Specialist Accountants for Advertising, Marketing and Digital Agencies
You billed £1.4m last year. The accounts show a profit, the bank balance disagrees, and nobody can say which five clients paid for the office. Which one is telling you the truth?
Most accountants file an agency’s accounts and stop. Merit starts earlier. We are Chartered Certified Accountants and Chartered Tax Advisers, so we read your numbers with tax trained eyes first. We work UK wide from offices in Manchester, London and Hertfordshire.
You can see what this has saved clients in our creative industries and agencies case studies.
What do ordinary accountants miss in an agency?
Across digital, creative and media agencies, we see the same five problems:
- Which projects and clients actually make money.
- Employment status and IR35 for the freelancers you use.
- VAT on services to overseas clients, and the place of supply rules.
- Uneven cash flow between retainers and project work.
- Structuring for growth and profit extraction.
Which clients and projects actually make money?
How do I work out project profitability?
Project profitability is not gross margin, which ignores the expensive part: your people’s time. Cost everyone at full recovery rate (salary, employer National Insurance at 15%, pension) over realistic chargeable hours, then add overhead.
- Fee £40,000, less £6,000 of bought in production. On gross margin it looks superb, 85%.
- The account director costs £47 an hour fully loaded (£75,300 over 1,600 chargeable hours) and gives 300 hours: £14,100.
- The senior designer at £30.50 an hour adds £12,200 for 400 hours. The artworker at £20 adds £5,000 for 250.
- Delivery cost £37,300, so contribution is £2,700, or 6.8%.
- Overheads run at 35% of fee income, so Bellworth carries £14,000. Real result: an £11,300 annual loss.
That anchor client loses £11,300 a year. Break even needs £57,400, so this is a scope conversation, not a price one. Halve the account director’s hours, drop artwork a grade, and it works at £46,000.
Is my freelancer employed or self employed?
Engage a freelancer directly and this is plain employment status. If HMRC decides they were really an employee, the PAYE and National Insurance are yours, not theirs. No small company exemption applies.
IR35: whose decision is it?
Where they work through their own limited company, the off payroll working rules apply instead. Medium or large, and both the determination and the liability are yours as end client. Small, and both stay with the freelancer’s company. Small follows the Companies Act tests (two of: turnover £15m or less, balance sheet £7.5m or less, 50 employees or fewer), uplifted for financial years beginning on or after 6 April 2025. The uplift cannot change anyone’s off payroll position before 2027/28, because the test looks at the last financial year whose accounts were due to be filed before the tax year began. Whether you are still small needs checking against your own accounts, because the two consecutive year rule delays the point at which your status actually changes.
- Income Tax £11,432, employee National Insurance £3,211, employer National Insurance £8,250 (15% above the £5,000 annual secondary threshold). That is £22,893 a year, about £68,700 over three years.
- Interest at base rate plus four points adds roughly £10,000. A careless inaccuracy penalty of up to 30% adds £20,600. Worst case, about £99,000.
Under the off payroll rules, credit for tax she and her company already paid can cut that bill. No such set off is automatic for a sole trader.
Do I charge VAT to overseas clients?
Whether you charge VAT to an overseas client is decided by the place of supply rules. For business to business services, supply happens where your customer belongs, so invoicing a business outside the UK is outside the scope of UK VAT: no 20% added, your customer applies the reverse charge.
For business to consumer services the rule reverses and UK VAT applies. One exception matters here: advertising supplied to a non-business customer outside the UK is treated as supplied where that customer belongs, so no UK VAT.
The trap reverses too. Outside the scope sales do not count towards VAT registration, but services you buy from overseas do. Media platforms and most software carry a reverse charge that counts towards the £90,000 threshold, so your own ad spend can push you over. Deregistration is £88,000 for 2026/27.
How do you fix uneven agency cash flow?
Project work puts your biggest cost before your biggest invoice. Media buying is worse: you pay the platform in days and collect in 45. Place £50,000 a month on 45 day terms and you permanently fund £75,000 of client advertising.
Billing on retainer is the cheapest fix. Invoice retainers monthly in advance and take 40 to 50% up front on projects. On £1.2m of fees, moving collection from 45 days to 15 releases about £98,000.
How should your agency be structured?
- Corporation Tax is 19% to £50,000 of profit and 25% above £250,000, an effective 26.5% between. A £25,000 employer pension contribution in that band saves £6,625, free of National Insurance.
- Dividend rates rose on 6 April 2026: 10.75% basic, 35.75% higher, 39.35% additional, £500 allowance. £80,000 of dividends taken with no salary now costs about £1,340 more, and closer to £1,590 alongside a £12,570 salary, so re-run your salary, dividend and pension mix.
- Business Asset Disposal Relief is 18% for disposals from 6 April 2026, up from 14%. On a £1m gain that is £180,000 of Capital Gains Tax, not £140,000. Plan two years out.
Why do agencies choose Merit?
- Chartered Tax Adviser led. Dual qualified as Chartered Certified Accountants and Chartered Tax Advisers, every engagement reviewed alongside your tax position. In most cases, the tax we save our clients exceeds the fee they pay.
- Worked inside HMRC. Our team includes professionals who have worked inside HMRC, so we know what triggers an agency enquiry and where Inspectors focus. Your position ends up defensible.
- Commercial partners, not textbook accountants. Our partners have built their own businesses from nothing to over £1m in turnover and have made the same calls.
- Fixed fees agreed in advance, three UK offices, free first meeting.
Agency tax questions we are asked most
Do I charge VAT to a client in the United States?
If they are a business, generally no. Under the place of supply rules the supply happens where your customer belongs, so it is outside the scope of UK VAT and your client applies the reverse charge. Keep evidence they trade.
What if HMRC decides our freelancer was really an employee?
The PAYE and National Insurance become the agency’s liability, not the freelancer’s, with interest and usually a penalty. On someone paid £60,000 a year, three years of exposure is roughly £68,700 of tax and National Insurance, before interest and penalties.
Our agency is small. Do the off payroll working rules apply?
If your freelancers work through their own limited companies and you are small under the Companies Act tests, the status decision stays with their company. That exemption does not cover freelancers engaged directly. Those are status cases, and the risk is yours.
How often should we review project profitability?
Monthly, alongside your management accounts. It only works if time is captured against jobs and costed at a full recovery rate including employer National Insurance, pension and overhead. Quarterly is too late to rescue an overrunning job. The ranking will surprise you.
We buy media for clients. Is that our income?
It depends whether you contract as principal or agent. As principal, the gross spend is both turnover and cost of sale, which inflates revenue and can drag you over VAT thresholds. As agent, only your commission is turnover. Contracts decide, not invoices. Our creative industries case studies include an agency whose turnover fell from £3.4 million to £1.1 million once this was done properly.
Can you take over from our accountant part way through the year?
Yes, and most of our agency clients arrive mid year. We write to your accountant for professional clearance and records, then manage the handover. You do not need an awkward conversation or your year end. VAT quarters and payroll are covered.
What will it cost?
We agree a fixed fee in advance, before any work starts, so no surprise invoices. The figure depends on your turnover, the number of entities and how much of the finance function you want us to run. Your first meeting is free.
Find out which clients are funding your agency
Bring three things to your free meeting: your last accounts, your top ten clients with fees, and every freelancer used for over six months. We will tell you which accounts carry the business, where your status exposure sits, and whether your overseas VAT is right.
Last reviewed: August 2026.
