Contingent workforces contend with major reform in the countdown to the UK Budget

The UK chancellor of the exchequer's forthcoming Budget is expected to touch on a range of issues affecting business costs and employment, but, even before it lands, a wave of legal and regulatory change is heading towards anyone who hires, supplies or pays contingent workers. From staffing agencies and "umbrella" companies to the end-user businesses that rely on contract and agency staff, there is much to watch out for as the Budget approaches on Wednesday 28 October.

Budget expectations

While the precise contents of the Budget remain under wraps, speculation has centred on several measures that could significantly affect businesses using flexible or contingent labour, including changes to National Insurance contributions (NICs). 

There has been some speculation that the chancellor may increase employer NICs or lower the threshold at which they become payable. For businesses that rely heavily on agency or contract staff, this could translate into materially higher costs if those changes feed through into the rates charged by staffing agencies and umbrella companies, whose own cost bases would rise. 

However, others have suggested that if, as indicated in his first speech as chancellor on 7 September, John Healey wants to encourage investment, innovation and jobs, he may be tempted to do the opposite and introduce measures to improve the employment landscape; for example, reducing income tax or NICs for those newly entering the job market, or improving the growth and skills levy.

A rumoured rise on the capital gains tax (CGT) rates is also spurring increased merger and acquisition activity ahead of the Budget. However, beneath the Budget speculation headlines, the more certain and arguably more consequential changes are already in motion.

Clamp down on bogus self-employment

The business secretary, Jonathan Reynolds, announced in his speech to the Labour Party conference in Liverpool this week that the government will close the loopholes to stop the "most egregious examples of self-employment". Reports suggest that a consultation will be launched next month and is expected to include proposals for a legal assumption of worker status when a case is brought to an employment tribunal.  

Could this work? "Deemed" status is not a new idea: the UK agency worker tax legislation deems an agency worker to be the agency's employee for tax purposes unless the agency can show that the worker does not work under anyone's supervision, direction or control. In Europe, the new Platform Work Directive, to be implemented by EU members states by 2 December this year, introduces a rebuttable presumption that a "platform worker" is employed unless it can be shown, based on national employment tests, that the individual is self-employed.

It remains to be seen how this will play out in Europe but in the UK the  introduction of deemed employed status for agency workers has lead many agencies to move away from engaging self-employed sole traders. The consultation is awaited and it remains to be seen what is proposed, but an assumption of worker status could help to "close loopholes" by driving "employer" behaviour away from engagements that are difficult to defend as genuinely self-employed. 

New rights for zero-hours and agency workers  

Whatever the Budget does bring, in the meantime, contingency workforces are undergoing a raft of legal and regulatory reforms. 

The government's "Make Work Pay" programme has generated two major consultations that will directly reshape the flexible labour market. Its consultation "Make Work Pay: modernising the Agency Work Regulatory Framework" looked to review the rules that govern how agency workers are hired, paid and treated. The "Make Work Pay: ending one-sided flexibility – reforms of zero hours and similar contracts" consultation separately sought views this summer, targeting the use of zero hours and similar contracts where all the scheduling risk sits with the worker.

Whatever the outcome of these consultations, the direction of travel is clear. By 2027, qualifying zero-hours workers and agency workers will have the right to be offered guaranteed-hours contracts based on their regular working patterns. Annual guaranteed hours offered by some umbrella companies are unlikely to be enough to place the engagements outside the scope of the new hirer guaranteed hours obligations. For businesses that have built their operating models around maximum scheduling flexibility, this represents a fundamental shift: workforce planning, contract structures and supplier agreements will all need revisiting well in advance.

Changes to the Conduct of Employment Agencies and Employment Businesses Regulations are also expected to bring umbrella companies more formally within the regulatory framework, affecting how umbrella arrangements are structured and governed. It is also possible that changes will affect recruitment and gig worker platforms.

These reforms will require the industry to begin reviewing reliance on zero hours and flexible agency worker arrangements now and not wait for the final legislative text before modelling the operational and cost impact. Changes required to reframe existing supply models or to implement guaranteed hour offer compliance processes will take months, not weeks. 

Tribunal time-limits extended

One change with particular relevance for those operating flexible workforce models is the extension of the time limit for bringing most employment tribunal claims from three months to six months, introduced under the Employment Rights Act 2025.

For businesses using agency workers, zero-hours contractors or umbrella-employed staff, this matters in a number of ways. Worker classification disputes, where an individual argues they are a worker or employee rather than self-employed, can now be brought considerably later than before. Complaints about equal pay, unlawful deductions from wages or holiday pay underpayments have a longer window. For those managing high-volume contingent workforces, the practical consequence is that potential claims will remain live for longer, making record-keeping, document retention and contract discipline more important than ever.

Businesses will be looking to revisit their document retention policies, ensuring contracts and working practice records are capable of responding to claims arising significantly further back in time than previously.

Third-party harassment

From 30 October, employers will be subject to a new duty not to permit harassment of their employees by third parties; for example, clients, visitors, or contractors operating on the same site.

The practical implication for contingent workforce users is significant. An end-hirer who places agency workers on site, or whose permanent staff interact regularly with contingent workers from other employers, is now expected to actively ensure that its environment does not permit harassment to occur. That means policies, training, reporting mechanisms, and a willingness to act when complaints are made. It is no longer sufficient to say that the harassing individual was not your employee, if the conduct was permitted the conduct to occur, liability may follow.

An audit of anti-harassment policies and training programmes can help ensure they explicitly address third-party conduct. Businesses will be looking to consider how site rules and supplier contracts can be updated to reflect the new duty.

