The UK government is looking into a statutory due diligence scheme for umbrella company use with the aim of tackling non-compliance in the industry. 

HMRC will publish new guidance later this year, including an online pay-checking tool to help umbrella company workers check whether the correct deductions are being made from their pay.

According to the government, the goal is to support workers and businesses that use umbrella companies.

“The government remains concerned about the scale of non-compliance in the umbrella company market, and the detrimental impact that this has on workers, taxpayers and the labour market,” it stated. “Last summer, the government consulted on options to reduce tax non-compliance in the market and will publish a response to its consultation in due course.”

The announcement is part of the tax administration and maintenance summary: Spring 2024 and is part of a package of technical tax policy proposals published yesterday, that supports its ambition to make the tax system fairer and tackle non-compliance.

“The government is minded to introduce a due diligence requirement to drive out bad actors from labour supply chains,” the announcement reads. “To this end it will continue to engage with the recruitment industry and other key stakeholders on the detail of a statutory due diligence regime for businesses that use umbrella companies, and ensure it has the best understanding of the impacts that this could have on reducing non-compliance.”

On 30 November 2021, the government published a Call for Evidence on the umbrella company market. The Call for Evidence closed on 22 February 2022 with over 400 responses received from industry representatives, umbrella companies, employment businesses and umbrella company employees, among others.

On June 2023, the UK government published a consultation on policy options to regulate umbrella companies and to tackle noncompliance in the umbrella company market.

The Association of Professional Staffing Companies (APSCo) has welcomed the push for greater compliance, but warns the problem is complex, making further action necessary. Tania Bowers, Global Public Policy Director at APSCo, said clear definitions and licencing of the umbrella sector are needed.

“It’s unfortunate that the minority of firms that are offering non-compliant umbrella solutions are creating headaches like this for policy makers and those firms that offer legitimate solutions to workers and businesses alike,” Bowers said. “We certainly welcome the news that HMRC is pushing ahead with a focus on due diligence to clampdown on unscrupulous behaviour, however the problem is multi-faceted and isn’t simple to resolve.”

“As we highlighted in our initial consultation response, the definition of umbrella companies needs more clarity and should also allow for marketplace evolution. The announcement today doesn’t, in our view, address this,” she added. “While we expect that umbrella compliance will be an on-going mantra for HMRC and regulation will evolve as a result, APSCo remains steadfast in its view that any proposals should not place more liability or obligations on recruiters.”

“We believe that a licencing or registration process is required with EAS or another body, in recognition that financial wrongdoing is the largest risk to workers and the supply chain. Further, industry self-regulation should be replaced with statutory compliance codes for the umbrella sector itself,” Bowers continued. “APSCo members do overall support enshrining due diligence in regulation as a first step as this will immediately lead to a more level playing field. However, they don’t think it’s the most effective route to stop tax non-compliance.”

According to UK law firm Osborne Clarke, staffing firms should prepare to get involved in further consultation when the response to the consultation and definitions of umbrella company are published.

“End users and staffing companies should identify which workers in their staffing supply chains are engaged via umbrellas and start to anticipate the need to carry out due diligence on their labour supply chains to ensure, as far as reasonably possible, that their staffing suppliers deal only with compliant umbrella companies,” the law firm stated. “This will involve including the requirement, possibly as part of any RFP (request for proposal) or tender process and in contracts, to demonstrate that checks have been carried out and repeated at regular intervals and that the use of umbrella companies in the supply chain poses low/no risk to end users.”