Most new start-up recruitment agency directors are unfamiliar with VAT and how it should be managed as it probably wasn’t something they had to deal with directly as a consultant. Having an understanding of VAT and how it affects cash-flow is vitally important to ensure that HMRC’s obligations are met and that an agency does not spend VAT that is due. However, there are various VAT rules that affect the recruitment industry that need to be factored in, especially when an agency starts trading as that is when VAT can have the biggest impact on cash-flow.
Below are some of the VAT questions and issues that recruitment agency directors face when running their own company:-
- Managing VAT On Permanent Placements
If your agency is only making permanent placements then every invoice has VAT that needs to be paid, with very little VAT that can be reclaimed. This means that the agency bank account each quarter may be very healthy as there will be a large amount of VAT money sitting in there, which is actually due to HMRC. In order to ensure that you do not spend this VAT amount, it is advisable 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 the funds in the main account are a truer 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 and also reclaimed on payments made to suppliers, not on invoices received. Accrual Accounting is where VAT is paid on invoices raised and supplier invoices 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 to be 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 you are on the correct scheme and frequency of payment. 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 which may reduce your VAT due and in some case 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 the VAT on. This may cause a VAT cash-flow hole where you are then due a refund each month from HMRC, and you will have to fund the VAT to the contractor during that 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 HMRC. Some clients (and agencies) will argue that they are providing medical professionals so the services are VAT exempt, but the rules are not clear as agencies are in fact providing staff, a service which is fully VATable. Clients will argue that some agencies will not charge VAT and some will say that they cannot reclaim the VAT as they are not registered as they are an exempt supplier.
- Nursing Agency Concession
Further to the point above regarding charging VAT to the medical industry, there is an exception under the Nursing Agency Concession which allows agencies to not charge for the provision of nursing staff. There are some parameters that need to be met in order for this to be an exempt supply and not all nursing or medical placements are covered under this. It is often advisable to work with your clients to ascertain if the service is under this concession or not, so the reasoning can be explained to 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 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 bank account or at the invoice finance company, thus reducing their funding charges.
TBOS manages the full back office and accounting services of the agencies it looks after, including reconciling and preparing the VAT returns. TBOS works with the agencies to ensure that they 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 gives help and advice to the agency directors on which expenses have VAT on that can be reclaimed on the returns made to ensure that they are making the most of the VAT rules and generating maximum profits.
For more information on how TBOS can help manage your back office and accounting needs including VAT returns, please contact our office.