Last reviewed: 4 October 2026. This guide is general information, not legal advice. It is not tax advice either: check your situation with an accountant.
TL;DR
- Most UK businesses start as a sole trader or a limited company. A sole trader must register for Self Assessment once they earn more than £1,000 in a tax year; a limited company must be registered before it trades (GOV.UK).
- VAT registration is compulsory once taxable turnover goes over £90,000 in 12 months. On a contract desk, VAT is charged on the full amount billed to the client, contractor rate included.
- There is no general licence for recruitment agencies in Great Britain, but there are sector licences (gangmasters, care agencies) and strict conduct rules.
- The core conduct rules: no fee to candidates for finding work, a Key Information Document and written terms before looking for work for a temp, and limits on temp-to-perm fees.
- Since 7 April 2026, the Fair Work Agency enforces those rules in Great Britain.
Step 1: choose your business structure
GOV.UK puts it plainly: "Most businesses register as a sole trader or limited company" (Set up a business). The two main differences for a recruiter are liability and registration.
| Sole trader | Limited company | |
|---|---|---|
| Liability | You are personally responsible for all the debts of the business | Owners are responsible only up to their investment |
| Registration | You can start trading straight away, but must register for Self Assessment if you earn more than £1,000 in a tax year | The company must be registered before it starts trading |
| Tax | Income Tax and National Insurance on profits, through Self Assessment | Corporation Tax on profits; directors pay tax on what they take out |
| Paperwork | Keep records, file a Self Assessment return | File accounts and tax returns, confirmation statement to Companies House |
A few points matter more in recruitment than elsewhere:
- Cash exposure on contract desks. An employment business must pay its temps for all the work they do, even if you have not been paid by the hirer. When you owe contractors before your clients pay you, limited liability is worth weighing with an accountant.
- You can switch later. GOV.UK notes it is usually easier to move from sole trader to limited company than the other way round.
Step 2: register with HMRC and Companies House
- Sole trader: you register as a sole trader by registering for Self Assessment. You need a National Insurance number.
- Limited company: you register the company with Companies House as part of setting up a private limited company, choose a name that follows the naming rules and usually ends in "Limited" or "Ltd", and provide a registered office address. The company pays Corporation Tax on its profits.
- Employer: if you hire staff, you will run payroll and must have Employers' Liability insurance from the day you become an employer, covering at least £5 million, unless an exemption applies (GOV.UK).
- Data protection fee: organisations, including sole traders, that use personal information must pay a data protection fee to the ICO unless they are exempt. A recruitment agency processes CVs from its first week.
Step 3: VAT and Making Tax Digital
The VAT threshold
You must register for VAT if your taxable turnover for the last 12 months goes over £90,000, or if you expect it to go over £90,000 in the next 30 days. You can also register voluntarily below the threshold.
This is where perm and contract agencies differ sharply. For a perm placement, your turnover is your fee. When you supply staff as principal, HMRC's VAT Notice 700/34 says you "must charge VAT on the full amount of the consideration for the supply", which includes the staff costs you recover from the client. A single contractor on a day rate can take a new agency over the threshold within months, so watch your rolling 12-month figure from the first assignment.
Making Tax Digital
- VAT: HMRC says all VAT-registered businesses should now be signed up to Making Tax Digital for VAT, keep VAT records and submit VAT returns using compatible software.
- Income Tax (sole traders): HMRC's Making Tax Digital for Income Tax applies to sole traders and landlords whose qualifying income is over £50,000 (for 2024 to 2025, mandatory from 6 April 2026), £30,000 (for 2025 to 2026, from 6 April 2027) and £20,000 (for 2026 to 2027, from 6 April 2028). It means digital records, quarterly updates and a tax return through compatible software. The 2027 and 2028 dates are announced by the government and may change if it decides so.
The government has also announced mandatory e-invoicing for VAT invoices from 2029. We cover what is confirmed, and what is not, in our guide to the UK e-invoicing mandate.
Step 4: the rules for employment agencies and employment businesses
The Employment Agencies Act 1973 and the Conduct of Employment Agencies and Employment Businesses Regulations 2003 apply to every agency in Great Britain. Northern Ireland has its own equivalent, the Conduct of Employment Agencies and Employment Businesses Regulations (Northern Ireland) 2005.
First, know which hat you wear. An employment agency finds people permanent jobs with an employer. An employment business engages a worker and supplies them to work under someone else's supervision: temping and contracting. A business that does both has to follow the rules for both.
What you cannot do
GOV.UK lists the key prohibitions. You cannot:
- charge a fee to a work-seeker for work-finding services;
- stop someone from working elsewhere or from terminating their contract with you;
- withhold payments or wages due, or make unlawful deductions from pay;
- supply a temporary worker to replace someone taking part in industrial action.
