliant operators.