WHICH VAT SCHEME? CASH ACCOUNTING OR ACCRUAL ACCOUNTING?

As many new recruitment owners have very little knowledge of accounting processes, deciding which VAT scheme they should be engaging with is not at the top of their agenda.

With lots of new recruitment agencies using online bookkeeping software to keep their books up to date and potentially submitting their own VAT returns, they may not necessarily be using the best VAT scheme for their agency, which could affect their business cash flow.

There are two main VAT schemes available to recruitment agencies:-

CASH ACCOUNTING

This scheme is available to businesses with sub-£1.35m turnover. It works very well for recruitment agencies as you only pay HMRC for VAT you have received from your clients, and you can reclaim VAT on the suppliers/expenses you have paid during the VAT period. For new recruitment agencies, this can be very helpful to cash flow, especially if you have invoices with VAT still outstanding. Your agency may also have paid contractors using umbrella/limited companies who are VAT registered but not received the funds from the clients, which may mean you are due a VAT refund on the next VAT return.

ACCRUAL ACCOUNTING

This scheme is available for any size business (including sub-£1.35m turnover). It works by you having to pay HMRC for any VAT charged on your client invoices and reclaim VAT on any suppliers/expenses that you have received. If you have not received payment on your client invoices, you will have to still pay the VAT to HMRC. If you are a new start recruitment agency on this scheme, this can cause cash flow issues while waiting for the VAT to be received from the client.

When you start your new recruitment agency, it is best to speak to your accountant about your VAT scheme to ensure you are on the right one for your business and you understand how the VAT scheme works.

TBOS provides a comprehensive back office and accounting solution to over 120 recruitment agencies, including managing their VAT records and schemes daily.

Please contact our office if you would like further information on how we can help your agency.

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