Government confirms intention to “regulate umbrella companies”

Long-awaited consultation response sets out plans for the sector in move that will be widely welcomed

The government has formally announced its intention to regulate the umbrella sector in its long-awaited response to the consultation on tackling tax avoidance, 18 months on from the consultation’s conclusion.

Taken together, these proposals will deliver “ improved outcomes for workers, support a level playing field in the umbrella company market, and protect taxpayers from the significant revenue losses arising from non-compliance”, the government said.

While the consultation was launched under the previous government in 2023, the issue of non-compliance in the umbrella sector has been well-documented for years.

Until now, flexible workers have been left in limbo, despite the controversial Loan Charge scandal and the growing number of tax avoidance schemes identified by HMRC that were known to operate in the sector.

As such, the renewed interest and commitment of the government to tackle the issue is likely to be widely welcomed across the flexible economy.

Two-pronged approach to ensure tax compliance

The first part of the government’s plan involves “amending the Employment Rights Bill to define and regulate umbrella companies”. In doing so, it hopes to “eliminate the most egregious” instances of tax avoidance and other technically lawful practices, such as skimming holiday pay.

In its response, the government also said it “strongly supports due diligence in labour supply chains” as a way to ensure tax compliance. However, it “does not believe that such a requirement alone would be sufficient” to address the extent of the issue in the umbrella sector.

As such, the government will “introduce legislation to move the responsibility for accounting for [tax liabilities]” across the supply chain, effective from April 2026. This year, the government plans to “consult on draft legislation… ahead of introducing legislation to Parliament” so it can achieve that deadline.

These measures “will support a level playing field for compliant businesses who already ensure that their labour supply chains are free of tax fraud and avoidance” and “protect workers from large, unexpected tax bills in the future as a result of tax fraud and avoidance by their employer”.

“Comparable rights and protections” coming soon

Under the “Priorities and Next Steps” section of the report, the government has restated its commitment to “restoring the principle that work should always pay”.

Flexible workers will benefit from this, and they will “get comparable rights and protections when working through [an] umbrella company as they would when taken on directly by an employment business”.

“Crucially, this means that where workers are engaged in an employment relationship – whoever their employer is – they should be able to easily access the rights that they are entitled to”, the report adds.

In further promising news, the government has also indicated that it will “continue to review further policy options and engage with stakeholders as appropriate” to ensure these measures work as intended moving forwards.