How does VAT work on recruitment fees and contractor self-bills?
A permanent placement fee is a charge for an introduction and carries VAT at the standard rate of 20 per cent. On a contract placement where the agency supplies the worker, HMRC's guidance is that VAT is due on the full charge to the client, not just the agency's margin. If the contractor's company is VAT registered and self-billed, its invoice carries VAT too, under a written self-billing agreement, and the agency reclaims that as input tax. Your accountant signs off the treatment.
Written by the Vayora team. Updated 28 October 2026.
VAT on a recruitment desk looks like one rule and turns out to be four. The perm fee has one treatment. The contract charge has another. The contractor's side depends on whether their company is VAT registered. And a client based abroad changes the question again.
Agencies get into difficulty when the desk assumes one rule covers all four. The usual symptoms are a VAT bill on a contract charge that someone thought was only the margin, a self-bill that charges VAT without the contractor's number on it, and a contractor who deregisters without telling anyone.
This page sets out each case using HMRC's own guidance, and says where we could not confirm a point. Vayora is software. Your agency's accountant signs off the tax treatment, and nothing here replaces their advice. For the basics of the money flow, see pay and bill and limited company contractors.
Is VAT charged on a permanent placement fee?
Yes, in the ordinary case. The standard rate of VAT is 20 per cent, and GOV.UK lists it as applying to most goods and services. HMRC's manual on employment bureaux describes the introductory model, where a worker and client contract directly and the bureau brings them together for a fee, as an introductory service on which the bureau accounts for VAT on its charges.
A worked example. A perm placement at £30,000 salary and a 20 per cent fee is £6,000. VAT adds £1,200, and the invoice is £7,200. A VAT-registered client reclaims the £1,200. If the candidate leaves inside the rebate period, the credit note takes the VAT back at the same rate. The credit notes page covers that route.
Whether a particular arrangement is an introduction or a supply of staff depends on who contracts with whom. A perm placement where the candidate becomes the client's employee is the clear introduction case. If you are unsure which model a deal is, ask your accountant before the first invoice.
Is VAT charged on the whole contract charge or only the margin?
On the whole charge. HMRC's notice on supplies of staff (VAT Notice 700/34, section 2.3) says VAT is due on the full consideration, which includes the staff costs recovered from the client. HMRC's manual adds that a concession which let agencies account for VAT on their profit only was withdrawn on 1 April 2009. Employment businesses now account for VAT on the full value of the supply, including the pay, PAYE, National Insurance and pension contributions, plus their profit.
That is the correct mental model for a contract desk: the agency supplies the worker's services to the client, and VAT sits on everything it charges for that supply. A £550 day, five days, is £2,750 plus £550 VAT, £3,300. The agency's margin on that week, with a £450 day rate paid to the contractor, is £500. The VAT is not £100, which is 20 per cent of £500. It starts at £550.
What brings it down to the right number is input tax. If the contractor's company is VAT registered and is paid through a VAT self-bill, the agency pays £2,250 plus £450 VAT, £2,700. It reclaims the £450 as input tax and owes HMRC the difference, £100 for the week, which happens to equal 20 per cent of the margin. If the contractor is not VAT registered, there is no £450 to reclaim, and the agency owes the full £550 of output tax, collected from the client.
The cash timing matters more than the arithmetic. The agency typically pays the contractor weekly and the client pays on 30 days or longer. The VAT on both sides moves with those cash flows, and an agency can be funding the contractor's VAT as well as the pay.
| Supply | Who invoices | VAT on what | Document needed |
|---|---|---|---|
| Perm placement fee to a UK client | The agency | The full fee, at 20 per cent | VAT invoice from the agency, plus a credit note for any rebate |
| Contract, contractor's company VAT registered, self-billed | The agency invoices the client; the agency raises the contractor's invoice on their behalf | Full charge on the client invoice; VAT on the contractor's pay on the self-bill | Client VAT invoice; signed self-billing agreement; self-bill showing the contractor's VAT number |
| Contract, contractor's company not VAT registered | The agency invoices the client | Full charge on the client invoice; none on the contractor's pay | Client VAT invoice; contractor payment document with no VAT |
| Contract, contractor on the Flat Rate Scheme | As VAT registered, above | Same invoice treatment; the contractor accounts to HMRC differently | As VAT registered; ask the contractor's accountant how they report it |
| Contract, client outside the UK | The agency invoices the client | Depends on place of supply; staff supplied to a person outside the UK are outside the scope of UK VAT (Notice 700/34) | Ask your accountant before invoicing |
What do a self-billing agreement and a self-billed invoice need to say?
Self-billing means the agency, not the contractor, raises the contractor's invoice from the approved timesheet. HMRC's guidance "VAT: self-billing arrangements" says the agreement is a legally binding document signed by both sides. It must confirm that the supplier accepts the customer issuing invoices on its behalf and that it will not issue its own VAT invoices for the same supplies. It needs an expiry date, usually 12 months ahead, and the supplier must agree to tell the customer if it deregisters, changes VAT number or transfers its business.
HMRC says plainly that you should not self-bill a supplier without their written agreement. The agency also keeps copies of the agreements and each supplier's name, address and VAT number. Without those records, HMRC says the self-billed invoices are not valid VAT invoices and input tax cannot be reclaimed. The contractor self-billing page goes through the agreement and the records in more detail, so we will not repeat it here.
Everything a standard VAT invoice carries, with the contractor's company as the supplier. The invoice must show the supplier's name, address and VAT registration number, which is the part agencies most often get wrong, because the agency's own details are what the system prints by default.
