Hiring a branding agency: VAT, IR35 and payment terms

What to take away

What to check in a branding agency's proposal

Comparing branding agencies is not only about what a directory listing or a client review shows. Portfolios and day rates are the visible part; two proposals with the same headline fee can cost a client very different amounts once VAT, contractor status and payment terms are read. Before you sign, ask each agency the same five questions and compare the answers side by side.

The sections below explain the rules behind each answer, from the agency's side of the contract, so you can judge whether a proposal has been thought through.

VAT registration thresholds and when an agency must register

VAT registration is the first tax question a branding agency faces, and it is answered by turnover rather than by ambition. HM Revenue & Customs sets a threshold for taxable turnover over a rolling 12 month period. Cross it and registration stops being optional. The threshold is written into Schedule 1 to the Value Added Tax Act 1994: a UK-established business must register for VAT once its taxable supplies in the year ending at a month end have exceeded £90,000, or when it expects them to exceed £90,000 in the next 30 days alone.

The test looks backwards, not forwards. You add up the value of taxable supplies in the previous 12 months. If that figure goes over the threshold, you must register within 30 days of the end of the month in which you breached it, and you are registered from the first day of the second month after that.

There is a second route. If you expect to go over the threshold in the next 30 days alone, you can register before the breach happens. Agencies pitching a large rebrand or a retained account often take this route to avoid a sudden bill.

Registration itself is done online through the HMRC VAT online service. The paper route is HMRC's form VAT1, still used where a business cannot register online. You need the business details, the bank account, the nature of the supplies and the date you want registration to start. HMRC then issues a VAT registration number, which has to appear on every invoice. The full process sits on the register for VAT guidance, and HMRC's VAT Notice 700/1, Should I be registered for VAT?, covers the edge cases.

Agencies below the threshold can register voluntarily. That suits a studio that buys a lot of print, media or production and wants to reclaim input VAT. It also suits a studio whose clients are all VAT registered businesses, because the client recovers the VAT anyway.

The awkward cases are mixed. A small agency with consumer clients and few costs gains little from voluntary registration, because it must add 20 per cent to its fees and cannot reclaim much. Run the numbers on your own cost base before deciding.

Groups and connected businesses need care. HMRC can treat separately incorporated studios under common control as a single taxable person for registration purposes, which pulls smaller entities over the threshold. Check before you assume each limited company stands alone.

Once registered, the obligations are ongoing. Returns are filed quarterly, usually through compatible software, and the record keeping rules are strict. Late filing and late payment both attract penalties, and the penalty regime for VAT is separate from the one for corporation tax.

Agencies that lose registration, usually by deregistering after a quiet year, must account for VAT on stock and assets still on hand. That final return catches people out. Plan deregistration with your accountant rather than in the week you decide to stop charging VAT.

Charging VAT, MTD record-keeping and the reverse charge for overseas clients

Once registered, an agency charges VAT on its supplies unless a specific rule says otherwise. The rate depends on the service, and the place of supply depends on whether the client is a business or a consumer and where it belongs.

For UK clients, the position is simple. You add VAT at the appropriate rate to the fee, show the VAT separately on the invoice, and pay it over on the quarterly return. The client, if registered, reclaims it. The net cost to a registered business client is the fee alone.

For overseas clients the position splits. Services supplied to a business customer outside the UK generally fall outside the scope of UK VAT under the place of supply rules. The customer accounts for the tax in its own country. This is the reverse charge, and it applies to most branding, design and marketing services sold business to business. HMRC sets out these rules in VAT Notice 741A, Place of supply of services.

On the invoice you show the fee with no VAT, and you add a note explaining that the supply is outside the scope of UK VAT and that the customer must account for it under the reverse charge. Do not charge UK VAT and do not leave the line blank without explanation.

Consumer clients abroad are different. If the customer is not in business, the place of supply can be the UK and UK VAT may apply. Agencies working with overseas private clients, or with overseas subsidiaries that are not separate businesses, need to check each case.

Making Tax Digital changes how all of this is recorded, not just how it is charged. VAT registered businesses must keep digital records and file returns using compatible software. Spreadsheets can still be used, but they must link to the filing software through bridging or an API.

The rules are set out in the Making Tax Digital for VAT guidance, VAT Notice 700/22.

In practice this means the finance manager needs a digital record of every supply, the rate applied, the VAT charged and the invoice reference. Manual adjustments typed straight into a return are not allowed. If your bookkeeper keeps a paper ledger and types totals at quarter end, that process has to change.

The reverse charge adds a record keeping wrinkle. You still need the invoice, the customer's VAT number or equivalent, and evidence of the customer's business status and location. Keep that evidence, because HMRC can ask for it years later.

Agencies that buy services from overseas suppliers face the reverse charge in the other direction. A UK agency buying design or development from a supplier in another country accounts for the VAT itself, usually as both output and input tax on the same return. The net cash effect is often nil, but the entries are not optional.

VAT rates on agency services and how quotes should show them

Most branding agency work is standard rated at 20 per cent. Strategy, design, copywriting, art direction, campaign planning and account management are all services supplied in the course of business, and none of them falls into a reduced or zero rated category.