Supply chain liability 

From 1 October, the right-to-work checking regime is being extended to impose liability further up the supply chain. Businesses will no longer be able to rely solely on the fact that their immediate supplier or agency conducted checks. If illegal working is found and there is evidence that a business further up the chain should have known or failed to take reasonable steps, it too can face penalties.

Staffing suppliers and digital labour platforms are explicitly within scope of the extended regime. For any organisation that sources labour through staffing agencies, sub-contractors, or labour providers of any kind, reviewing supply chain due diligence processes, contractual protections and audit rights has become essential.

A review of supplier onboarding and audit frameworks can help ensure that contracts with staffing agencies and labour providers include obligations and processes that comply with the Home Office's "prescribed requirements".

Corporate criminal liability

In August 2025, HMRC launched the UK's first corporate criminal prosecution under the failure to prevent the facilitation of tax evasion offence, targeting Stockport-based accountancy firm Bennett Verby. This is a landmark moment for staffing supply chains.

The message is clear: companies can face criminal liability not just for what they do themselves, but for what those acting on their behalf facilitate. Umbrella companies, payroll intermediaries and other third parties operating within a supply chain are within scope. If HMRC can show that your business failed to put reasonable prevention procedures in place and that someone associated that a business helped a worker or contractor evade tax, the corporate criminal liability can follow.

Compliance frameworks that include specific procedures for preventing the facilitation of tax evasion, with supply chain risk mapping and assessment of the tax compliance risk presented by each intermediary, are now standard risk management practice.

MSC rules and tax risk

The managed service company (MSC) legislation is also back in focus. The outcome of the Boox case, heard in June, will be closely watched across the contractor and accountancy services market, given it will test the boundaries of when a company providing financial or administrative services to contractors crosses the line into being an MSC provider; with significant tax consequences for the contractor company, the service provider and anyone else involved in encouraging or actively facilitating the use of the contractor.

For businesses engaging personal service company (PSC) contractors, this is a reminder that the structures used by their labour supply chain carry real tax risk  that can, in certain circumstances, travel upstream to agencies and directors.
The Boox decision will be closely monitored across the industry. Businesses that engage PSC contractors will be looking to take early advice on whether those structures are exposed to MSC characterisation risk, particularly checking any arrangement where an intermediary, such as an umbrella company, pays or appears to pay a PSC contractor. 

VAT fraud: ignorance is no defence

A timely warning comes from the Upper Tribunal's July decision in Opus Labour Services Limited v HMRC. The case is a stark illustration of how VAT fraud in construction labour supply chains can devastate businesses, even those without actual knowledge of the fraud. Drawing on the Kittel principle, HMRC can deny VAT input tax recovery where a business "knew or should have known" that it was participating in a fraudulent supply chain. VAT fraud is not limited to construction labour supply chains: the message for any sector reliant on outsourced labour is that, commercially naïve due diligence is not enough. Businesses need to be able to demonstrate that they made genuine, documented enquiries about the legitimacy of their labour providers and took meaningful steps when red flags appeared.

Labour procurement due diligence in high-risk sectors such as construction, healthcare, logistics is worth revisiting. Umbrella companies' VAT registration should be regularly checked, together with confirmation that company paying the umbrella workers is the same legal entity for which a VAT registration has been confirmed. Documented, proportionate and genuinely capable of identifying fraud risk go further than box-ticking.

M&A due diligence

For anyone involved in the buying or selling of businesses that use or supply contingent labour, the cumulative weight of these developments is now squarely on the due diligence agenda. Umbrella company joint and several liability, worker classification risk, right-to-work supply chain liability, MSC exposure, VAT fraud risk, third-party harassment liability, and extended tribunal claim windows are no longer peripheral concerns to be addressed in a warranty schedule. They are front-and-centre diligence questions that require interrogation at the outset of any transaction.

Buyers and their advisers are already asking searching questions about how target companies manage their contingent workforce, who sits in their supply chain, what compliance frameworks exist, and what historic exposure may be lurking. Sellers can expect to have to demonstrate the robustness of their arrangements, not merely assert it. With employment claims now capable of being brought up to six months after the relevant event, the tail of historic liability in any acquisition is materially longer than it once was.

A dedicated contingent workforce workstream in transaction due diligence is increasingly the norm: sellers should be prepared to produce evidence of compliance or risk deals falling through; buyers need to be alert to the potential contingent liabilities and structure their negotiations accordingly. 

IR35: noise without change

Following the shadow chancellor's recent commitment to remove IR35 if the Conservatives were elected, there has been plenty of noise and discussion around what an end to the off-payroll working regime might look like. However, one thing the Budget is very unlikely to change is this IR35 regime. Despite persistent calls from contractor groups for reform or repeal, there is no credible expectation that the current government will revisit the rules.

What is shifting, however, is the likelihood that those rules will soon be enforced. The first formal assessments under the off-payroll rules in the private sector are now anticipated, meaning businesses that have been less than thorough in evidencing their status determinations face uncomfortable questions if asked to justify certain outside IR35 determinations.

Organisations engaging PSC contractors, whether directly or via an agency or consultancy, are well served by status determination statements that are robust, properly evidenced, passed down to contractors and consistently applied – and reviewed with a clear, documented audit trail for all off-payroll engagements.

Osborne Clarke comment

Whether the Budget brings higher employer NICs, adjusted tax thresholds, a rise in CGT rates or something less expected, the flexible labour market is already navigating one of the most intensive periods of legal and regulatory change it has seen in years. The combination of new worker rights, extended criminal and civil liability, heightened tax risk, sharper enforcement from HMRC, and a new culture of employer responsibility around workplace conduct means that operating in this space without specialist advice is an increasingly uncomfortable position to be in.

The question for businesses supplying or engaging contingent workforces is not whether these changes will affect them: it is whether they are ready.