Who pays the candidate? The question that decides a recruiter's tax bill

Figures relate to tax year 2025-26 (UK) · 2025 (US)

A recruitment agency crossing the Atlantic meets one question before any other. Who pays the candidate? If the client does, your job ends with the fee. If you do, you have taken on payroll in a country where you have no entity.

Everything else follows from that answer: the forms, the registrations, the margin. So this guide covers placements first, then the client paperwork, then the structures agencies use to keep it manageable.

Key takeaways

• Permanent placements usually stop at the fee, with the client employing the candidate.
• Contract placements can put you on the hook for payroll where the worker sits.
• Employer of record providers take on that payroll for a margin.
• American clients will ask for a W-8BEN-E before paying a British company.
• A salesperson signing contracts abroad can create a taxable presence.
• State registration can apply wherever a placed worker physically works.

Who pays the candidate?

That single question drives most of the compliance. If the client pays the candidate, your job ends with the fee. If your recruitment agency pays them, you have taken on payroll in the country where the work happens.

Permanent placements almost always fall in the first group. Contract placements usually fall in the second, unless a third party stands in the middle.

Ask it before you quote. The answer changes your margin as well as your paperwork.

Contract or permanent placement for a recruitment agency?

Permanent placements are simpler. You introduce a candidate, invoice a fee, and the client employs them directly. The tax question stops at the fee, and the treaty usually protects it.

Contract placements are harder. If the contractor sits on your payroll while working in the other country, you have taken on employment obligations there, including withholding and social security.

That distinction drives most of the cost in this sector. Many agencies handle permanent work across borders happily and use a partner for contract work.

What about employer of record providers?

They employ the worker locally on your behalf and handle payroll, tax and employment law. You pay a margin, and the compliance risk moves to them. For occasional placements in a country where you have no entity, that often works out cheapest.

Check what the provider actually covers. Payroll is standard, but liability for misclassification, benefits and local employment claims varies between contracts.

The form your American client wants

A W-8BEN-E, in most cases. It confirms that the company is not American and claims treaty benefits on the fee. Without it, the client may withhold 30% from payments, which then takes months to recover.

According to IRS guidance on withholding, the payer holds the form and applies the reduced rate. The form is straightforward once someone has completed one, and it lasts around three calendar years.

Complete it before the first invoice. Recovering withheld tax afterwards means filing an American return for the company, which costs more than the paperwork you avoided.

Four checks before the first invoice

Send the form. Check who signs contracts. Ask who pays the candidate. Then look at the state.

Each check takes minutes. Each one prevents a problem that takes months to fix. We run them with every new agency client.

Most agencies pass all four. The ones that do not usually have a salesperson abroad, or a contractor on the wrong payroll.

Does the client size matter?

Not for the rules. A start-up client and a listed one both trigger the same withholding question. Large clients simply ask for the form sooner, because their finance teams know the rule.

Small clients sometimes pay without asking. That is not a reason to skip the form. The obligation sits with them, and they may correct it later by withholding from a future invoice.

What about candidates who move country?

The work location decides the obligations, not the passport. A British candidate placed in Texas creates American payroll questions from day one. An American candidate placed in Leeds creates British ones.

Visas sit alongside the tax, and they usually take longer. Build both into the timeline you promise the client.

A worked example

The figures below are illustrative. Take an example: a Manchester agency places three engineers with a Boston client, earning £90,000 in fees, with all staff working from Manchester.

The agency files a W-8BEN-E, so no American tax is withheld. No office or agent exists in America, so no presence arises. Britain taxes the profit in the ordinary way.

Now add a salesperson living in Chicago who signs the next three clients. That changes the analysis, because a dependent agent concluding contracts can create a taxable presence and an American filing obligation.

How do you price cross-border work?

Build the extra cost into the margin, not into a hope. Payroll providers charge a fee per worker per month, and compliance advice costs money in the first year of any new country. A recruitment agency that prices those in stays profitable.

Currency matters too. Invoicing in dollars while paying costs in pounds moves your margin every month, and a hedge or a currency clause can protect it.

