Over the past few months, MAYACHI has spoken with several startup recruitment agency directors who have questioned whether they should register for VAT as a new business.
In some cases, they have consulted their accountants, who advised that, since their turnover is currently below the VAT registration threshold of £90,000, registration is not required.
However, all recruitment agencies should register for VAT, even if they are below the threshold, as they are providing taxable (VATable) supplies to their clients and can also reclaim VAT on their expenses.
Here are some key reasons why recruitment agencies should register for VAT from day one:
CLIENTS ARE EXPECTING VAT TO BE CHARGED ON INVOICES
Recruitment companies are providing business-to-business services and therefore are expecting VAT to be present on invoices raised, as they are also VAT registered.
YOUR AGENCY COULD LOOK SMALL IF YOU ARE NOT VAT-REGISTERED
If your agency is not VAT registered because you’re below the £90,000 threshold, clients may perceive your business as small or inexperienced. This perception could deter potential clients from working with you or delay new business opportunities.
SOME OF YOUR OVERHEADS WILL BE 20% HIGHER
Without VAT registration, you cannot reclaim VAT on supplier invoices or other business expenses. This means certain costs will be 20% higher, which can directly reduce your profit margins and the amount distributable to shareholders.
The only times a recruitment agency should contemplate not being VAT registered would be if the recruitment service they are providing to a client is on a business to customer basis (i.e. direct to an individual) who may not be VAT registered or to a client where they are providing an exempt supply (where the client cannot reclaim the VAT) so could make the service 20% more expensive. However, in both circumstances, it would be advisable to seek advice from an accountant.
Ironically, most accountants are themselves VAT registered. Advising a recruitment client not to register may inadvertently increase that client’s costs by 20%.
MAYACHI provides help and support to recruitment agencies to ensure that they understand how VAT works and their HMRC obligations. MAYACHI can advise recruitment agencies on which VAT scheme they should be working under and ensure that they stay compliant within the rules and regulations.