Recruitment agencies run two businesses under one roof. Permanent recruitment earns a one-off fee per placement. Temporary and contract recruitment buys a worker’s time and sells it on at a margin, week after week. The accounting, the risks and the cash flow are entirely different.
Permanent placements
A placement fee is usually a percentage of the candidate’s first-year salary, invoiced when the candidate starts. Most terms include a rebate or free replacement if the candidate leaves within a set period.
- Recognise the fee when the candidate starts, net of an estimate for rebates if they are common.
- Keep a list of placements still within the rebate period; at the year end, provide for expected rebates based on history.
- Pay consultants’ commission on fees when they are earned, with claw-back rules in the commission scheme.
Temporary workers and contractors
For temps, the agency pays the worker (or the worker’s company or umbrella) and invoices the client for the same hours at a higher rate. What matters is gross margin: the difference between the charge rate and the full cost of the worker.
| Worker engaged | Agency pays | Agency’s obligations |
|---|---|---|
| Agency’s own PAYE temp | gross pay, employer NIC, pension, holiday pay | full payroll, auto-enrolment, Agency Workers Regulations |
| Through an umbrella company | the umbrella’s invoice | due diligence on the umbrella; from April 2026 the agency can be held liable for PAYE the umbrella fails to pay |
| Contractor’s limited company | the company’s invoice | off-payroll working rules where the client is medium or large; status determination statement from the client |
| Self-employed sole trader | the worker’s invoice | status must be genuine; agency workers supplied under supervision, direction or control are usually treated as employed |
The intermediaries report
Employment intermediaries that supply workers and do not operate PAYE on their pay must send HMRC a quarterly intermediaries report listing those workers and payments. Missing reports carry penalties. Build the report from the contractor payment records each quarter.
Track margin per worker, per client and per consultant from day one. Start your free trial.
Worked example: one temp week
A temp works 37.5 hours at a pay rate of £14 and a charge rate of £19.
| Amount | |
|---|---|
| Charge to client (37.5 × £19) | £712.50 plus VAT |
| Gross pay (37.5 × £14) | £525.00 |
| Holiday pay accrued (12.07%) | £63.37 |
| Employer NIC and pension (estimate) | £70.00 |
| Gross margin | about £54 |
Small percentage changes in on-costs wipe out margin, so price with the full cost, not the pay rate.
Cash flow and funding
Temps are paid weekly; clients pay in 30 to 60 days. A growing temp desk needs working capital, often from invoice finance. Record the facility as a liability, keep debtors in the ledger in full and reconcile the funder’s statement monthly.
VAT
Agency fees and temp charges are standard-rated. The full charge for a temp, including the worker’s pay element, is subject to VAT, which matters when supplying exempt clients such as some healthcare or education providers.
Month-end routine
- Agree timesheets to invoices raised and to payroll or contractor payments.
- Review margin per worker and flag any below target.
- Update the rebate list for permanent placements.
- Reconcile the invoice finance account.
- Prepare the intermediaries report at each quarter end.
For contractor status questions, see employment status and IR35.
See your margin by desk instead of by guesswork. Start the free trial.