Impact on the Contingent Labour Supply Chain- Budget 2024

The Chancellor, Rachel Reeves, set out the Autumn Budget which in her own words seeks to “Fix the Foundations to deliver change”. One such change which has the potential for huge implications for the contingent labour supply chain.

At Section 5.26 of the budget reference is made to the “tax avoidance and fraud in the umbrella company market”. A solution to this is presented to “make recruitment agencies responsible for accounting for PAYE on payments made to workers that are supplied via umbrella companies”. These plans are said to take effect from April 2026 and are accompanied by a policy paper that offers further information.

Below we set out own interpretation of the proposed changes but this comes with a considerable health warning that the wording of the policy paper is as yet unclear and it may be some time before we get draft legislation that will offer certainty around how the provisions will piece together.

The policy paper begins;

“As announced at Budget on 30 October 2024, the government will therefore bring forward legislation to change who has responsibility to account for Pay As You Earn (PAYE) where an umbrella company is used in a labour supply chain to engage a worker. This will move the responsibility to account for PAYE from the umbrella company that employs the worker to the recruitment agency that supplies the worker to the end client. Where there is no agency in a labour supply chain, this responsibility will sit with the end client. This will take effect from April 2026”.

On the face of it, this is a welcome provision. By placing greater responsibility for tax on the agencies that control the link between the worker, the umbrella and the end client, transparency is established.

Where this provision then becomes less clear is in the follow up guidance; Impact on the Contingent Labour Supply Chain- Budget 2024 This material provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore, no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or WTT.

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Impact on agencies

Agencies operating PAYE will withhold income tax and NICs before making payments to the umbrella company employing the worker, or any other intermediary between them and the umbrella company, remitting these sums to HMRC and preventing umbrella companies from failing to pass sums that should be withheld from workers’ pay to HMRC. Agencies will also be responsible for the payment of employer NICs.

Impact on umbrella companies

Umbrella companies will no longer be legally responsible for operating PAYE on payments to the workers that they employ.

Impact on workers

Workers will continue to receive their pay net of income tax and NICs following the introduction of the measure, although the business providing their payslip may change.

Our team has read and re-read these statements a fair few times to truly take account of the implications here. What does appear to be the case is that a hybrid model may be emerging where the worker is employed by the umbrella, but they receive their payslip and tax deductions by the agency. The guidance suggests that the umbrella will continue to employ the worker, but that the agency will be responsible for deducting tax and NI, paying across to HMRC. Could this be a form of Joint Employment under the PEO model where the agency becomes the Employer of Record and the umbrella retains the employment, HR and statutory risks?

Some immediate questions (more than answers) spring to mind here;

1. In order to facilitate this, agency 1 in the supply chain will need to know the gross taxable pay and deductions of the worker in order to account for the PAYE liability due. This calls for complete transparency as to the commercial arrangements that each entity in the supply chain has. With long complex supply chains that involve more than one agency or intermediary, margins will be exposed, creating commercial challenges for Tier 2 and 3 agencies.

2. We have to assume that this could lead to more agencies operating a margin only model, which in turn creates more commercial challenges as often agency 1 will transfer its contractual risk to agency 2, then in turn agency 2 offloads its commercial risk to agency 3 etc. With margin only contracts, the lower tier agencies are at risk of being removed from the supply chain.

3. Given it is the RTI submissions that determine who is legally responsible to account for PAYE, will the changes require an umbrella to operate under the Agency’s PAYE reference or remain under their own? Or will the amounts withheld and remitted to HMRC by the agency act as a credit to be offset against the umbrella PAYE account?

4. Can we expect changes to the Employment Intermediaries reporting to accommodate these changes.

5. What about salary sacrifice- many umbrellas offer their worker the option to contribute to their pension scheme on a salary sacrifice basis, as it forms part of the gross to net calculations. If the umbrella is no longer legally responsible to account for PAYE, the cost savings that arise from salary sacrifice in the form of reduced Employers NI and Apprentice Levy will no longer be passed on to the worker.

As we say, more questions than answers at this stage and there are many more that we could layout here, but will do so in a later update when we get further information. Where it then gets both clearer and more confusing is in the following statement;

“Where an agency chooses to outsource operation of payroll to the umbrella company that employs the worker they are supplying, PAYE will be operated by the umbrella company on behalf of the agency and the agency will be liable for any shortfall”.

This suggests that we revert to the current model, but all that changes is that the liability for tax and NI sits with the top agency or the end-client where no agency exists. That would make more sense but at this stage finding a thread between the two scenarios is tricky with the information we have.

What is clear is that the primary agency is in the firing line here. In parallels to Off-Payroll reforms (although targeting a different level of the supply chain) the provisions detail, whilst limited in detail at present, clearly show HMG and HMRC’s intent to ensure the agency is responsible for the supply chain. Arguably, this has long been the case s.44 ITEPA 2003 treating a worker as an employee of the agency where they are under SDC, but what is created here is a much more transparent and direct route to ensure the agency accounts for tax and NI.

Whilst it has, therefore, been important for some time now that agencies forensically examine their supply chain to ensure there are no bad actors operating within it, the risk will begin to increase as more direct legislation is passed to hold the agencies to account for the failings of those other entities in the supply chain. Similarly, your contracts will need to be reviewed to ensure effective indemnity provisions are in place and that operating frameworks are imposed more closely.

All things considered, it looks as though with changes to employer rights, greater transparency on the supply chain and PAYE risk shifting upwards, umbrellas will be called upon to account for the measures they take to protect the worker and their own clients to a greater degree than has been the established norm. Never before has it been more important for agencies to implement effective compliance frameworks and work with genuinely compliant umbrella companies, that can evidence compliance on an ongoing basis. It’s time to engage in payslip checking, PSL monitoring and stay ahead of the curve as the changes to legislation are announced.

As always, WTT will continue to keep the market updated with changes as we see them.

Equally, if you are an end-client, agency or umbrella and want some context to the proposals and what you can be doing to prepare, WTT Legal is a specialist in this field and we’re always here for a chat to talk through your current framework and help you stress test it.