Big changes ahead for UK contingent workers with new laws looming and increased HMRC tax enforcement

The UK government plans major legal changes that will affect contingent workforce arrangements in the next two years. These include giving zero-hours agency workers the right to guaranteed hours and make staffing companies liable for umbrella company non-compliance. 

On 5 March, the government  provided more detail about the right to guaranteed hours and published details of how umbrella companies will be brought into recruitment regulation. These measures alongside other recent developments will have a big impact on the commercial models of hirers, staffing companies, gig-worker platforms and employment intermediaries. 

Many will need to restructure how they engage and supply contingent workers if they are to survive. 

Hirers, staffing companies and employment intermediaries will be looking to take measures to ensure they can trade through the changes, many of which are scheduled to come into force next spring or, in the case of some HMRC tax enforcement activity, are already occurring. 

Legislative developments 

This week's updates offer more clarity on the government's plans to provide agency workers with guaranteed hours and pay when shifts are cancelled or changed at short notice and to bring umbrella companies into the scope of recruitment regulation. 

Other new measures proposed in the Employment Rights Bill (ERB) include plans that are progressing for the creation of the Fair Work Agency, which will combine the functions of the Gangmasters and Labour Abuse Authority, Employment Agencies Standards Inspectorate and National Minimum Wage enforcement team within HMRC. The new agency will have additional powers relating to labour supply-chain compliance.

Separately to the ERB, the government has confirmed that it is continuing to work on eradicating the use of non-compliant "umbrellas" by introducing new legislation to make "agencies" responsible for ensuring that agency workers are paid subject to  income tax and national insurance contributions. 

The government's policy paper and response to the consultation confirms that this will be similar to the agency worker tax legislation (chapter 7, part 2 of the Income Tax (Earnings and Pensions) Act 2003). The "agency" – the company that holds the contract with the end hirer – will be liable for any shortfall whether they operate their payroll themselves or use an "umbrella" company to run payroll for them. In the meantime, HMRC is stepping up action against certain types of umbrella arrangement. 

More detail on the new umbrella compliance legislation is expected to be published later this year, with consultation on draft legislation likely. 

Guaranteed hours for agency workers 

The government has tabled draft provisions to the ERB that would require end hirers to guarantee hours rights to agency workers and provide them with reasonable notice of shifts and proportionate pay when shifts are cancelled, moved or curtailed at short notice. The ERB contains yet another definition of "agency worker".

The right to guaranteed hours for a qualifying worker will apply only after a set but, as yet unconfirmed, reference period (12 weeks has previously been mentioned). Many are understood to have highlighted to the government how difficult it will be to provide guaranteed-hours contracts to agency workers without creating mutuality of obligation between the end hirer and the agency worker that would the end hirer becomes the legal employer of the agency worker (effectively making the role of staffing companies redundant). 

'Tougher' reforms: more detail?

However, the government appears to be pressing forward with its intention to extend these provisions to agency workers, reflecting the sentiments of a cross-party committee of MPs that earlier this week. The committee stated that the reforms needed to be "tougher" and that leaving key details to be decided later undermined "the certainty that the reforms aim to achieve".  

However, more detail will be  needed, potentially via detailed regulations to determine exactly how these measures will affect end hirers, suppliers and agency workers.

Some of the questions still remaining include:  

• What roles will be classified as involving a genuinely "temporary" need and as such – as proposed – be excluded from the right?
• Will there be exclusions for particular job types or particular employers?
• What fixed-term roles will be deemed not to count towards building a regular pattern of work and as such be excluded from the right?
• To what extent will larger staffing companies be allowed to move zero-hours agency workers from one end hirer to another within an industry, such that the relevant individual never builds a regular pattern of work at any end hirer.
• Will there be an anti-avoidance regime? Would such a regime stifle perfectly normal activity by many staffing companies in moving agency workers from one client to another depending on demand?

