Summary
Significant Government reforms to “tackle” the umbrella company market are underway, including legislating to define umbrella companies in the Employment Rights Bill to bring them within the scope of ‘employment businesses’ and allow for their regulation.
In this article, we explore the forthcoming changes and how to prepare.
[Note: this article has been updated on 16 October 2025 to reflect recent developments.]
Background
If you are familiar with the employment business and employment agency landscape, you can skip this section
At present, employment agencies and employment businesses in Great Britian are regulated under the Employment Agencies Act 1973 (‘EAA’) and the Conduct of Employment Agencies and Employment Businesses Regulations 2003 (‘Conduct Regulations’). Employment agencies typically find permanent staff, which are hired by their clients (e.g. what recruitment consultancies do), whereas employment businesses typically employ staff and hire them out to end clients (e.g. what temp agencies do).
The above laws regulate the conduct of employment agencies and businesses by placing certain minimum obligations on each of them (with some differences) but which broadly include the provision of a key information document, prohibitions on charging fees for finding work, requirements to undertake suitability checks, record-keeping requirements and prohibitions on detrimental action in certain circumstances.
In contrast, there is no statutory definition of an ‘umbrella company’. An umbrella company is generally considered to be an entity acting as an intermediary that employs individuals on behalf of employment businesses (i.e. recruitment agencies) and end clients. They are generally not caught by the above rules as they are not finding work for those they employ or engage.
Given this, the previous Conservative government launched a consultation back in June-August 2023 on “Tackling non-compliance in the umbrella company market”. In a surprise move, the current Government issued a response to the consultation in March 2025, in which it stated it wanted to define umbrella companies and allow for their regulation “in the same way” that employment businesses are regulated. The rationale for this was to protect “the most vulnerable at work” and to ensure that people who work through an umbrella company have comparable rights and protections to those working through an employment business.
Employment Law Reforms
Following the consultation response, the Government introduced an amendment to the Employment Rights Bill (‘ERB’) to expand the definition of ‘employment businesses’ in the EAA so that it includes umbrella companies.
The amended definition of an ‘employment business’, however, is broad and will cover the business of participating in “employment arrangements”, which includes people who are, or who are intended to be, in the employment of a person to be supplied to act for and under the control of another person in any capacity. ‘Participating in’ includes being an employer of the individuals, paying for or receiving or forwarding payment for the individuals, supplying people or taking steps to do any of these things.
This has been done to allow for umbrella companies to be regulated. The Government has said that umbrella companies will be regulated “in a similar way to the existing Conduct Regulations”. According to this Fact Sheet, the Government has said it will consult on whether amendments to those regulatory obligations should be made to ensure they are “appropriate for application to umbrella companies and address the main harms identified in this sector (for example, lack of pay transparency and difficulty in enforcing employment rights and obligations).” Since then, the Government has indicated that it will consult on the regulation of umbrella companies in Autumn 2025. And that the measure will take effect in 2027. Whether the Government ultimately decides to apply the Conduct Regulations in the same way, including in respect of the prohibition on charging working-finding fees, or whether certain aspects are amended or disapplied therefore await to be seen. However, if such rules are applied to umbrella companies in the same way, this could have a profound effect on the overall business model.
Currently, employment businesses are regulated by the Employment Agency Standards Inspectorate (‘EAS’), but this will fall into the remit of Fair Work Agency once established. For more information on the Fair Work Agency including its enforcement powers, read our article here.
Tax reforms
We note that in conjunction with the above employment reforms, the Government has proposed separate tax reforms to the umbrella company market set to take effect from 6 April 2026. Draft legislation (to be included in the next Finance Bill) has been published along with some draft guidance (here and here).
In simple terms, as part of the proposed new rules, the Government is introducing joint and several liability provisions. While as the employer, the umbrella company will remain responsible for operating PAYE correctly (including tax and NICs), the relevant party in the labour supply chain (such as the end client or an agency) will also be liable for unpaid PAYE tax and NICs if the umbrella company fails to meet its PAYE obligations as employer and HMRC can pursue recovery of the unpaid amounts from the applicable relevant party in the chain. The provisions are complex, but the draft HMRC guidance explains more and provides examples and parties should consider specialist employment tax advice to determine whether and how any changes might affect them.
How to prepare
Until the Government launches its consultation and any revisions to the Conduct Regulations are made, the true impact of the changes to the employment framework for employment businesses is unknown. The tax changes are clearer, now that the Government has published its proposed legislation and draft HMRC guidance.
To prepare, employers might want to:
- Try to understand their labour supply chain to understand their reliance on umbrella companies and other labour supply arrangements that may be caught by the new rules, undertaking any necessary strengthened due diligence processes to identify areas of risk
- Consult advisers and the HMRC guidance to understand who in their supply chain will be joint and severally liable for tax payments so that contractual agreements and indemnities can be updated accordingly to reflect this.
- Keep in touch with labour suppliers to see how they are responding to the proposed changes
- Keep on top of developments to see how the proposals progress over the course of the coming months
