COMPLIANCE
Tax legislation
Shift in pay as you earn (PAYE) responsibility
The Government has proposed legislation to shift the responsibility for PAYE from the umbrella company employing the worker to the recruitment agency supplying the worker to the end client. If there’s no agency in the labour supply chain, the responsibility will fall on the end client. This change is due to take effect from April 2026, with the draft legislation in the Finance Bill 2025 and the Finance Act in the autumn. This has left the umbrella industry in turmoil, as the final legislation isn’t known, and when it is, there’ll be very little time to plan. The knock-on impact on businesses is likely to cause labour supply issues in the run up to April 2026, with their current models being impacted by the uncertainty. Some labour supply businesses may find alternative ways to operate post-April 2026, but this would require significant changes, such as becoming a payroll bureau. If recruitment agencies plan to take on the PAYE liability, this may soon lead to renegotiated margins in their standard terms of business, pushing up the fees for the supply of labour. Given the lack of clarity on the regulations, and as businesses are unprepared for such a significant change, the Government may want to consider delaying the implementation of this policy. The change also fails to consider the new corporate criminal offence of ‘failure to prevent fraud’, part of the Economic Crime and Corporate Transparency Act 2023, which will come into effect on 1 September 2025. This aims to hold large organisations accountable if they profit from fraud committed by employees, agents, subsidiaries or other associated persons. A key risk for many will be the labour supply chain, and it’s not clear how end users will undertake labour supplier due diligence effectively when all this legislation is in place. Better still would be stepping back and looking at all the labour supply options and regulations across Government and departments. There’s never been a comprehensive review of the supply chain and its functionality. While the labour supply chain has evolved organically over the years due to the growth in the contingent workforce, compliance and regulation have been fragmented. What’s truly needed is a cross-party Government review of the entire supply chain, focussing on future
requirements to help businesses grow the economy. This is rather than applying temporary fixes, with more regulations, to problems arising from the current complexity
Make sure all parties understand their obligations under the new legislation. Contracts should make it clear that all parties are obliged to ensure tax compliance and provide for comprehensive indemnities if this obligation isn’t met. Implementing robust monitoring systems Establish systems to monitor compliance. This includes regular audits and checks that correct tax deductions are being made, and workers are receiving their full entitlements.
in rules and the differences between employment law and tax positions.
How can you start to prepare, now? In the meantime, and as the Government is ploughing ahead, engagers would be wise to start preparing by: Understanding the new legislation Familiarise yourself with the key changes in the ERB and the Finance Bill 2025. These include the shift of PAYE compliance responsibility from umbrella companies to recruitment agencies and end clients. Conducting a thorough audit Review your current labour supply chain. Assess their compliance with existing regulations and their readiness for the new legislation. Take proactive steps to safeguard your position and ensure the payroll obligations are being met in the labour supply chain. Bear in mind HMRC guidance (in particular, the ten things HMRC considers that businesses should check).The guidance can be located here: https://ow.ly/BP8z50VAVU2. Engaging with reputable umbrella companies Ensure the umbrella companies and labour suppliers you engage with are reputable and compliant with the new regulations. Look for companies that are members of professional bodies, such as the Freelancer and Contractor Services Association and the Recruitment and Employment Confederation. Updating contracts and agreements Consider the risks associated with entering into new contractual arrangements involving umbrella companies and labour suppliers, especially where the contracts will extend beyond the end of March 2026. Review whether you need to amend contracts with them to reflect the new compliance responsibilities.
Providing training and support Offer training sessions for your hiring
managers, human resources and compliance teams to ensure they’re fully aware of the new requirements.
Key points Recent HMRC actions
HMRC’s freezing injunction against an umbrella company for £171 million in underpaid NICs highlights the importance of understanding your off-payroll risks in the supply chain. Engager responsibilities Engagers must provide accurate information and status determination statements, where appropriate, to classify workers correctly, ensuring compliance with regulations. Strict parameters for labour providers Once in place, businesses should only engage with accredited providers and establish comprehensive contracts outlining compliance expectations. Regular audits Conducting regular audits of recruitment / off-payroll working partners and supply chains is essential to verify ongoing adherence to contractual obligations and compliance standards.
Culture of compliance Fostering a culture which values
compliance throughout the organisation is crucial, including regular training and clear internal guidelines.
PROFESSI NAL in Payroll, Pensions and Reward
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June 2025 | Issue 111
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