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How to Start a Recruitment Business: Step 4

by Max Jones/ Monday 12th March 2018

How to Start a Recruitment Business: Step 4

Welcome back to this blog series – thank you very much for joining us again to continue our journey through starting your own recruitment business.

Over the last few months we’ve explored the importance of understanding why you are looking to start your own business, overcoming the financial hurdles when starting your business & we’ve made ourselves aware of (some) routes available out there to motivated recruiters to really help them create & build their agency in the way they want.

This time I felt it was important to look at one pillar of your recruitment business that, without it, I don’t care how many placements you make, how many staff you have & what your growth plan is for the coming year, your business is going to fall short at some stage. & that pillar is, of course, the Accounting & back office side of your business.

Now I could spend the next month talking to you about the areas within this pillar that we, SSG, feel are important for a recruiter to consider when launching their own agency but, in the interest of not taking up too much of your time at this stage, I wanted to focus on just a few areas in the accounting provisions of your business that are useful to consider right from the “get go”.

Understanding VAT

The recruiters we have the pleasure of supporting are a fantastic & varied bred of individual; from a family man with 3 children & a wife, to a 25-year-old women looking to build an asset before starting a family, we’re incredibly fortunate to be able to spend time with &, in turn, understand the concerns & worries of every recruiter looking at starting their own agency.

But, regardless of background, experience or motivation – nothing seems to bamboozle a recruiter more than The Tax Man…Over the years, the most frequently asked questions poised to SSG have always been focussed around VAT. & there are a couple of things to consider when looking at VAT that you need to be aware of in the early stages of your business.

Firstly, VAT can either be a compulsory aspect or voluntary aspect of your agency. VAT registration is compulsory if, during the course of any 12 month period, your turnover exceeds the VAT threshold which (as of March 2018) currently stands at £81k. It’s important to note that, as of April 2018, that threshold goes up to £85k (see the Tax Man isn’t all bad news!).

In any case we, SSG, would always advise our ventures to register for VAT during the launch of their business & I would recommend the same for you. Why? Firstly, you are then able to reclaim the VAT back on any purchases made through the business. A rate which currently (as of March 2018) stands at 20%. & secondly, it’s all about perception. Nothing screams “small recruitment agency” more than not being VAT registered. Not being VAT registered is an automatic indication to your clients & competition that you do not make generate more than £81,000 a year &, therefore, if only from a perception point of view – we would always advise being VAT registered.

Going about this is relatively simple, although I do use that word sparingly! It can be completed online or over the phone. Upon completion, you will be sent a VAT registration number which we advise to keep very safe & HMRC will also contact you to let you know when your returns are to be completed.

Command over your VAT Returns

Usually, unless stated otherwise by HMRC, VAT returns are submitted on a quarterly basis. It’s essentially a process whereby you declare to HMRC what VAT your agency collected over that 3-month period & in turn when VAT you paid out. With this information, you therefore are able to understand how much VAT is due or, in some cases, how much VAT is owed to you.

VAT is collected through your agency charging your end client for services & paid out against any purchases your agency makes that has VAT attached to it.

It’s worth noting that, when submitting your return, whether this will be on a cash accounting or invoice accounting basis. We would recommend talking to your accountant or support provider about which avenue your business will go down & therefore how this influence your return in terms of what you pay & when you pay it.

Are you eligible for the Flat Rate Scheme?

Another area a lot of our clients’ enquirer about is what’s known as the “Flat Rate Scheme” & therefore I wanted to round off this part of the blog with talking about it a little bit.

This type of scheme is only available to particular types of businesses & it would be worth talking to your accountant first to see if you are eligible or not. If you are eligible, which most recruitment agencies are, then the typical scheme means that the VAT you pay will be fixed rate of between 12-14%.

The negative of the scheme is that you can’t reclaim any VAT back on purchases you made through the business & therefore, in actual fact, while it sounds like an attractive scheme sometimes it’s not overly beneficial. Nevertheless, well worth knowing about & exploring.

How to take money out of your business?

Much like when we examine some of the taxation nuances of your agency (namely VAT), I could spend a few months talking you through the best ways to take money out of your business. & I guess that’s why, over the years, the holistic offering of SSG has been so beneficial to the ventures we support. & while you can’t truly understand the accounting side of your business through reading one blog online, I hope it gives you a good footing to then explore these areas (& more) in more detail as your agency develops.

But for now, let me run through the headline things to consider when taking your hard-earned money out of your agency.

Separate Entitles

It’s important to try & mentally (& physically) separate yourself from your agency. By doing this & viewing your agency as a separate entity to yourself, you will then be able to make sure your business works for you & not the other war round. Simplistic I know, but commonly overlooked.

Through viewing the business in this way, you will see yourself as both a shareholder & employee of the agency. This comes with its benefits, as it can influence the way in which you take money out of your business.

Salary, dividends & personal allowances

With the above understanding, you can therefore structure the way in which you take money out of your agency by utilizing both your personal allowances (through the form of a salary as you are an employee) & also through dividends (as you are too, a Shareholder).

The first £16,000 taken out of a business is tax-free & therefore, we tend to advise “our guys” to take out a minimum salary perm month of about £680 per month (£8,160 a year). Through doing this, the remaining £3,340 of your Personal allowances (which currently stands at £11,500) can then be added onto to your Dividend from the agency.

The first £5,000 taken as a Dividend is (as of March 2018) tax-free & therefore we would advise utilizing that & processing the remaining £3,340 as a dividend to lessen your business tax.
So, in summary:

  • The first £16,000 is tax-free
  • Pay yourself a salary totalling £8,160 per year
  • Pay yourself a dividend totalling £8,340 per year
  • In which the first £5,00 is tax-free

Closing thoughts

& that concludes our whistle stop tour of some of the accounting elements of your recruitment business. As I have said before, it would be difficult to talk about every single aspect you need to consider in the accounting side of your recruitment agency, but I hope the focus around these two key areas has given you a good platform to then approach this exciting side of your agency.

Thank you so much for reading this article on wearessg.com

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