Chancellor Rachel Reeves’ announcement in the Autumn Budget that the government would tackle tax avoidance in the umbrella sector was a long-overdue commitment to clean up bad practice. However, the proposed solution – shifting PAYE liability from umbrella firms to recruitment agencies – creates new problems rather than solving existing ones. Worse still, it actively undermines the Employment Rights Bill (ERB) and contradicts the government’s own stance on fair work practices.

FCSA has already highlighted the flaws in the HMRC-led plan in our recently published report ‘Regulating the UK’s Umbrella Market’. Our analysis makes it clear: without proper licensing and enforcement, this policy will not just fail; it will make compliance harder and open the door for more payroll pirates to exploit workers and businesses.

The ERB is designed to strengthen worker protections, particularly by banning exploitative ‘fire and rehire’ tactics. However, the chancellor’s so-called ‘umbrella regulations’ would force a mass repapering exercise, requiring hundreds of thousands of workers to be issued with new contracts.

If a private business tried to impose this level of contract upheaval, it would rightly be condemned as fire and rehire – precisely the kind of practice the ERB is trying to stamp out. The government cannot have it both ways: if it truly wants to protect workers, it cannot push through policies that break the continuity of workers’ employment, deny them stability and create confusion in the labour market.

HMRC’s ‘designated employer’ policy disregards the ERB’s provisions and removing rights from workers.

What makes this even more concerning is that HMRC and Treasury have completely bypassed conducting an Impact Assessment on this policy – avoiding independent scrutiny from the Regulatory Policy Committee (RPC). This is deeply ironic, given that the regulatory change is supposedly aimed at tackling tax avoidance, yet it avoids the regulatory oversight that ensures it is doing the right thing in good policymaking.

Had an Impact Assessment been carried out, it clearly would have flagged the serious economic and administrative burdens this policy places on the labour market – particularly the unintended consequences for workers, compliant umbrella companies, recruitment agencies and end clients.

It’s worth remembering that the policy resulted from a two-year-old consultation being dusted off. That was led by a different department, under the previous administration – so a few things may have got lost in translation. To add to this, the consultation response was published after a policy announcement had already been made! Much like the ‘tax gap’ numbers, the retrofitted response is a classic example of ‘policy-based evidence making’.

Were the chancellor or her ministers aware of the policy’s implications at the time of the announcement? This clearly is an accident, and it can still be prevented. This case highlights the importance of policy scrutiny and Impact Assessments.

The most frustrating part of this debacle? The government has already very sensibly amended the ERB to bring umbrella companies under the remit of the Fair Work Agency (FWA) – a new enforcement body designed to drive up compliance in the labour market.

This means HMRC’s proposed PAYE shift is unnecessary. Instead of destabilising the sector with rushed, ill-thought-out measures, the government should focus on introducing a licensing scheme for umbrella companies, working alongside the ERB’s provisions, ensuring only compliant firms can operate. This could be delivered with pace – the building blocks are already there.

As outlined in FCSA’s Umbrella Market report, licensing – combined with proper enforcement under the Fair Work Agency – would:

• Eliminate bad actors (or as we call them, payroll pirates) without creating unnecessary disruption for compliant businesses. Licensing means their past will follow them.
• Protect workers from harmful contract changes that contradict the very spirit of the ERB.
• Ensure a fair and level playing field for businesses by preventing tax avoidance and fraud at its root, rather than unfairly shifting the burden and responsibility onto recruiters.

Rather than rushing through flawed legislation with no proper scrutiny, HMRC and Treasury should step back and work with the Department for Business and Trade and industry experts to implement an approach that will actually work. FCSA has long called for a well-regulated, compliant umbrella sector, and we are ready to support solutions that achieve that goal without destabilising the market or undermining worker protections.

The ERB and so-called ‘umbrella regulations’ should work together, not against each other. The government has a clear choice: lose face by pushing through unworkable legislation that will cause chaos, or adjust their approach by aligning these policies to create a stable, fair and compliant labour market.

Dropping a previous government’s policy idea should not be a difficult thing to do when your own manifesto-backed legislation provides a better way forward. Doubling-down on this will not end well.

At FCSA, we’ll continue engaging with policymakers and pushing for licensing and proper enforcement, so that the contracting industry remains strong, stable and becomes fairer for all.

Nick Dancer is head of policy and public affairs at the FCSA

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