COMPLIANCE
The modern workplace: labour supply chains and the use of umbrella companies
Susan Ball, Employment Tax Partner, and Charlie Barnes, Head of Employment Legal Services, RSM UK, discuss the different sources of labour supply in the modern world of work, exploring some of the problems this can cause and the changes taking place in this arena
T he modern workplace has several sources of labour supply – direct employment, contract labour, agency labour, secondments and outsourced labour. Where the source of labour isn’t on the business’s payroll, this presents certain risks and challenges, which are increasing as different models evolve. Contract and agency labour are often referred to as contingent labour, and can include self-employed sole traders, intermediaries such as personal service companies, agency payroll workers, professional employer organisations or umbrella company workers. End clients often believe that workers supplied to them are either: l employed by another party in the chain (such as an agency or the umbrella company); or l providing outsourced services (meaning they don’t need to consider them under the rules); or l genuinely self-employed outside IR35 (under the tax rules such as Chapter 8 / 10 and Section 44 of the Income Tax (Earnings and Pensions) Act (ITEPA) 2003). This is all without undertaking sufficient due diligence or any checks on the labour supply chain. This presents a significant risk. For example, one of the parties in the chain may pay the worker off-payroll and retain the taxes included in the fees charged to the end client, which should be remitted to HM Revenue and Customs (HMRC). This issue was highlighted in two recent cases: l the PPS Umbrella case [2024], where HMRC pursued the umbrella company for £7.3 million in unpaid taxes l the Ducas case [2024], involving £171 million in unpaid taxes.
What’s clear from the increase in cases in recent years is that existing tax and National Insurance contribution (NIC) legislation, including IR35 and the off-payroll working reforms (2017 and 2021), has driven the use of umbrella companies. While compliant labour supply companies represent about 70% of the workforce, playing a valid role in the labour supply chain, umbrella companies have faced significant negative attention in recent years. This is due to entities committing large-scale labour supply fraud, operating tax avoidance schemes and exploiting workers. Currently, umbrella companies effectively operate as the Employer of Record, a term more commonly used in international employment contexts. According to HMRC, there were approximately 700,000 umbrella company workers in 2024, with at least 275,000 engaged in non-compliant umbrella companies. HMRC reported a loss of £500 million to disguised remuneration tax avoidance schemes in 2022/2023, with hundreds of millions more lost to mini- umbrella company fraud. It’s no surprise then that the Government has said it would introduce further regulation in this area. The labour supply chain faces three main problems: l stopping fraud l regulating the industry l understanding the labour supply chain. Preventing fraud and creating a fully compliant industry overnight isn’t feasible. The solution requires several steps to address a multifactorial problem. On 4 March 2025, the Government published its response to the 2023 consultation on tackling non-compliance in the umbrella company market. This response covered two broad areas:
l the regulation of the industry for employment rights purposes l tax policy to address non-compliance. The measures aim to tackle non- compliance, fraud and exploitation among umbrella companies, while ensuring the protection of workers’ rights and maintaining the integrity of the labour market. It’s worth noting that there seems to be some confusion between the two initiatives. The regulation of umbrella companies falls under the remit of the Department for Business and Trade, and addresses the conduct of companies, their operational standards and worker protection. Proposals to strengthen the regulation of umbrella companies here in the UK have now been included in the recent amendments to the Employment Rights Bill (ERB). The second initiative is the protection of tax, which comes under the remit of HMRC, and this proposal will alter who’s deemed the employer for tax purposes.
The ERB
Definition and regulation of umbrella companies The ERB introduces a new legal definition of labour suppliers such as umbrella companies, and brings them under the regulatory oversight of the Employment Agency Standards Inspectorate (and at some point in the near future, the Fair Work Agency). This move aims to ensure that umbrella companies operate transparently and comply with employment and tax laws but may also catch other businesses as well. The Bill could receive Royal Assent in the summer and it’s possible that some reforms could come into force as early as October 2025.
PROFESSI NAL in Payroll, Pensions and Reward
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June 2025 | Issue 111
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