More lobbying is expected, particularly around fixing of the reference period.

Amendments' further benefits

There is a further benefit for zero-hours agency workers from the tabled amendments. By making end hirers responsible for providing the guaranteed hours, these workers may not only get guaranteed hours; they will arguably also qualify for full employment rights (given the direct relationship with the end user and mutuality of obligation). If so, agency workers will also indirectly benefit from the proposed  day-one unfair dismissal rights.

Hirers of zero-hours agency workers will move from having only to fund holiday pay and pensions for those workers to having to fund all employment protection costs and build in termination protocols. There is a lot more at stake here than just guaranteed hours.  

Potentially unintended consequences

History suggests that any change leading to increased costs and compliance burden relating to use of agency workers will lead to increased use of self-employed modes of engagement motivated by a wish to by-pass new employment legislation. The fact that the government has kicked into the long grass a proposed reform of employment status rules – which would make use of false self-employment models much harder – makes an increase in the use of "false" self-employment options more likely.

The big question in due course may be whether HM Treasury notices, as a result of any such surge in false self-employment, a reduction in tax receipts. At a time when economic growth may be difficult to achieve and world events may force the government to increase spending in various areas, the government may well no longer tolerate tax leakage that is related to the use of "false" self-employment models.

The tabled amendments to the ERB are expected to be debated and further amended throughout the report stage of the bill (currently scheduled for 11-12 March). 

Staffing suppliers likely to be most affected are those supplying into the hospitality, nursing and care, tutoring, and teaching sectors.

Staffing suppliers: preparatory action 

• Identify which agency workers or types of role involve variable weekly hours and assess to what extent hours can be guaranteed.
• Identify which end-user clients will or may agree to fixed weekly hours and which will not.
• Develop or search the market for rota-filling software that might automate the fair allocation of shifts to workers on a regular basis.
• Consider plans to build exclusive master service agreement (MSA) relationships so that the staffing supplier has greater visibility of end-user shift patterns and usage patterns to enable it to get more comfortable about guaranteeing hours to certain agency workers and to comply with the new guaranteed hours regime. Smaller staffing companies with high numbers of variable hours agency workers may conclude that they are better off merging with a larger staffing company with those MSA relationships.

'Employment business' to include umbrella companies

This week's tabled amendments to the ERB includes an expansion of the definition of "employment business" in the Employment Agencies Act 1973. This is intended to bring umbrella companies into the scope of the act. Although amendments to the Conduct of Employment Agencies and Employment Businesses Regulations 2003 have yet to be proposed but this will likely follow given the government's intention to regulate umbrella companies in the same way as recruitment agencies.

Key obligations that will affect umbrella companies include an obligation to pay their workers (irrespective of whether the umbrella company has received payment from the agency), the need to carry out checks, comply with information gathering and confirmation requirements, and a prohibition of charging its workers for services.

Although umbrella companies arguably already fall within the definition of "employment business", they do not generally provide work-finding services to work seekers and so the Conduct Regulations will need to be amended to bring umbrella companies fully into the scope of UK recruitment regulation.

This announcement is in addition to the government's plan for new legislation to tackle umbrella company tax non-compliance (see below). Whilst it may seem reasonable to assume that the expanded definition of employment business will also be adopted as part of the new tax legislation, definitions and meanings between tax and employment legislation rarely coincide so it is possible that we'll see different "definitions" used in each. 

The tabled amendments are expected to be debated and further amended throughout the report stage of the bill, which is currently scheduled for 11-12 March. 

Umbrella non-compliance: proposed tax plans 

The government plans to introduce legislation that makes the "agency" that supplies an umbrella worker to the end client – where an umbrella company is used in its supply chain – responsible for ensuring that the correct income tax and National Insurance contributions (NICs) are deducted and paid to HMRC and liable for any shortfall where liabilities have not been discharged by the umbrella company. 

