In April this year, HMRC announced that regulation was on the cards for the umbrella company market to tackle widespread non-compliance with tax and employment legislation, which we discussed in a previous blog.

The big questions now are what shape this will take, when will it be ready for implementation, and - fundamentally - will it happen at all, now that a general election has been called?

Where are we now?

The update on 18 April 2024 mooted the introduction of a due diligence requirement for businesses that use umbrella companies 'drive out bad actors from labour supply chains' and address the detrimental impact that non-compliant payroll operators have on workers, taxpayers and the labour market in general.

In the meantime, HMRC has indicated that it will publish a response to the consultation that ran during the summer in 2023 on options to reduce tax non-compliance. HMRC also promised to release a new, online pay checking tool to help umbrella company workers check whether the correct deductions are being made from their pay.

What form could regulation take?

From the limited details available, the onus is being placed on recruitment firms and any other businesses that work with umbrella companies to take measures to ensure they only engage the services of compliant firms. These firms should already be carrying out thorough due diligence as standard practice when choosing to work with a new third party, particularly one that will handle payroll functions.  Due diligence is also already incorporated into government's guidance, titled 'Responsibilities for employment business working with umbrella companies'.

A regulatory framework could include significant fines or other reprisals where due diligence is deemed to not have been carried out sufficiently. This could make working with umbrella companies very unappealing unless firms can be certain of their compliance. Therefore, regulation may well involve the requirement for businesses to only work with umbrella companies vetted and approved by a reputable accrediting organisation, so that non-compliant companies are rooted out. Profitable membership organisations already exist to this purpose, and yet non-compliance is still rife.

This has also been the core mission of the PCA since launching in November 2023, to flush out unscrupulous companies and protect workers. However, as a not-for-profit organisation, the PCA's main objective is not to make money, but to set the gold standard in accreditation. Any umbrella companies that have been rigorously audited and approved by the PCA are fully legitimate payroll firms that operate in a transparent, honest and fair manner, and will need to repeat the process annually to demonstrate their ongoing commitment to tax compliance.

Carrying out effective due diligence is extremely challenging, with fraudulent operators, by design, very hard to identify and root out. This is where organisations like the PCA are essential, because we fulfil this due diligence role on behalf of recruitment businesses. Our umbrella company members are thoroughly and repeatedly audited by an independent global accounting firm to ensure they are transparent, ethical, and truly legitimate payroll operations.

What are the challenges?

The current government has indicated that it will 'continue to engage with the recruitment industry and other key stakeholders on the detail of a statutory due diligence regime for businesses that use umbrella companies, and ensure it has the best understanding of the impacts that this could have on reducing non-compliance'.

Such a process could take many months to reach a solution, which, in turn, will take more time to formalise and implement. All the while, the clock has started to tick, counting down to the general election on 4 July. The incumbent government is highly unlikely to introduce regulation before this date, potentially making it part of its campaign promise.

A potential new Labour government would also seek to hit the ground running. Could implementing regulation of umbrella companies be an avenue to quickly appease the 800,000 workers in the UK who are paid by them, by reducing the risk of these workers falling victim to fraudulent payroll activity? It would also present an opportunity to reassure the majority of compliant umbrella companies whose reputation risks being tarnished by unscrupulous operators.

Whilst the PCA is in favour or swift regulation, hasty measures are not the solution. The PCA will continue to monitor, reflect, and engage on policy developments as the new statutory due diligence regime takes shape.