Most new start-up recruitment directors are unfamiliar with VAT as it’s not something they would have dealt with previously as a consultant. However, when transitioning into a recruitment director its important to understand the different elements of VAT and how it can affect a business’s cash-flow – as in some cases it can lead to VAT funds being mistakenly spent. Late VAT submissions and payments can lead to an increase in HMRC surcharges which can harm an agency’s profitability and can be quite detrimental to a new start up recruitment business.
Below are some of the VAT issues that recruitment agency directors face when running their own recruitment business:
MANAGING VAT ON PERMANENT PLACEMENTS
If your agency is only making permanent placements then every invoice requires VAT to be paid, with very little VAT that can be reclaimed from your business expenses. This means that the agency bank account each quarter may appear very healthy as there will be a large amount of VAT money sitting in there, which is actually due to HMRC. To ensure that you do not spend this VAT amount, it is recommended to set up a separate bank account where the VAT element of the invoice is transferred to each time a payment is received. By doing this, you can protect the funds owed to HMRC and stay informed of the correct funds in the main agency account which shows an accurate representation of the company’s cash-flow.
CASH ACCOUNTING OR ACCRUAL ACCOUNTING?
When your agency is registered for VAT, you have 2 choices on how your VAT returns are calculated. Cash Accounting is where the VAT is paid over on payments received, not on invoices raised, with this VAT being reclaimed on payments made to suppliers but not on invoices received. Accrual Accounting is where VAT is paid on invoices raised and when supplier invoices are received. In the early days of your agency, it is often advisable to use a cash accounting method as you only have to pay VAT on VAT that has been received, instead of paying VAT on invoices that have yet not been paid. However, once an agency has exceeded £1.65m in turnover, the agency can only use the accrual accounting method going forwards.
THE RIGHT VAT SCHEME AND FREQUENCY
It is a good idea to regularly discuss your VAT scheme with your accountant to ensure your business is on the correct scheme and payment frequency. VAT returns are often submitted and paid on a quarterly basis but if you are on a refund scenario then you should consider moving to a monthly submission so the refunds are received each month. Also, if your turnover is below £150k you may be eligible to run a flat rate scheme, this may reduce your VAT payment and in some cases provide additional profit.
VAT ON INTERNATIONAL PLACEMENTS
VAT is chargeable between a UK company and another UK company, so when you make an international placement there is no VAT chargeable on the invoices raised to non-UK companies. In order to remain compliant with international VAT rules, you need to include the clients VAT number on the invoices so that the VAT is reverse charged. You also need to evaluate the cash-flow situation on international placements as even though you will not be able to charge VAT to your clients, your candidates may be using UK registered companies which you will have to pay VAT on. This may cause a VAT cash-flow hole where you are then due a refund each month from the HMRC, meaning you will have to fund the VAT to the contractor during this time.
VAT TO THE MEDICAL INDUSTRY
The VAT rules on invoices to the medical industry have always been very vague and it is unlikely you will get a straight answer from the HMRC. Some clients (and agencies) will argue that they are providing medical professionals so the services are VAT exempt, however theses rules are unclear as agencies are in fact providing staff, which is a service that is fully VAT chargeable. In many cases clients will argue that some agencies don’t charge VAT, with agencies noting they cannot reclaim the VAT as they are not registered because they are an exempt supplier.
NURSING AGENCY CONCESSION
Further to the issue mentioned, there is an exception under the Nursing Agency Concession which allows agencies to not charge for the provision of nursing staff. However, there are some parameters that need to be met in order for this to be an exemption and not all nursing or medical placements are covered under this. It is often advised for agencies to work with their clients to ascertain if the service is under this concession or not, so the reasoning can be later explained to the HMRC should there be a future audit.
VAT WITHHELD BY PAY AND BILL COMPANIES
Often when an agency uses a Pay-And-Bill company, they will believe they are being provided 100% finance as the Pay-And-Bill company will pay the candidate and provide the agency with their profit minus their charges each week. However, many of these companies will often hold back the VAT and PAYE element of the placements and pay this to the HMRC directly or give it to the agency when the payment is due (which means the Pay-And-Bill company is not necessarily providing 100% finance). Therefore, an agency using a Pay-And-Bill company may be at a disadvantage on their cash-flow compared to a company using invoices finance – as the VAT and PAYE funds can be stored in the agency’s bank account or at the invoice finance company, thus reducing their funding charges.
HOW TBOS CAN HELP WITH VAT
TBOS manages the full back-office and accounting services of many recruitment clients, with a part of our service contributed to reconciling and preparing VAT returns. We ensure our clients are prepared under the most effective scheme and at the correct frequency (i.e. if the agency is in a refund situation then the returns are completed on a monthly basis). TBOS also provides guidance on which expenses have VAT and which amounts can be reclaimed to ensure that they are making the most of the VAT rules and generating maximum profits moving forward.
For more information on how TBOS can help manage your back office and VAT requirements, please contact our office on 0345 504 6333.
Alternatively you can email us on firstname.lastname@example.org