ANOTHER CHANGE TO THE IR35 LANDSCAPE
In the 2024 Autumn budget those working through an umbrella company and those working for and/or with umbrella companies were dealt a massive blow. New legislation planned for April 2026 will see umbrella company changes and create a potentially seismic moment in the landscape of IR35. Here we look into what is changing, when and why.
WHAT IS AN UMBRELLA COMPANY?
Let’s start with first things first, what exactly is an umbrella company? Very simply, an umbrella company is an intermediary company used to employ and pay temporary workers. Those workers being supplied to end clients will have come to the umbrella company directly or via a recruitment agency. Recruitment agencies offer an umbrella company option as it allows them to offer a PAYE option, often for when a role is determined to be inside IR35. In addition, many recruitment agencies also offer an in-house payroll option.
Crucially, an umbrella company is responsible for the workers employment rights, their income tax and National Insurance (NI) deductions, and reporting and paying these over to HMRC. And it is this part that the Government wants to start cracking down on to ensure complete compliance.
WHAT UMBRELLA COMPANY CHANGES ARE HAPPENING?
From April 2026 there is legislation being introduced by the Government that shifts the responsibility for managing PAYE/NIC compliance. It will move away from umbrella companies and be the burden of either the recruitment agency or the end client (if it is a direct engagement). As to how this will happen in practice is still being finalised, and is expected shortly, but it is expected to take the shape of what is known as ‘Option 3’.
But what is Option 3? In the original consultation document of June 2023 there were a number of options laid out. Option 3 suggested shifting liability and responsibility for the operation of PAYE to recruitment agencies. In theory this sounds practical, but in reality, it is fraught with issues, including how recruitment agencies skill up and get systems ready, but mainly around which company ERN/PAYE reference is used and by whom, something we won’t go into the nuances of in this article.
WHAT HAS TRIGGERED THE CHANGE?
Following the IR35 rule changes in the private sector in 2021 there was a boom in the creation of umbrella companies and their use. With that came a number of curious schemes utilised by various payroll providers and/or umbrella companies – ranging from the slightly dubious to the completely ridiculous and fraudulent. Mixed in with them were genuine and completely compliant schemes, but the damage was done, and the industry was tarred with the notion of non-compliance. The government purports that there is a circa £500m tax gap due to umbrella company non-compliance, even if they have yet to provide evidence to back this claim up. And it is this tax gap that the legislation aims to close.
WHEN ARE THEY HAPPENING?
The draft legislation will appear in the Finance Bill 2025-26, with implementation in early April 2026, leaving very little time for those affected to a) understand exactly what is going to happen and b) once known how they should and can deal with it, if they indeed can. To say it’s a little rushed is an understatement…
WHAT ARE THE LIKELY CONSEQUENCES OF THE CHANGES?
HMRC’s view on tacking non-compliance in the umbrella sector is well known, and as per the IR35 changes in 2017 and 2021, they look to shift the responsibility for compliance up the labour supply chain. Examples of the issues deemed prevalent and in need or compliance include:
- Schemes paying impossible take home pay rates i.e. 85%
- Workers not receiving their statutory rights i.e. holiday pay
- Misleading & fraudulent documentation i.e. making the worker believe everything is compliant
- Pay differences i.e. advertised pay versus actual take home pay
- Incorrect payments i.e. over/under payments to HMRC.
But whilst many in the industry are happy to see a clean up of known rogue operators, not everything in the garden is rosy. Some commentators believe that the impending changes will have a negative effect, with possible consequences being:
- A rushed approach rather than getting the right solution
- Workers being deprived of employment rights
- Workers being exposed to financial insecurity
- Compliance oversight being passed to businesses who are simply not ready i.e. recruiters – 24,000 employment businesses having to do what just 600 payroll intermediaries did, creating a potentially even bigger problem to police
- Shifting the problem and not solving it – there is talk of the potential creation of mini recruitment agencies who will in essence be the umbrellas in a new guise and undertaking the same/similar schemes
- Lost HMRC revenue – some state this could be as higher than £7bn.
ALTERNATIVE SOLUTIONS
A safe and secure option when the changes hit is for business to once more consider spending time to correctly assess IR35, rather than implementing blanket bans on outside IR35 roles or by utilising umbrella companies.
By using systems such as The Contractor Compliance Portal to assess IR35 status, genuinely outside IR35 roles and talent open up that would have been previously ignored and lost. Not only that, the fee payer, which is almost always the recruitment agency, can insure away the IR35 risk for outside IR35 roles, something that cannot be done with the burden of administering PAYE for temporary workers and which has been shunted over to them when the umbrella company changes take effect.