Over the next week we will be running a series of articles that reviews HMRC’s approach to enforcing compliance in the sector and looks to highlight critical actions that will need to be considered following any changes to avoid repeating the same mistakes.

A Data Goldmine Left Untapped
In an era where data analytics drives decision-making across industries, HMRC has long possessed powerful tools that could have reshaped compliance in the umbrella market. The introduction of Intermediary Reporting (2015) and Real-Time Information (RTI) (2013) gave HMRC unprecedented visibility into payroll structures and tax deductions. Yet, instead of using this data proactively to crack down on non-compliance in the umbrella sector, the regulator remained largely reactive.

Fast forward to 2025, and HMRC is now scrambling to implement sweeping reforms, including the potential regulation of umbrella companies and the introduction of tax debt transfer provisions. The question remains: could much of today’s non-compliance crisis have been avoided had HMRC leveraged the data at its disposal earlier?

The Warning Signs Were There
From the outset, Intermediary Reporting—requiring agencies to submit quarterly reports on payments made to workers not on PAYE—exposed gaps in employment transparency. At the same time, RTI required employers to report PAYE payments in real time, theoretically allowing HMRC to monitor irregularities in tax deductions, employment models, and suspicious activity.

This data should have flagged red alerts about the rapid expansion of unscrupulous umbrella models, such as:

• Mini Umbrella Companies (MUCs) – These were widely used to exploit VAT and National Insurance breaks by fragmenting payrolls.
• Tax Avoidance Schemes – Some umbrellas paid workers via disguised remuneration schemes, evident in discrepancies between reported earnings and tax liabilities.
• Inflated Employment Costs – RTI submissions could have shown patterns of excessive deductions from workers’ payslips.

Had HMRC actively scrutinised these data streams, it could have identified the worst offenders early, closing loopholes before they became widespread industry norms.

HMRC’s Failure to Act: A Systemic Issue?
Despite mounting evidence of tax abuse and worker exploitation, HMRC took a piecemeal enforcement approach, allowing the problem to escalate. Several factors contributed to this:

1. Lack of Real-Time Enforcement – While RTI offered a live view of payroll transactions, enforcement mechanisms remained sluggish, relying on retrospective audits rather than active interventions.

2. Weak Intermediary Reporting Oversight – Agencies reported payments, but HMRC failed to cross-check these with worker tax records, allowing off-payroll models to thrive.

3. Compliance Burden on the Wrong Players – Rather than holding the designers and promoters of these non-compliant arrangements accountable, HMRC seemed to pusue anyone other than those making the money from the schemes.

By failing to act decisively on this data, HMRC has allowed non-compliance to erupt in the umbrella sector.

What Could Have Been Different?
Had HMRC fully analysed and acted on intermediary reporting and RTI data from their inception, the umbrella compliance landscape today might look very different:

• Early Identification of Non-Compliant Umbrella Models – A data-driven compliance approach could have blacklisted bad actors before they scaled operations.

• Targeted Enforcement – Rather than broad-brush reforms, HMRC could have imposed penalties on specific high-risk firms, reducing collateral damage to compliant umbrellas.

• Trust in the Market – Proactive enforcement would have prevented the reputational damage now affecting the umbrella sector, fostering a fairer playing field.

Instead, HMRC now finds itself reacting to a crisis that could have been prevented—one that has cost workers millions in lost wages and the Treasury billions in tax revenue.

Conclusion: Data Was the Answer All Along

As HMRC moves to regulate umbrella companies in 2025, one thing is clear: the tools to prevent today’s compliance issues already existed years ago. Had HMRC as the regulator leveraged intermediary reporting and RTI effectively from the start, today’s drastic reforms may not have been necessary.

Professional Passport’s 2021 report, The Good, The Bad and The Ugly, provided foresight into the challenges within the umbrella company sector and offered actionable recommendations. Had these suggestions been implemented earlier, they might have mitigated some of the compliance issues that HMRC’s 2025 response now seeks to address. Proactive regulation, mandatory due diligence, robust enforcement, and enhanced transparency could have fostered a more compliant and equitable environment, potentially reducing the need for the measures currently being proposed.

This failure raises a fundamental question about HMRC’s approach to compliance—is it finally ready to use the data at its disposal to enforce rules in real-time, or will it continue to play catch-up? The future of the umbrella market, as well as general tax compliance, may well depend on the answer.