According to the government's policy paper, this will make the tax position for workers employed by umbrella companies the same as for other agency workers. Since 2014, responsibility and liability for operating Pay As You Eern (PAYE) on payments to agency workers lies with the agency that holds the contract, under which the workers are supplied, with the end client. 

This measure seems more or less inevitable and, once it comes into force, it will undoubtedly make staffing suppliers more cautious about relying on umbrella companies prompting some to take agency worker payrolls back in-house, or move to more well-established umbrella companies whose payment arrangements are transparent and demonstrably compliant.

Unless the legislation is considered as part of the government’s broader objective of moving to a single status of worker and to introduce a statutory definition of self-employment, there is a real risk that use of self-employment arrangements will increase for roles in which there is current reliance on cost savings or tax minimisation arrangements currently offered by some "dodgy" umbrella arrangements, including umbrella companies that present as PAYE umbrellas but operate unlawful tax avoidance or evasion schemes "behind the scenes".

New market pressures

Organisations whose competitiveness is currently dependent on low-cost labour supply arrangements or where workers themselves choose what appear to be more attractive, lower-tax options may be faced with a reality of having to deal with non-compliant umbrella companies in order to stay in business.

Faced with this increasing market pressure, some may gamble that they can construct self-employment engagement models that are not easy for HMRC to "prove" as wrong. Some will take the view that HMRC has insufficient resource to catch most questionable self-employment arrangements. Even where HMRC does take action, some organisations may gamble that that may not be for several years.

Some staffing companies and managed service providers may be happy to be disintermediated, becoming "margin only", potentially retaining a payment function. Stepping out of the supply chain would be a safer option for staffing companies. Another option is for umbrella companies to become payroll agents.  

All parties involved in the use and supply of contingent workers will continue to need to be vigilant and have reasonable procedures in place to avoid criminal risk under the Criminal Finances Act (CFA).

This does not spell the end for the well-established participants in the umbrella industry that have good systems and can demonstrate compliance. Investing in payroll systems for contingent and gig workers is not usually high on the list of priorities for users and suppliers of contingent workers – and, therefore, companies with specialist payroll expertise are likely to continue to be needed.

Expected mid-2025 and April 2026

The new legislation is intended to take effect from April 2026, but there have been no updates since the Budget announcement last October. Usually, draft legislation for the Finance Bill arrives in and around the July the year before the bill takes effect. Draft legislation is expected either this July or potentially before. The policy paper published in October 2024 stated that full details of how this measure will operate can be expected in the "coming months".

In the meantime, HMRC has published updated guidance on help on labour supply chain assurance (GfC12 tax risks) to ensure end users and staffing suppliers better understand their supply chains.  This is intended to provide best practice guidance in this area.

Even without new legislation, there are ways that liability for underpayments of PAYE tax and NICs can, under certain circumstances, pass along the supply chain to staffing suppliers and end users. Consequently, staffing suppliers will likely want to continue to undertake effective and thorough due diligence on supply chains. Reliance on umbrella industry accreditations is not sufficient.

Preparatory action

Staffing suppliers should assume that this legislation will come into force in April 2026 and start to:

• Think about their current arrangements with umbrella companies and whether to set up an internal payroll.
• Refresh due-diligence checks on umbrella companies and consider terminating or winding down arrangements with umbrellas that do not fully meet the compliance checks.
• Consider whether there are any reasons to doubt umbrella company compliance; for example, by asking recruitment consultants whether they are aware of any reason an umbrella company may not be doing what it says it does.
• Review the impact of ending any referral or refund arrangements with umbrella companies.
• Review CFA policies and procedures to ensure that they include reasonable checks on umbrella companies.

End users should start to:

• Assess which staffing suppliers engage with umbrella companies and check what compliance checks they carry out.
• Review contracts with staffing suppliers and MSPs to check that supply-chain compliance, including use of umbrella companies, Construction Industry Scheme payment intermediaries and engagements via personal service companies are covered off.
• Review CFA policies to ensure that they include staffing supply chains and use of umbrella companies.

