Many recruitment businesses, accrediting organisations and other stakeholders welcomed the recent announcement, by the chancellor herself, that a legislative crackdown on umbrella companies was imminent, from April 2026.

But Olivia Spruce, Director of the Payroll Compliance Authority (PCA), a not-for-profit accreditor in the outsourced payroll sector, believes that the details outlined so far will not change the status quo.

Spruce, who has also been CEO of recruitment agency Positive Healthcare since 2018, says: "At the PCA we have long been campaigning for legislation alongside many others in the sector. It is the only way to clean up the illegal activity that has been going on for years, which is impacting workers, HMRC's revenue and other compliant businesses in the labour supply chain.

"However, the route to regulation that the government is proposing, which is to make recruitment agencies ultimately responsible, will not shake up the sector enough or bring about the change we need. Ambiguity will remain and through this ambiguity is how unscrupulous umbrella companies flourish."

Umbrella companies handle the payroll function on behalf of recruitment firms and businesses up and down the country for approximately 700,000 temporary workers. Without regulation, fraudulent activity in the sector has been rife including incorrect tax deductions, pay skimming, and withholding of holiday pay.  HMRC estimates that £500 million was lost to such disguised remuneration tax avoidance schemes in 2022 to 2023. Spruce believes this figure may in fact be significantly higher.

The government has announced that it will introduce legislation to transfer the responsibility to account for Pay As You Earn (PAYE) and other tax deductions from the umbrella companies that employ the workers to the recruitment agencies that supply the workers to an end client. If a business is not using an agency, the responsibility will sit with this end client business.

The government's reason for this approach is because recruitment agencies can manage which businesses enter their labour supply chains and so can, by extension, prevent illegitimate operators from entering the market. Making these recruitment firms legally responsible for ensuring that PAYE and other tax deductions are properly accounted for is expected to tighten due diligence and ongoing monitoring practices around engaging umbrella companies and thereby improve compliance within the market.

Spruce explains: "The majority of recruitment agencies already carry out thorough due diligence and do all they can to make sure that any umbrella companies they engage are compliant. However, recruiters are not accountants or fraud detectors, and some of the schemes in operation are extremely sophisticated and hard to spot. The details of legislation we know so far may spur some agencies to be even more thorough in their checks and monitoring, however, driving sector-wide compliance in this way will be a challenge given that we are recruitment specialists, not experts in financial conduct or governance."

"Fixing the sector is no simple task and won't be done overnight. Alternative regulation could be through a central accreditation scheme run by a government-funded body, or an existing accrediting organisation with suitable credentials."

The government is due to set out full details of the proposed measure in the coming months, with draft legislation to be included in the Finance Bill 2025, with opportunities for stakeholders to provide feedback on the proposal.