You may charge candidates for separate services such as CV writing or training, but only with written terms given in advance, a right to cancel, and never as a condition of finding them work.
What you must do for temps and contractors
If you run an employment business, workers must be:
- given a Key Information Document and written terms of engagement "before you start looking for work for them";
- paid for all the work they do, paid holiday, paid at least the National Minimum Wage, and not forced to work more than 48 hours a week;
- given a written statement when they start work.
We explain the Key Information Document, the 12-week equal treatment rule and the day-one rights in detail in our guide to agency worker regulations in the UK.
Before you place anyone
Before placing a work-seeker, you must get sufficient information from the hirer: who they are, the start date and duration, the type of work, location, hours and health and safety risks, and the experience and qualifications required. Extra checks apply to work with vulnerable people, including two references.
Advertising jobs
Every job advert must include the full name of your agency, say whether the job is temporary or permanent, and you must not advertise a job unless the hirer has confirmed it wants to fill it (GOV.UK).
Fees to clients
Your fees to clients are commercial terms, with one important statutory limit: temp-to-perm transfer fees are only enforceable under the conditions of regulation 10. We cover the clauses in our recruitment agency terms of business template.
Step 5: check whether you need a licence
There is no general licence for recruitment agencies, but some agencies do need one:
- Gangmasters. Agencies that provide workers for agriculture, horticulture, shellfish gathering, or food processing and packaging must be licensed by the Fair Work Agency.
- Nursing and domiciliary care agencies may need to register with the Care Quality Commission (England), Care Inspectorate Wales, the Regulation and Quality Improvement Authority (Northern Ireland) or the relevant Scottish regulator.
Who checks: the Fair Work Agency
The Fair Work Agency began operating on 7 April 2026, replacing the Employment Agency Standards Inspectorate. Its enforcement policy statement says it works with employment agencies and businesses to help them comply, investigates complaints, and carries out proactive, targeted inspections in Great Britain. In Northern Ireland, the Employment Agency Inspectorate of the Department for the Economy regulates agencies based there.
Keeping records is part of compliance. For example, the government's guidance asks employment businesses to keep evidence that each Key Information Document was sent for at least 12 months after work-finding services last took place.
Step 6: set up your tools before your first placement
A new agency does not need five tools, but it needs one place where candidates, clients, placements and invoices meet. In Marvin:
- Desk is the ATS and CRM: candidates, clients and contacts, jobs and the pipeline.
- People holds assignments for contractors on a day rate, with a personal space where they fill in monthly timesheets in days and half-days that the client signs from a secure link, without an account. See how it works in our guide to timesheet software for recruitment agencies.
- Cash drafts the placement fee invoice when a candidate is hired, and the monthly client invoice from approved timesheets.
If you plan to place both permanent candidates and contractors, our guide to contract and temp recruitment software explains what to look for.
Marvin does not register your business, run PAYE or RTI payroll, decide IR35 status or handle hourly timesheets. Before you rely on Cash for invoicing, check with us how it fits your currency and VAT set-up. Book a demo and we will walk through your first placements with you.
Frequently asked questions
Do I need a licence to open a recruitment agency in the UK?
Not in general. There is no general licence for recruitment agencies in Great Britain. A licence from the Fair Work Agency is needed to supply workers to agriculture, horticulture, shellfish gathering or food processing and packaging, and nursing and domiciliary care agencies may need to register with the care regulator of their nation, such as the Care Quality Commission in England.
Should a new recruitment agency be a sole trader or a limited company?
Both are possible. A sole trader is simpler to set up but personally liable for the debts of the business. A limited company is a separate legal entity with limited liability, but must be registered before trading and file accounts and tax returns. If you will supply contractors, weigh limited liability with an accountant: you may owe contractors before your clients pay you.
When must a recruitment agency register for VAT?
When its taxable turnover over the last 12 months goes over £90,000, or is expected to go over £90,000 in the next 30 days. If you supply contractors as principal, VAT is due on the full amount charged to the client, so a contract desk can reach the threshold quickly.
Can a recruitment agency charge candidates a fee?
No. Agencies cannot charge a work-seeker a fee for finding or trying to find them work. They can charge for separate services such as CV writing or training, with written terms, a right to cancel, and never as a condition of finding work, with limited exceptions such as entertainment and modelling.
Who checks that recruitment agencies follow the rules?
In Great Britain, the Fair Work Agency, which began operating on 7 April 2026 and replaced the Employment Agency Standards Inspectorate. In Northern Ireland, the Employment Agency Inspectorate of the Department for the Economy.
