Umbrella companies, CEST and worker status: what's changing?

Many employers look to hire workers and self-employed contractors to supplement their workforce. Proposed changes to various regimes could impact on the feasibility of this approach.

Proposed changes to umbrella companies

An umbrella company is a business model used by some recruitment agencies to engage and pay temporary workers. The recruitment agency finds temporary work for an individual with one of its clients, and the individual is then engaged and paid by the umbrella company.

The Employment Rights Bill proposes significant amendments to the definition of "employment business" under the Employment Agencies Act 1973. The proposal is to broaden the current definition to include "employment arrangements," which encompasses the activities of umbrella companies. The change will therefore bring umbrella companies within the scope of the Conduct of Employment Agencies and Employment Businesses Regulations 2003 (the Conduct Regulations). This means umbrella companies will be subject to various obligations, including:

• paying workers irrespective of whether they have received payment from the hirer or recruitment agency; 
• complying with requirements related to information gathering and verification; 
•  prohibiting charging workers for services except in limited circumstances permitted by the Conduct Regulations.

The proposed change will also bring umbrella companies under the remit of the Employment Agency Standards Inspectorate, which will be responsible for enforcing these regulations. Eventually, this responsibility will pass to the new Fair Work Agency which the government is intending to set up.

In addition, as part of the Autumn 2024 Budget, the government announced that legislation would be included in the Finance Bill 2025 to transfer PAYE responsibility from umbrella company employers to the agency that supplies the worker to the end-client, or directly to the end-client if there is no agency. This change aims to eradicate tax non-compliance by umbrella companies by moving the taxation responsibility away from them.

Once the proposals come into force, it is likely that recruitment agencies will be more cautious about relying on umbrella companies. This may result in some recruitment agencies taking payroll back in-house or moving to more well-established umbrella companies that have transparent and demonstrably compliant payment arrangements. Any employers that currently engage with agencies using umbrella companies should audit these arrangements and consider whether they are still appropriate in light of these planned changes.

Off payroll working rules and employment status

The off payroll working rules, set out in Chapter 10 of Part 2 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA), apply to working arrangements in the private sector where certain gateway tests are met, including that the worker is supplying services to a client in situations where the agency legislation does not apply. Typically, the off payroll working rules apply where an individual provides their services through an intermediary, such as a personal services company, to an end-user.

Where the gateway tests are met, these rules require the client (end-user) to carry out an employment status determination, typically using the government's Check Employment Status for Tax (CEST) tool, unless the client has written confirmation from the individual or the intermediary that the intermediary is not a relevant intermediary for the purposes of the rules.

If the status determination reveals that the individual is in deemed employment with the end user, then the fee payer (being the entity contracting with the intermediary which could be the end user or an agency) becomes responsible for the deduction of income tax and NICs (including employer NICs and, if relevant, the apprenticeship levy) in relation to that individual and must account for these to HMRC.

On 30 April 2025, HMRC updated its CEST tool and accompanying CEST-related guidance in order to improve its accuracy. The CEST tool is intended to enable end users to check an individual’s employment status by answering a series of questions. HMRC states that, provided the CEST tool is used correctly, with accurate information and in accordance with HMRC guidance, and there are no tax planning arrangements, then it will stand by the answer produced by the tool.

Employers should ensure that they use the updated tool when carrying out a status determination.

Proposed reform of employment status

The government has proposed to consult about moving away from the current three-tiered system (comprised of employees, workers and the self-employed) towards a simpler, two-tiered system consisting of only workers and the genuinely self-employed.

Any consultation on this subject would need to be detailed to consider properly how the two-tiered regime would capture the variety of working arrangements in existence in the UK and how a simpler regime could at the same time be both flexible enough to adapt to changing working practices and robust enough to guard against loopholes used by employers looking to avoid the regime.

Earlier this year, the government referred to the two-tier regime as a “longer term goal”, so imminent changes are not expected (and proposed amendments have not yet made it into the Employment Rights Bill). However, the House of Commons Business and Trade Committee’s report in March has called for these reforms to be accelerated.

This acceleration would include the enhancement of protections for self-employed persons. The New Deal green paper suggested that Labour would look to give genuinely self-employed persons the right to:

• withdraw their labour due to immediate risks to their health and safety
• increased protection against being blacklisted for raising health and safety concerns
• have a health and safety representative at work.

The ‘Plan to Make Work Pay’ paper also suggested that Labour may look to give self-employed persons the right to a written contract and additional rights to address late payments.

However, given that the distinction between employment and worker status is fundamental to a range of rights and is present in an array of existing legislation, implementation of the two-tier system would likely take years.

Employers who rely on self-employed contractors or workers to supplement their workforce should keep a close watch on developments in this area and consider whether an alternative business approach might be required if these proposals are adopted.