UK minded to introduce umbrella company statutory due diligence requirement

The announcement was included in a package of tax policy proposals published by HM Revenue & Customs (HMRC). The government has said that it remains concerned about the scale of non-compliance surrounding umbrella companies, and the detrimental impact that this has on workers, taxpayers and the labour market.

Penny Simmons, a tax expert at Pinsent Masons, said: “The requirement could add to existing requirements, which already impose significant tax compliance burdens on businesses to police their supply chains and ensure that those they engage with are paying the correct amount of tax. The possibility of such a requirement again emphasises the need for businesses to have robust due diligence processes when engaging with temporary workers and labour suppliers and to have effective tax risk management processes in place.”

“Ultimately, the impact of a statutory due diligence requirement will depend on the detail of the requirement and whether it will be prescriptive. A less prescriptive requirement would allow for greater flexibility for businesses, although it could also create significant uncertainty for businesses as to what is needed to meet the due diligence requirement,” said Simmons.

The government has said that it will continue to engage with the recruitment industry and other key stakeholders on the detail of the due diligence requirement and ensure it has the best understanding of the impacts that this could have on reducing non-compliance.

Simmons said: “It is positive that the government has confirmed that it will continue to engage with industry before making a decision. It will be important for businesses and stakeholders to actively participate in discussions with the government to ensure that any requirements introduced are not overly onerous, do not make it harder for businesses to gain access to labour and do not create uncertainty.”

The term 'umbrella company' describes an arrangement under which contract workers are supplied by an umbrella company to an employment business, which then supplies the workers to a business – the client – receiving the services of the workers. The client is invoiced for the work that those workers undertake. The workers are then paid as employees or self-employed by the umbrella company.

The latest policy announcement follows a consultation on tackling non-compliance (58-page / 621KB PDF) that was published in June 2023. The consultation set out options for addressing non-compliance by umbrella companies in relation to both employment rights and tax. From a tax perspective, while many umbrella companies operate legitimately, those viewed as abusive by HMRC have been known to pay contractors the minimum wage and then supplement each individual's income, significantly reducing the amount of payroll tax collected by HMRC. The government has not confirmed when it will publish an update to the consultation and has said it will publish a response in due course.

HMRC has also said that it will publish new guidance later this year to support workers and businesses that use umbrella companies. HMRC will also publish an online pay checking tool to help umbrella company workers to check whether the correct deductions are being made from their pay.

Simmons said: “The government’s desire to regulate the umbrella company market is understood and regulation that prevents unacceptable tax avoidance and fraud is welcome. However, it will be important to ensure that the government safeguards against any unfair unintended consequences. Any preventative measures should be carefully planned so as not to disproportionately prevent flexibility across the labour supply market.”