The exceptions matter. Printed matter such as brochures and leaflets can be zero rated in some circumstances, while the design work behind them is standard rated. If an agency supplies print as a disbursement or as a resale, the treatment differs. The categories are listed in the VAT rates guidance.

Digital services follow the general rule, but the place of supply rules decide which country's VAT applies. A UK agency selling a brand toolkit download to a consumer in another country deals with that country's VAT, often through the non union scheme. Business customers abroad still fall under the reverse charge.

Quotes are where most disputes start. A quote that shows a single figure without saying whether VAT is included leaves the client to assume the worst. State the position on the face of the document: fees plus VAT at 20 per cent, or fees inclusive of VAT, or outside the scope of UK VAT under the reverse charge.

If you are not yet registered, say so, and say what happens if you register during the project. A clause that lets the agency add VAT later protects the fee. Without it, the client can argue the quoted price was final and the agency absorbs the tax.

Retainers need the same treatment. Show the monthly fee, the VAT, the total payable and the payment date. The worked example in budgeting for a branding agency shows the fee and VAT side by side. A client budgeting from a single net figure will be surprised by the first invoice, and surprise is what turns into a late payment.

Clients comparing proposals should ask every agency the same question about VAT and scope, then compare like with like. A budget template with the VAT field included makes that comparison straightforward.

Some agencies quote a day rate and some quote a project fee. The tax treatment is the same, but the cash flow is not. A project fee invoiced on milestones can sit unpaid for months, while a day rate billed monthly keeps money moving.

The choice of pricing models therefore has a tax and cash consequence, not just a commercial one.

Expenses need a policy. If the agency recharges travel, stock photography or font licences, decide whether those are part of the taxable supply or a separate disbursement. Most are part of the supply and carry VAT. Genuine disbursements, paid on the client's behalf, are treated differently and must be shown separately.

IR35 and off-payroll working for embedded agency contractors

IR35 is the set of rules that decides whether a contractor working through an intermediary is, for tax purposes, employed or self employed. The label on the contract does not decide it. The reality of the engagement does.

The rules sit in the Income Tax (Earnings and Pensions) Act 2003. Chapter 8 of Part 2 applies where the contractor's own company decides status; Chapter 10 of Part 2 holds the off-payroll working rules, where a public authority or a medium or large client decides.

A branding agency often engages senior freelancers: a strategy director, a motion designer, a copywriter. If they work through a personal service company and the engagement looks like employment, PAYE and National Insurance are due as if they were employees, and the fee is treated as salary.

Since the off payroll working reforms, the responsibility for deciding status moved. For medium and large clients in the private sector, and for public sector bodies, the client, not the contractor's company, makes the status determination and carries the liability if it is wrong. Small clients are exempt, and the contractor's company keeps that responsibility.

For agencies this creates two exposures. The agency can be the client when it hires contractors directly. The agency can also be the intermediary when it supplies contractors to its own clients, which raises questions about who is really the end client. The rules are explained in HMRC's help to comply guidance for the reformed off-payroll working rules.

Small company status matters. A client is small if it meets two of three tests on turnover, balance sheet total and employees, using the small company limits in the Companies Act 2006. For financial years starting on or after 6 April 2025 those are turnover of £15 million or less, a balance sheet total of £7.5 million or less, and no more than 50 employees; the earlier limits were £10.2 million and £5.1 million. Check the current figures on GOV.UK. Many agency clients are small, which pushes the determination back to the contractor. Agencies should record that assessment rather than assume it.

Control is the central test. If the agency decides what the contractor works on, when and where they do it, and can move them between tasks, the engagement points towards employment. If the contractor controls how the work is done and can send a substitute, it points the other way.

The other factors are familiar. A contractor with several clients, their own equipment, their own insurance and a genuine right to turn down work looks self employed. A contractor embedded in the studio for a year, on the agency's kit, reporting to a studio manager, looks employed.

Mutuality of obligation cuts both ways. If the agency is obliged to offer work and the contractor is obliged to accept it, that points to employment. A project with a defined deliverable and a defined end date points away from it.

Financial risk is often overlooked. A contractor paid a fixed fee for a fixed scope, who bears the cost of correcting their own work, carries risk. A contractor paid a day rate regardless of output carries less. Document which model applies.

Using CEST and documenting status decisions

HMRC provides an online tool, Check Employment Status for Tax, usually shortened to CEST. It asks a series of questions about the engagement and returns a status result. It is free and it produces a record you can keep.

The tool is not the final word. It gives a view based on the answers given, and HMRC will stand by a CEST result if the answers accurately reflect the engagement. If the working practice differs from what was described, the result is worthless. CEST is available at the check employment status for tax service.

Use it before the contract is signed, not after a compliance letter arrives. The answers should come from the person who will actually manage the contractor, because they know how the work will be directed. A finance manager guessing at studio practice produces a misleading result.

Keep the output. Save the PDF or the reference number with the contract, the statement of work and any substitution clause. If HMRC enquires into the engagement, that file is the first thing you will be asked for.