HMRC also says the self-billed invoice must carry the statement "The VAT shown is your output tax due to HMRC". The VAT on a self-bill is the contractor's output tax. They account for it to HMRC, not the agency, and HMRC says they should not treat it as input tax.
- The contractor's company name and address, not the agency's, as supplier.
- The contractor's VAT registration number.
- A unique invoice number, the tax point, a description, the net amount, the rate and the VAT.
- The output tax statement on any self-bill that charges VAT.
What if the contractor is not VAT registered, or deregisters?
HMRC's guidance says no VAT is added to self-billed invoices issued to suppliers that are not registered. If a supplier stops being registered, you can keep self-billing them, but you cannot issue them VAT invoices, and HMRC states that the arrangement is then no longer covered by the VAT regulations. In practice the document becomes a plain payment record with no VAT.
The risk is the gap. A contractor deregisters in June, the agreement requires them to tell you, they do not, and the agency keeps charging VAT on the self-bill and reclaiming the input tax. Review the agreement on its expiry date, and check the VAT number again at the same time. The reverse also happens: a contractor registers part-way through an assignment and the documents need to change from the next one.
What about contractors on the Flat Rate Scheme?
Under HMRC's Flat Rate Scheme, a business pays a fixed rate of VAT to HMRC instead of working out VAT on sales minus VAT on purchases, and cannot reclaim VAT on its purchases except for certain capital assets over £2,000. The scheme changes how the contractor accounts for VAT to HMRC. It is a question for the contractor's own accountant.
For the agency, the practical point is that a flat rate contractor is still a VAT-registered supplier with a VAT number. The self-billing agreement, the contractor's number on the self-bill and the output tax statement all apply as before. Your accountant should confirm the details for any contractor who tells you they are on the scheme.
What changes with a client outside the UK?
Place of supply rules apply, and this is where to stop and ask your accountant. VAT Notice 700/34 says that if you supply staff to a person who belongs outside the UK, that supply is outside the scope of UK VAT. It also says that staff supplied by a person outside the UK and the Isle of Man are subject to the reverse charge at the standard rate. It points to VAT Notice 741A for doubtful cases.
Do not infer too much from that. We read the staff supply rules and nothing on introduction fees to overseas clients. A perm fee to a client in another country, or a contract where the work is done in the UK for a foreign parent, needs a view from your accountant before you issue the invoice, not after.
What are the common errors?
Most errors come from one of five places, and all are cheap to prevent with a check at approval rather than a correction after issue.
- Treating VAT on a contract charge as 20 per cent of the margin instead of the whole charge.
- Issuing a VAT self-bill without the contractor's VAT number on it.
- Self-billing a contractor with no signed agreement, or one past its expiry date.
- Carrying on charging VAT on a self-bill after the contractor has deregistered.
- Raising a credit note on the client invoice and forgetting the matching VAT on the self-bill.
Where Vayora fits
Vayora's invoices default to a 20 per cent VAT rate, and the rate on an ad hoc invoice such as a perm fee can be set when you raise it. Your own VAT number is held in Settings, and an invoice that charges VAT without one is flagged, because your client cannot reclaim VAT without it.
On the contractor side, each contractor record holds a VAT registered flag and a VAT number, checked for shape (nine digits, optionally with a GB prefix) but not against HMRC's records. A VAT registered contractor's self-bill is raised at 20 per cent. A contractor who is not registered gets a self-bill at no VAT. A VAT self-bill is built with the contractor's company as the supplier, its name, address and VAT number, and the line "The VAT shown is your output tax due to HMRC". If a VAT registered contractor has no VAT number on record, approving the timesheet is refused with the fix named, instead of issuing an invalid self-bill. The self-billing agreement is signed electronically from the contractor record, which stamps the signing date and sets a review date 365 days later.
Where it stops. Vayora does not file VAT returns or check a number with HMRC. It does not detect that a contractor has deregistered, so keep the flag current. It has no place of supply logic, so overseas clients are for you and your accountant, and it has no Flat Rate Scheme handling. To see the pay-and-bill flow with VAT worked through, start a free trial, or read more on contract finance.
Common questions
- Do I charge VAT on the contractor's pay or only my margin?
- On the whole charge to the client. HMRC's guidance on supplies of staff says VAT is due on the full consideration, including staff costs recovered from the client. You reclaim VAT on the contractor's invoice if their company is VAT registered, which brings the net VAT you pay down.
- Can I self-bill a contractor who is not VAT registered?
- You can raise the payment document from the approved timesheet, but it carries no VAT and is not a VAT invoice. HMRC says no VAT is added to self-billed invoices for suppliers that are not registered. If the contractor registers later, the documents and the agreement need to change.
- How often should I review a self-billing agreement?
- HMRC's guidance says agreements usually run for 12 months, with an expiry date, and the customer should review them at the end of that period. Check the contractor's VAT number and status at the same time, and keep the signed copies with each supplier's name, address and VAT number.
- Does a perm placement fee carry VAT?
- In the ordinary case, yes, at the standard 20 per cent rate. A £6,000 fee becomes £7,200 with £1,200 VAT. A VAT-registered client usually reclaims it. If the structure of the deal is unusual, or the client is overseas, ask your accountant before invoicing.
- What if my client is based outside the UK?
- Place of supply rules decide it. HMRC's notice says staff supplied to a person who belongs outside the UK are outside the scope of UK VAT. For other fees and for complicated cases it refers to VAT Notice 741A. Get your accountant's view before the first invoice rather than after.