HMRC action against umbrellas 

In 2024, HMRC stepped up its direct and indirect action against non-compliant umbrella companies, including "mini umbrella" companies. 

In early December last year, a freezing injunction was obtained by HMRC against the UK umbrella company Ducas on the basis that it was alleged to have been involved in the fraudulent evasion of employer NICs through the use of undisclosed personal services companies (PSCs). This was contrary to the contractual representations made to staffing agencies that engage with Ducas. The company had also allegedly produced "fraudulent documents" designed to conceal this from HMRC and other third parties, such as staffing agencies and, possibly, the NHS and its audit teams. This is an issue that is thought to affect all staffing agencies dealing with Ducas and approximately 30,000 workers. HMRC alleges this involved a £171 million employer NICs fraud.

While the question of whether Ducas is liable to pay the employer's NICs has yet to be decided by the tax tribunal, this case provides a useful reminder of the importance of checking that umbrella companies treat all payments to workers as employment earnings and pay tax and NICs accordingly.

Staffing agencies that have engaged with Ducas in the past or continue to do will want to seek legal advice to check whether they are at risk of liability in respect of payments to Ducas workers or any other umbrella company or payment intermediary on a gross of tax basis. End users and staffing agencies will also be looking to review their CFA policies and procedures to ensure that they are not at risk of any criminal liability for failing to have prevented the facilitation of tax evasion by an umbrella company.

Wider scrutiny ahead

Pending the proposed 2026 umbrella legislation and based on HMRC's actions in 2024, wider scrutiny of historical and current umbrella arrangements can be expected. This is a useful wake up call for some. But until more concerted action is taken by HMRC against non-compliant umbrella companies, there is still no level playing field for those who rely on them. This is allowing non-compliant umbrellas to flourish in a "race to the bottom". 

Staffing companies will recognise that it is essential to have rigorous checks on umbrella companies and not to rely just on questionnaires or industry accreditations. Those staffing companies that have received "tax-loss letters" from HMRC relating to umbrellas will want to seek legal advice immediately.

IR35 company thresholds to change

The off-payroll working IR35 rules for company-size thresholds are to change next month. From 1 April 2025, a private company or organisation will be considered small if two out of the three following conditions are met:

• turnover of not more than £15 million (increased from £10.2 million);
• balance sheet of not more than £7.5 million (increased from total of £5.1 million); and
• monthly average number of employees – 50 (no change).

The government estimates that this increase in thresholds means approximately 14,000 companies will change from being considered medium sized to small – and therefore will no longer be responsible for IR35 assessments nor will they be liable for unpaid PAYE and NICs. This liability will instead remain with the PSCs themselves. In practice, this will likely lead to a rise in the usage of PSCs. 

For the purposes of the off-payroll working rules, a company’s size is determined by reference to its previous financial year end and for the duration of a tax year. Therefore, the company size threshold changes will have no practical impact for off payroll working until 1 April 2026 at the earliest. 

No transitional arrangements are envisaged. HMRC has confirmed that it will update its employment status guidance manual in due course to reflect the changes.

HMRC enforcement of IR35

The off-payroll working rules in the private sector were introduced in April 2021. Given that the usual "look back" period for assessing tax is four years, it is expected that HMRC will start to raise IR35-related tax assessments during the 2025/26 tax year in respect of tax year 2021/22.

Although some end users have received compliance enquiries from HMRC relating to their use of contingent workers and processes for determining IR35 status, no tax assessments seem to have yet been raised under the 2021 rules. End users and staffing companies will be looking to review their IR35 processes to ensure that they have evidence in place to support status determinations made in the last four years and to take any requests from HMRC for further information seriously.

We have carried out a more detailed analysis of the impact of the Employment Rights Bill proposals on users and suppliers of agency workers and if you would like a copy, please let us know.