Marketing, creative, digital and recruitment agencies tend to grow quickly, and the finances get harder at the same pace. More clients means more staff, more freelancers, more VAT and more cash tied up in unpaid invoices. Agencies that keep growing profitably track the right numbers and get the tax basics right early. This guide covers the accounting points that matter most once an agency moves past the founder and a laptop stage.
- VAT for agencies, including overseas clients
- Recharges, disbursements and pass through costs
- Retainers, projects and when to recognise income
- Gross margin, utilisation and client profitability
- Staff, freelancers and IR35
- Cash flow and getting paid
- Paying yourself as an agency owner
- Tax reliefs worth checking
- Frequently asked questions
VAT for agencies, including overseas clients
You must register for VAT once your taxable turnover passes £90,000 in any rolling 12 month period, or if you expect to pass it in the next 30 days alone. Many agencies register voluntarily earlier because their clients are VAT registered businesses who can reclaim the VAT, so it costs the client nothing and lets the agency reclaim VAT on its own costs.
Overseas clients need care. Under the general rule, services supplied to a business customer outside the UK are outside the scope of UK VAT, so you do not charge UK VAT, although you still show the supply on your VAT return. You should keep evidence that the customer is a business and where it belongs. Some services, such as those connected with land or certain events, follow different rules. Services to private individuals overseas follow different rules again. Our VAT accountants can check how each income stream should be treated.
Recharges, disbursements and pass through costs
Agencies often pay for media, software, printing or travel on behalf of clients and bill them back. In most cases this is a recharge, which means it is part of your supply and you charge VAT on the full amount. A true disbursement, where you act purely as the client’s agent and the cost is the client’s own, can be passed on without VAT, but the conditions are strict and most agency costs do not meet them.
Recharges also distort your figures. If media spend runs through your accounts, turnover looks much larger than the value your agency creates. Track net revenue, meaning turnover less pass through costs, so you can judge growth and margins properly.
Retainers, projects and when to recognise income
Monthly retainers are simple, because income matches the month of work. Projects billed upfront, in stages or on completion are harder. If you bill a large project in advance, part of that income relates to work you have not yet done, and counting it all in the month you invoice makes that month look very profitable and later months look poor.
Your annual accounts should match income to the period in which the work was performed. Doing the same in your monthly management accounts gives you a true view of profit, month by month, and avoids nasty surprises when the year end figures arrive.
Gross margin, utilisation and client profitability
The numbers that tell an agency owner most are:
- Gross margin, which is net revenue less the direct cost of delivering the work, including staff time and freelancers.
- Utilisation, which is the share of your team’s available hours spent on billable client work.
- Client profitability, which compares what each client pays with the time and costs it takes to serve them.
Many agencies find that one or two clients take far more time than their fees cover. Without time tracking linked to your accounts, those clients stay hidden inside an overall profit figure. Reviewing profitability by client each quarter helps you reprice, change scope or replace accounts that hold the business back.
Staff, freelancers and IR35
Most agencies use a mix of employees and freelancers. Employees bring employer National Insurance at 15% on earnings above £5,000 a year, pension contributions and holiday pay, which outsourced payroll can handle each month.
Freelancers bring IR35 questions. If a freelancer works through their own limited company, the off payroll working rules decide who assesses their status. If the client is small, the freelancer’s own company decides. A medium or large client must decide and issue a status determination. From April 2025 a company counts as small if it meets two of these three tests: turnover of £15 million or less, a balance sheet of £7.5 million or less and 50 employees or fewer. Your agency may also sit in a chain between the end client and the freelancer, in which case you have duties to pass on determinations and, in some cases, operate PAYE.
Freelancers who work like employees, with fixed hours, line management and no control over how they work, create employment status risk even outside IR35. Review long running freelance arrangements each year.
Cash flow and getting paid
Agencies pay staff monthly but often wait 30 to 60 days or longer for clients to pay. Growth makes this worse, because you take on staff before the fees from new clients arrive. Simple steps help:
- Bill retainers in advance at the start of each month.
- Take a deposit before starting large projects and bill the rest in stages.
- Set clear payment terms in your contracts and chase overdue invoices quickly.
- Keep a rolling 13 week cash flow forecast so you see a gap coming before it arrives.
- Put money aside each month for VAT and corporation tax.
Paying yourself as an agency owner
Most agency owners take a combination of salary and dividends from their limited company. Dividends can only be paid from accumulated profits after corporation tax, which is 19% on profits up to £50,000 and 25% above £250,000, with marginal relief in between. From April 2026 dividend tax is 10.75% in the basic rate band, 35.75% in the higher rate band and 39.35% in the additional rate band, after a £500 allowance.
Company pension contributions are another efficient route, because they are usually deductible for the company and avoid both National Insurance and dividend tax. If you have business partners, agree a written policy on drawings and dividends early.
Tax reliefs worth checking
Agencies that build their own software, platforms or tools may qualify for research and development relief, although routine website builds and campaign work normally do not. Capital allowances let you deduct the cost of computers and equipment in the year you buy them. Electric company cars carry a low benefit in kind rate compared with petrol and diesel cars. Each relief has conditions, so check them with your accountant before you rely on them.
If you want an accountant who understands how agencies make money, our accountants for agencies and consultancies work with founders at every stage of growth.
Need an accountant for your agency?
NDCA is an ACCA-regulated accountancy practice with fixed monthly fees and a named accountant. Book a free consultation and pick a time that suits you.
Frequently asked questions
Do agencies charge VAT to overseas clients?
Usually not. Most services to overseas business clients carry no UK VAT, though they still go on your return. Keep evidence that the client is a business and where it belongs, because some services follow different rules.
Should I charge VAT on recharged costs?
In most cases yes. A recharge forms part of your supply and VAT applies to the full amount. The exception is a true disbursement, where you act purely as the client’s agent.
What gross margin should an agency aim for?
It varies by type of agency and how much work you deliver with your own staff. Track gross margin on net revenue each month and compare it over time and by client rather than relying on a single benchmark.
Who decides IR35 status for freelancers my agency uses?
It depends on the size of the end client. A medium or large client decides. If the client is small, the freelancer’s own company decides. Agencies in the middle of a chain must pass on status determinations.
When should my agency move to monthly management accounts?
Once you have several staff or your turnover is growing quickly. Monthly figures show profit, cash and client profitability in time for you to act on them.
Can my agency claim R&D tax relief?
Only for qualifying projects that seek an advance in science or technology, such as building new software. Routine websites, apps built on standard tools and campaign work do not usually qualify.
