Managing the risk of umbrella non-compliance

The UK Government has embarked on a detailed analysis of practices within the umbrella company sector, addressing issues surrounding tax avoidance and other improper practices through an open consultation entitled ‘Tackling non-compliance in the umbrella company market’.

Whilst the vast majority of umbrella companies operate compliantly and ethically, this consultation looks to address the minority who do not. It has been published by HM Treasury (HMT), HM Revenue & Customs (HMRC) and the Department for Business & Trade (DBT).

Tackling umbrella non-compliance

The consultation, which closes on 29th August, proposes two approaches for how an umbrella company is determined:

  • permitting only certain methods of engagement and payment – with four options under review
  • or, applying 3 tests in order to determine the nature of their activity in line with an umbrella – with no limit on the engagement or payment method

Where responsibilities and obligations sit will also be under consideration, as well as who enforces the legislation moving forward. There is currently no statutory definition for an umbrella company, so the consultation looks to formalise this, in addition to the due diligence needed to manage conformity.

Managing risk in your supply chain

For businesses and recruitment agencies, this consultation emphasises the importance of partnering with compliant umbrella companies. As the Government moves towards stricter enforcement measures, it’s expected that the consultation will also address their proposed approach for non-compliance – including tax liability. With loss of revenue from tax avoidance being a big driver behind the Government’s consultation.

For organisations who manage a single or multiple recruitment partners within their supply chain, this review raises similar concerns that came to light when IR35 was extended into the private sector in 2021. Whilst it may be the responsibility of the recruitment agency (known in this consultation as the employment business or employment agency) to ensure they are working with ethical umbrella companies, it’s good business practice to have clear evidence that this compliance is in place and agencies are undertaking regular due diligence to manage this.

“When it comes to adhering to legislation, the Government want to see that reasonable care has been taken by organisations – making it crucial to have a formal process in place.”

– Richard Hanson, Linx Client Services Director

Understanding umbrella use in your supply chain

If you’re not familiar with how recruitment agencies within your supply chain are managing umbrellas, then the first step is to gain a more detailed understanding. What umbrella companies are they using and what measures do they have in place to check they are both ethical and compliant?

Whilst your organisation may not ultimately be responsible should it come to light that non-compliant umbrella companies are involved further down your supply chain, it’s important that organisations proactively manage this potential reputational damage.

Undertaking a supply chain audit

Linx’s supply chain auditing solution, available through our Compliance as a Service, sees us work with clients to proactively undertake a comprehensive review of their recruitment supply chain.

Extensive assessment and auditing allow businesses to gain a transparent view of their supply chain, looking across several legislative areas such as IR35, Agency Worker Regulations and umbrella working practices.

Recognising that each business has a different approach to how they set-up and operate their supply chain, which can span multiple business divisions and industry disciplines, we work with organisations to create a bespoke audit that covers all areas of their operations. Before returning our findings, together with recommendations and suggestions on how processes can be improved to ensure stronger compliance. Something which we recommend is regularly repeated, to ensure processes continue to be followed consistently to minimise risk of non-compliance.


If you’d like to review compliance within your recruitment supply chain, then our team are ready to support you.