Accounting & Tax for Recruitment Agencies

Both supply of staff fees (where the agency employs the worker and seconds them to the client) and introductory fees (where the agency introduces a permanent employee) are standard-rated for VAT at 20%. The VAT is charged on the full agency fee in both cases. There is no VAT exemption for recruitment services. The distinction matters for accounting purposes (margin calculation, payroll treatment) but not for the VAT rate.

If you place contractors who work through their own limited companies (PSCs) with end-clients, you are typically the ‘fee-payer’ in the Chapter 10 off-payroll supply chain. As fee-payer, you are responsible for: (1) receiving and passing on the Status Determination Statement from the end-client; (2) operating PAYE and NIC deductions if the contractor is determined to be inside IR35; and (3) maintaining records of all SDS determinations. Failure to comply makes you liable for the PAYE/NIC that should have been deducted.

The AWR (2010) give temporary agency workers the right to equal basic employment conditions after 12 weeks in the same role with the same client. Equal conditions include: basic pay (same as if directly employed by the client), working time (same hours/overtime structure), rest periods and annual leave entitlement. The 12-week clock resets if the worker changes role, client or takes a break of more than 6 weeks. We track AWR qualifying periods for all temp workers and update payroll accordingly.

Since the 2024 Finance Act, recruitment agencies using umbrella companies in their supply chains must conduct and document due diligence. Required checks include: confirmation of PAYE registration, evidence of compliant PAYE processes (example payslips), confirmation of NMW compliance, evidence of statutory deductions, and annual review. We build a due diligence checklist and review programme for recruitment agency clients.

In addition to standard business records (bank statements, invoices, contracts), recruitment agencies must maintain: contractor placement records (SDS, contract terms, payment history), AWR 12-week tracking records, umbrella due diligence documentation, employment status assessments, and payroll records for all workers operated through PAYE. HMRC’s employment agency compliance team expects complete and chronological records for all placements.

Since the 2024 Finance Act, recruitment agencies have joint and several liability for umbrella company PAYE failures in their supply chain. ‘We didn’t know’ is no longer a defence. Conduct annual due diligence on every umbrella company in your supply chain — and document it.

Missing the AWR qualifying point creates equal-treatment liability from the 12th week — potentially including back-payment of the difference between the worker’s actual pay and the comparable directly employed rate. AWR back-payments can cover multiple placements across multiple clients — the exposure compounds.

Failing to obtain and process Status Determination Statements from end-clients for contractor placements means the agency is operating without a compliant off-payroll framework. HMRC’s employment status compliance team specifically looks for agencies without SDS procedures.

Many recruitment agencies are profitable in aggregate but loss-making on a significant number of individual placements — particularly AWR-affected temp placements where equal-treatment costs haven’t been modelled. Monthly margin analysis by placement type identifies where your business is genuinely profitable — and where it isn’t.