Get paid promptly as well. American payment terms often run longer than British ones, and a growing agency feels that in cash flow before it feels it in profit.

What about temp desks and margins?

A temp desk changes the risk profile of a recruitment agency completely. You hold the worker, you run the payroll, and the margin is thin. Doing that across a border multiplies the compliance for each placement.

Many agencies keep temp work domestic for that reason. They place permanent roles across the Atlantic and leave contract work to partners with local entities.

That is a commercial choice, not a tax rule. But it is the pattern we see most often among profitable cross-border desks.

When a recruitment agency hires abroad

A recruitment agency that hires its own consultant in another country faces the same questions it solves for clients. Local payroll, local social security and possibly a corporate presence all follow from that single hire.

Our guide to working remotely for a US employer covers the mirror case, where an American company hires in Britain.

Plan the first overseas hire carefully. The second one is easy once the structure exists.

What is a permanent establishment?

It is a fixed place of business, or a dependent agent who habitually concludes contracts for you, in the other country. Where one exists, that country can tax the profits attributable to it. Without one, the treaty generally keeps business profits taxable only at home.

For a recruitment agency, the agent test matters as much as the office test. A consultant based in New York, signing clients on your behalf, can create a presence even with no premises at all.

When should you set up a US entity?

Later than most people think. A British company can serve American clients for years without one. An entity makes sense when you hire staff there, need a local bank account, or clients insist on contracting with an American company.

It brings costs. Federal and state filings, payroll registration and an accountant on that side. Weigh those against the benefit before you form anything.

Do American states complicate things?

Yes, and they follow their own rules. A state can require registration and payroll withholding where a worker is physically present, even when the federal treaty protects the company's profits. State thresholds vary, and some are very low.

So the federal answer never settles the whole question. Check each state where a placed worker actually sits.

VAT and sales tax on fees

British VAT rules decide whether you charge VAT on a fee to an American client. Business-to-business services usually fall outside the scope. American sales tax generally does not apply to recruitment services, though a few states tax employment services specifically.

Keep evidence that the client runs a business and sits abroad. That evidence supports the VAT treatment if HMRC asks.

What records should you keep?

Client contracts, the tax forms you filed, and a note of where every placed worker physically sits. Add the evidence supporting your VAT treatment. Together those answer nearly every question either authority might raise.

Keep them by client and by year. When a question arrives about a placement from three years ago, that structure saves days.

How to set the business up

Most of the work happens before the first invoice. These steps cover the common path for a British agency winning American clients.

1. Complete a W-8BEN-E for each American client before invoicing them.
2. Confirm that nobody in America signs contracts on the agency's behalf.
3. Decide whether contract placements will sit on your payroll or with a partner.
4. Check the state position for any worker physically located in America.
5. Set up separate tracking for fees from each country in the accounts.
6. Agree who handles candidate payroll in the contract with the client.
7. Review the position whenever you hire someone outside Britain.

Mistakes and penalties we see with agencies

• Invoicing an American client with no W-8BEN-E, then losing 30% at source.
• Letting a remote salesperson sign contracts and creating a presence unintentionally.
• Putting contractors working in America on a British payroll.
• Ignoring state registration where a placed worker actually sits.
• Assuming an employer of record covers every liability in the contract.
• Charging VAT on fees that were outside the scope, or omitting it where it applied.

Penalties follow the obligation missed. Payroll failures in either country attract charges quickly, and an unregistered presence can bring back taxes with interest.

What if the agency is American?

The questions mirror. An American agency placing candidates into Britain needs to know whether it has created a presence here, whether British payroll applies, and how the off-payroll rules treat contractors. The answers differ in detail but follow the same structure.

Our guide to UK contractors with US clients covers the individual side of the same market.

How US UK Tax Accountants helps

We set up the paperwork before the first invoice, test whether any presence exists, and design the contract structure around it. Where placements already run in both directions, we review what those arrangements created. If your recruitment agency bills across the Atlantic, get in touch and we will map it alongside our treaty relief work.

Last reviewed 24 September 2026. This article is general information and not personal tax advice. Arrangements vary considerably between agencies, so take advice on your own contracts before relying on any of it.