The recent withdrawal of an amendment to the Employment Rights Bill (ERB), which sought to subject umbrella companies to a licensing authority, marks only a temporary pause in efforts to regulate this growing sector. Chris Bryce, chief executive of the Freelancer & Contractor Services Association (FCSA), emphasises that the contractor industry will continue pressing for licensing of umbrella companies, commonly known as "brollies," to ensure higher standards and protect contractors from unscrupulous operators. Despite the amendment’s removal at the penultimate stage of ERB considerations, prospects remain strong for introducing a licensing regime by 2027 under upcoming umbrella company regulations and the remit of the new Fair Work Agency (FWA).

The government’s own policy materials signal an intention to regulate umbrella companies more robustly. While the ERB will no longer bring licensing into effect from April 2026 as initially hoped, umbrella regulation is expected under the FWA’s remit from April 2027. Bryce and the FCSA are actively engaged with officials to shape this framework, advocating for licensing as an essential first step. Such a regime would include key elements like a fit and proper person test for directors and shareholders, ensuring onshore banking for umbrella companies, and verifying that employment contracts meet compliance thresholds. This approach aims to weed out bad actors who exploit complexities in the labour supply chain for profit, often at contractors' expense, and to level the playing field for compliant umbrella operators.

The broader policy environment supports this trajectory. In 2023, HM Treasury launched a consultation targeting non-compliance within the umbrella company market, proposing legislation to bring umbrella companies under the definition of employment businesses, thereby subjecting them to regulation by the FWA. From April 2026, a significant shift in accountability will occur with recruitment agencies becoming responsible for Pay As You Earn (PAYE) tax accounting when workers are supplied through umbrella companies. This joint and several liability (JSL) mechanism underscores the government’s commitment to tackling tax non-compliance and ensuring fiscal responsibility in the employment chain.

However, these tax accountability measures, while vital, are deemed insufficient alone. Comprehensive regulation embracing licensing and stricter oversight is urgently needed to address the range of compliance issues in the market. The complex and evolving nature of work patterns, coupled with increasing supply chain intricacies, demand a regulatory framework capable of managing these challenges effectively. The Fair Work Agency’s establishment is an opportunity to craft such frameworks, with the licensing regime envisaged as a foundation to facilitate targeted enforcement and improve market integrity.

The concept of licensing is not an unfamiliar one in related sectors. The Gangmasters and Labour Abuse Authority (GLAA), which is due to be integrated into the FWA, currently issues licences to labour suppliers in sectors such as agriculture and shellfish gathering, where operating without a licence constitutes a criminal offence. This model demonstrates that licensing can be both effective and enforceable, providing a valuable precedent for umbrella company regulation.

Moreover, recent rulings and guidance indicate heightened scrutiny of umbrella companies and mini umbrella company structures exploited for fraudulent purposes, including VAT abuse and misuse of employment incentives. HM Revenue & Customs (HMRC) has successfully taken action to deregister fraudulent mini umbrella companies from VAT, while the GLAA has urged businesses to exercise due diligence to avoid complicity in tax evasion and fraud schemes. These developments reinforce the urgency and necessity of a regulatory regime that combines licensing with enforcement to safeguard the integrity of the labour market and protect workers.

In summary, while the journey toward licensing umbrella companies faced a setback with the ERB amendment withdrawal, evolving government policies, industry advocacy, and enforcement trends point to licensing becoming a key component of sector regulation from 2027. This progression addresses both tax compliance and wider employment standards concerns, aiming to eliminate rogue operators and improve conditions for contractors. The growing complexity of work arrangements and the risks posed by unregulated umbrella companies make urgent the creation of a licensing system, which industry leaders like the FCSA are committed to advancing alongside the government.

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Source: Noah Wire Services