What is different about accounting for a recruitment agency
A recruitment business sits in the middle of other people's pay. That brings tax and legal duties that most service businesses never meet, and one of the most important changed on 6 April 2026. GOV.UK draws a line between two models, and many agencies run both:
- Employment agency (permanent placements). You introduce candidates who are then employed and paid by the hirer. Your income is a placement fee.
- Employment business (temporary and contract work). Workers are supplied to a client and work under the client's supervision, but you pay them. You must pay a temporary worker for all the hours they work, even if the hirer has not paid you or has not authorised the timesheet.
A permanent desk is a fairly simple fee business. A temp or contract desk means payroll, holiday pay, off-payroll working checks, umbrella company due diligence, quarterly HMRC reports, VAT on the whole charge and a funding gap between paying workers and being paid.
Temp payroll and the agency rules
Under HMRC's agency rules you must operate PAYE as if the workers you supply were your employees when all of these apply: the worker personally provides services to a client, there is a contract between the client and your agency, and the client pays for the worker's services. The rules do not apply where nobody has the right to supervise, direct or control how the worker does the job, where the worker always works from home or premises the client does not control (unless the job requires it), or for actors, musicians, entertainers and models. They also do not apply where someone else in the chain, such as an umbrella company, already employs the worker.
Running temp payroll brings employment law duties too:
- Pay at least the National Minimum Wage. From 1 April 2026 the rate for workers aged 21 and over is £12.71 an hour.
- Irregular-hours and part-year workers accrue holiday at 12.07% of the hours worked in each pay period. For leave years beginning on or after 1 April 2024 you may pay them rolled-up holiday pay instead of paying when leave is taken.
- From 6 April 2026 you must keep records of annual leave and holiday pay for at least 6 years.
- Employer National Insurance is 15% above £5,000 a year (£96 a week). Employment Allowance can cut the bill by up to £10,500, but earnings of workers within the off-payroll working rules cannot be counted.
Worked example: what one temp placement earns
A worker on weekly payroll works 37.5 hours at £15 an hour. You charge the client £22 an hour. Rolled-up holiday pay is used and figures are shown before any workplace pension contributions.
| Line | Working | Weekly amount |
|---|---|---|
| Basic pay | 37.5 x £15 | £562.50 |
| Rolled-up holiday pay | £562.50 x 12.07% | £67.89 |
| Gross pay | £562.50 + £67.89 | £630.39 |
| Employer National Insurance | (£630.39 minus £96) x 15% | £80.16 |
| Total cost of the worker | £630.39 + £80.16 | £710.55 |
| Charge to the client | 37.5 x £22 | £825.00 |
| Gross margin | £825.00 minus £710.55 | £114.45 |
| VAT on the invoice | £825.00 x 20% | £165.00 |
Three lessons sit in that table. First, the margin is about 14% of the charge, and pension contributions come out of it too. Second, VAT is due on the full £825, not on your £114.45 margin. Third, turnover climbs fast: one placement like this for 52 weeks bills £42,900 (£825 x 52), so three of them bill £128,700 and take an unregistered business well past the £90,000 VAT threshold.
Cash is the other lesson. If the client pays 30 days after month end, you may fund four or five weekly payrolls before the first invoice is paid. On this placement, four weeks of cost is £2,842.20 (£710.55 x 4) for every worker you place.
VAT on supplies of staff
When you supply temporary staff as a principal, VAT is charged at the standard rate on the full consideration, which includes the salary, National Insurance and pension costs you recover from the client, not just your fee. If you act only as an agent, introducing workers who then contract directly with the client, you account for VAT on your introduction fee alone. A supply of staff to a customer who belongs outside the UK is outside the scope of UK VAT.
The Cash Accounting Scheme, for taxable turnover of £1.35 million or less, lets you pay VAT when your client pays rather than when you invoice. For a temp desk with slow payers that can make a real difference. Our VAT registration guide explains the threshold rules.
Contractors, IR35 and the deemed employer
When you place a contractor who works through their own limited company with a public sector client, or a medium or large private sector client, the client must decide whether the off-payroll working rules apply and give a status determination statement (SDS) with reasons. Size conditions apply only to clients: an agency of any size has duties.
