VAT (Value Added Tax) can be an enigma for new start-up recruitment agencies, as often they have not had to deal with VAT in their previous roles as employees. However, as a new agency owner, understanding VAT is essential as it is a constant and critical element of running a business.
Recruitment agencies should register for VAT (even if they are under the registration threshold) as they are making VATable supplies to their clients. Registration allows them to reclaim VAT on expenses, and without registration, their business can appear smaller or less established.
There are two accounting methods for VAT registration with HMRC, and it is advisable to consult with your company accountant to determine the best method for the agency:
CASH ACCOUNTING
Under this method, VAT is accounted for when it is received on client invoices or paid on contractor/supplier invoices or expenses, based on movements in and out of the bank account. For example, if a sales invoice is issued in April but the client pays in May, the VAT becomes payable in the May accounting period, not April.
ACCRUAL ACCOUNTING
This method accounts for VAT based on the date of the invoice, regardless of when payment is made or received. This means if sales invoices are raised in April, the amount of VAT payable would be shown within the April accounting period, even if the client has not yet paid the invoice.
Most recruitment agencies tend to register under the Cash Accounting method, as it can ease early cashflow pressures. VAT is only payable once funds are received from clients rather than when invoices are issued.
However, when an agency’s turnover is projected to exceed £1.35 million within a 12-month period, it must switch to the Accrual Accounting method, meaning VAT must be paid based on invoice dates. This transition period can have an impact on cash flow, so it is important to seek financial advice when approaching this threshold.
In some cases, particularly if an agency is providing recruitment services to overseas clients but paying contractors through UK umbrella companies or limited companies (meaning the service is delivered in the UK), it might be beneficial to adopt Accrual Accounting from the outset. This allows the agency to reclaim VAT refunds sooner. In such circumstances, it may also be advantageous to move to a monthly VAT return cycle rather than quarterly, to reclaim the refund sooner.
MAYACHI provides help and support to recruitment agencies to ensure that they understand their HMRC obligations and to ensure they operate within the rules and regulations. MAYACHI can review a company’s VAT scheme to ensure that they are working most efficiently and that they are on the correct structure for the business.
