Government confirms plans to boost regulation of umbrella companies
On 4 March 2025, HM Treasury published the Government's response to its consultation on tackling non-compliance with employment rights and tax obligations by umbrella companies.
The response confirms that the Employment Rights Bill will be amended to define umbrella companies, introduce a regulatory framework, and bring them within the remit of the Employment Agency Standards Inspectorate (EAS).
Defining and regulating umbrella companies
The Government’s response recognises the complexities involved in defining umbrella companies. Instead of adopting either of the two original consultation proposals, the new definition will focus on the following two key indicators:
- An umbrella company is an entity that employs individuals with the purpose of supplying them to a hirer
- An umbrella company is an entity that manages payment for services performed by individuals supplied to a hirer.
The regulation of umbrella companies will align with the Conduct of Employment Agencies and Employment Businesses Regulations 2003, ensuring consistency with existing rules governing employment agencies and businesses. A statutory consultation will be required before implementing any amendments to these regulations.
Enforcement and tax compliance measures
The EAS will oversee the enforcement of umbrella company regulations. However, its responsibilities will later transfer to the newly established Fair Work Agency, as proposed under the Employment Rights Bill.
Separately, as announced in the Autumn Budget 2024, the government will introduce legislative changes from April 2026 to address tax non-compliance in labour supply chains. Under the new rules, when an umbrella company is used to engage a worker, responsibility for PAYE compliance will shift from the umbrella company to the recruitment agency supplying the worker. If no agency is involved, this responsibility will fall to the end client.
Key takeaways for employers
These reforms aim to address longstanding concerns about umbrella company practices, particularly around tax compliance and worker protections. Employers using umbrella company arrangements should prepare for increased scrutiny and ensure that their labour supply chains are fully compliant with new regulatory and tax requirements. Reviewing contractual relationships and ensuring that employment and tax obligations are correctly met will be essential ahead of the changes taking effect in 2026.