The deemed employer is the party lowest in the chain, above the contractor's company, that holds the SDS. If that is you and the role is inside the rules, you deduct income tax and employee National Insurance from the fee and pay employer National Insurance. If there is another agency below you, pass the SDS down. If you receive no SDS, pay without deductions and ask why; the client may be small. As the first agency in the chain, liability can move back to you if HMRC cannot collect from parties below you. See our contractor accountants page for the contractor's side.
Umbrella companies: the April 2026 PAYE change
For payments made to workers on or after 6 April 2026, the agency that has the contract with the end client is responsible for making sure an umbrella company in its supply chain operates PAYE correctly. The law makes the agency jointly and severally liable, so HMRC can recover underpaid PAYE and National Insurance from the agency. Where no agency is involved, the end client carries that risk.
HMRC's guidance for agencies expects documented due diligence: check the umbrella is VAT registered and matches Companies House, get payslips and pay statements directly from workers to confirm PAYE is being run and the assignment rate matches what you sent, and walk away from any umbrella promising workers higher take-home pay. Read what is an umbrella company for background.
Employment intermediary reports
If you supply more than one worker to clients and do not operate PAYE on their pay, for example contractors paid through their own companies or umbrella employees, you must send HMRC a report using its template. The intermediary with the contract with the client sends it. You must file a nil report for a quarter in which you supplied no workers. Reports are due one calendar month after each reporting period:
| Reporting period | Deadline |
|---|---|
| 6 April to 5 July | 5 August |
| 6 July to 5 October | 5 November |
| 6 October to 5 January | 5 February |
| 6 January to 5 April | 5 May |
Late reports bring automatic penalties of £250 for a first offence, £500 for a second and £1,000 for a third and later offence within 12 months.
Company structure and director pay
A limited company keeps the contract and payroll liabilities of a recruitment business inside the company, separate from your personal finances in most circumstances. Company profits are taxed at 19% up to £50,000 and 25% above £250,000, with marginal relief between. Directors commonly take a salary at or near £12,570 plus dividends. For 2026/27 dividends above the £500 allowance are taxed at 10.75%, 35.75% or 39.35% depending on your income tax band, and they cannot be deducted from company profits. Our guide to director salary and dividends shows the numbers.
Cash flow and invoice finance
Because you must pay temps whether or not the client has paid, a growing temp desk needs working capital. Invoice finance lends against unpaid invoices. With factoring, the provider also runs your sales ledger and collects from your clients. Invoice discounting is finance only: you keep collecting, and facilities are often undisclosed to clients. Compare the fees carefully and tell your accountant before you sign, because the facility changes how debtors, fees and bank balances appear in your books. Good cash flow habits still matter: short payment terms, weekly invoicing to match weekly payroll and fast chasing.
Regulation and licensing
Agencies and employment businesses must follow the Employment Agencies Act 1973 and the Conduct Regulations 2003, enforced by the Employment Agency Standards Inspectorate. You cannot charge work-seekers for finding them work, and you must give each work-seeker a key information document and written terms before looking for work for them. Most agencies need no licence, but those supplying workers for agriculture, horticulture, shellfish gathering or food processing and packaging must be licensed as gangmasters by the Fair Work Agency. Nursing and domiciliary care agencies in England may need to register with the Care Quality Commission.
Key deadlines for 2026/27
- Employment intermediary reports: 5 August 2026, 5 November 2026, 5 February 2027 and 5 May 2027.
- VAT returns and payment: 1 calendar month and 7 days after each VAT period.
- Corporation Tax: pay 9 months and 1 day after the year end; CT600 due 12 months after it.
- Annual accounts: 9 months after the accounting reference date. Confirmation statement at least every 12 months.
- Director Self Assessment for 2025/26: file and pay by 31 January 2027; second payment on account by 31 July 2027.
How GoForma helps recruitment agencies
GoForma is a UK online accountancy practice with ACCA and AAT qualified accountants, working with clients across the UK by phone, video, email and WhatsApp. We are rated 4.9 on Google from 72 reviews and 4.8 on Trustpilot from 142 reviews.
A new or permanent-placement agency typically fits the Operate Bundle at £128 a month plus VAT: a dedicated accountant, year-end accounts and CT600, payroll for one director, VAT returns, director Self Assessment, confirmation statement and a London business address. The Grow Bundle at £148 covers two directors. FreeAgent accounting software, worth £360 a year, is included, and every package is rolling monthly. If you run temp payroll, ask for a free bespoke quote so we can scope the work properly. See our packages or book a free consultation.