Where CEST cannot give a definitive answer, take advice. The tool has limits, and some engagements, particularly those involving complex working arrangements or a right of substitution that is never used, sit outside what it can resolve. A written opinion from an accountant or tax adviser is stronger evidence than a borderline tool result.

Review status when the engagement changes. A contractor who starts on a defined project and drifts into an open ended role has changed status in substance. Repeat the assessment and record the new one. An annual review is a reasonable discipline for long running relationships.

Status decisions should be consistent. If two contractors doing the same work for the same client are treated differently, the weaker decision will be hard to defend. Publish the reasoning internally so account handlers apply it the same way.

Under the off-payroll working rules, the client that decides status should produce a status determination statement (SDS) giving the reasons for its determination. Agencies supplying contractors to end clients should pass the determination down in writing. The client decides status, the agency passes the outcome to the contractor's company, and the contractor's company applies it. Keep the chain documented, because the liability follows the decision.

Late payment legislation and payment terms in agency contracts

Late payment is the quiet tax on agency cash flow. The law that governs it is the Late Payment of Commercial Debts (Interest) Act 1998, which gives a supplier a statutory right to interest on overdue commercial debts, plus fixed compensation for the cost of chasing.

The statutory rate is set by reference to the Bank of England base rate, so it moves: statutory interest on late commercial payments is 8% plus the Bank of England base rate for business to business transactions. A contract can replace it only with a substantial remedy for late payment; a different rate alone is not necessarily enough, and where the contractual remedy is not substantial the statutory interest still applies. Fixed compensation is banded by the size of the debt: £40 for a debt under £1,000, £70 for £1,000 to £9,999.99, and £100 for £10,000 or more.

Payment terms are a contractual matter. Thirty days is common, sixty is common in larger organisations, and anything beyond that should be priced. A ninety day term is effectively a discount the agency is giving the client for free.

The prompt payment code and the government's fair payment practices push larger buyers towards shorter terms, and since 2017 large businesses have had to report on their payment practices twice a year. That reporting is public, so a client's record is checkable before you sign.

Invoices should be unambiguous. Show the purchase order number, the period covered, the fee, the VAT, the total and the due date. An invoice that the client's finance system cannot process is an invoice that will not be paid on time, whatever the terms say.

Chase on day one after the due date. A polite written reminder with the invoice attached, copied to the account contact, is usually enough. Escalate in writing, then consider statutory interest. Interest is a right, not a favour, but claiming it can cost the relationship, so decide which matters more.

For agencies, the practical answer is a deposit. Ask for a percentage up front on project work, stage the rest against milestones, and stop work if a milestone payment is overdue. A clause allowing suspension for non payment is worth more than a clause allowing interest.

The costs that never appear on the quote, such as chasing time, rework and the interest of financing a slow payer, are real costs. Price the payment terms into the fee or refuse the terms. Doing neither is how agencies run out of cash while reporting a profit.

A contract checklist covering VAT, IR35 and payment terms

Work through this before the engagement letter goes out. Each line is a decision, not a formality, and each one has a place in the contract. The selection checklist covers the other gates before signing.

The contract clauses that decide most of these points are the ones clients push back on hardest, so settle them early. A fuller list of the clauses worth agreeing before work starts sits in this guide to contract clauses.

Two worked examples, with invented figures, show how the pieces interact. A Manchester agency wins a 60,000 pound rebrand for a UK retailer, running six months. It is VAT registered, so it quotes 60,000 plus VAT.

The client is registered and recovers the VAT, so the net cost is 60,000. Terms are 30 days from invoice, with 30 per cent on signature and the balance on milestones. One senior contractor is engaged through a personal service company for four days a week over the project.

The agency is a small company, so the contractor's company determines status. CEST returns self employed, the contract allows substitution, and the contractor works from their own studio two days a week. The file records all of it.

A London agency sells a brand system to a business client in the Netherlands for 40,000 pounds. The supply is outside the scope of UK VAT, so the invoice shows 40,000 with a reverse charge note and no VAT. The client accounts for Dutch VAT.

Terms are 45 days. The agency buys photography from a supplier in France for 5,000 pounds and accounts for the reverse charge on that purchase in its own return. Cash flow depends on the Dutch client paying inside 45 days, so the agency has priced a small buffer into the fee.

Neither example is unusual. The tax position, the contract terms and the cash flow are one decision, not three. An agency that treats VAT registration, off payroll working and payment terms as separate admin tasks will get one of them wrong.

What a directory entry or review can and cannot confirm

Directory entries and reviews describe the work: positioning, portfolio, sector experience and the client names the agency is allowed to publish. They are the right material for building a shortlist. They are silent on the three facts this article covers, and a studio with glowing reviews can still be unregistered for VAT, or a heavy user of contractors whose status has never been assessed.

Each of the three has a source you can check rather than a claim you have to believe. The agency review evidence pack and the vendor due diligence paperwork list show what to request.

A shortlist built on the work and then tested on these three points is a shortlist a client can price. For named studios to start from, see the shortlisting method.

Common questions