The increase in Employer NICs did most of the heavy lifting in Rachel Reeves' Autumn Budget. Whilst there is a concern that the changes may drive an increase in false self-employment, it may also encourage businesses to adopt off-payroll solutions in its workforce, or to re-examine their approach to determining the status of current off-payroll workers.
However, lurking in the detail of the Budget notes was an announcement that legislation would be introduced to tackle the loss of tax from non-compliant umbrella companies. These changes are likely to have an impact on workforce hiring models.
Umbrella companies are often used by recruitment agencies to employ workers who are supplied to other businesses (known as end user clients) under a myriad of different types of labour chains. In some cases, the "end client" may also engage with the umbrella company directly.
Currently, the umbrella company (as the employer) is responsible for payroll tax obligations and employment rights in respect of the workers they supply. There have been instances where businesses have required that their off-payroll workers are supplied via umbrella companies as a means to circumvent any obligation to assess the status of off-payroll workers, given that these workers are employed by the umbrella company. Other business use umbrella companies as a means to outsource the payroll obligations of its off-payroll workforce.
However, there has been evidence of significant non-compliance by some umbrella companies in respect of payroll taxes and VAT. HMRC has found it difficult to clamp down on the loss of tax as a result of non-compliance and often underlying workers have been left to face unexpected tax bills from an arrangement which they may not have had much choice in adopting. An estimated £500m of unpaid tax in 2022 – 2023 is said to have arisen predominantly from non-compliant umbrella companies.
Following a call for evidence and a consultation issued last summer, there were three options floated for dealing with the issue:
- introduce a mandatory due diligence requirement, with penalties for non-compliance;
- give HMRC the power to collect unpaid tax debts from another party in the labour chain, in specified circumstances; or
- deem the recruitment agencies which supply the workers to be the employer for tax purposes.
As part of the Budget, it was announced that the government would be taking forward option 3 with effect from April 2026. This means that where there is a chain of recruitment agencies involved in the supply of a worker who is paid by an umbrella company, the agency directly engaging with the end client will be deemed the employer and will be responsible for accounting for PAYE and NICs. Where there is no recruitment agency (i.e. the end client contracts with the umbrella company directly), the end client will be responsible.
Whilst it will still be possible to outsource the operation of PAYE to a payroll bureau or umbrella company, responsibility for the correct tax being paid would lie with the recruitment agency (or end client, if no recruitment agency). This puts the position for workers operating via umbrella companies on an equal footing with agency workers for tax purposes.
Further detail will emerge over the coming months when draft legislation is laid as part of the Finance Bill 2025 and technical guidance will be issued in due course. The government has committed to engage with key stakeholders on the detailed proposals.
Employment businesses and end user clients should consider how the new measures will impact their workforce hiring practices.
To see a summary of the key tax takeways from the UK Autumn Budget 2024 click here.
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