Principal or agent? What recruitment businesses need to consider under FRS 102

For recruitment businesses supplying temporary workers or contractors, one of the key considerations under the revised FRS 102 is whether the business is acting as principal or agent.

It might sound like a technical accounting distinction, but it can have a significant impact on the numbers reported in your accounts.

A business acting as principal will generally recognise the gross amount charged to the client as revenue, with the cost of the temporary worker or contractor recognised separately as a cost.

Where the recruitment business is acting as an agent, it will generally recognise only its fee or commission as revenue.

This means the conclusion can have a significant impact on reported turnover and gross margin percentages, even though the underlying cash generated by the business may be exactly the same.

What has changed?

The revised FRS 102 applies for accounting periods beginning on or after 1 January 2026 and introduces a new five-step approach to revenue recognition.

As part of this, businesses need to consider whether their promise to the customer is to:

• provide the specified service themselves, in which case they are acting as principal; or

• arrange for another party to provide that service, in which case they are acting as agent.

The key question is control.

Does the recruitment business control the specified service before it is transferred to the client?

For recruitment businesses, answering this question will require looking beyond simply who raises the invoice and considering the substance of the contractual arrangement.

What should recruiters consider?

There is no single factor that determines whether a recruitment business is principal or agent. The overall arrangement needs to be considered.

However, there are several areas which may help indicate whether the recruitment business controls the service.

1.  Who is responsible for providing the service?

Is the recruitment business responsible for ensuring the temporary worker or contractor provides the agreed service? Does it have responsibility for resolving performance issues or finding a replacement?

Greater responsibility for delivering an acceptable service may support the recruitment business acting as principal.

2. Who determines the price?

Consider how much discretion the recruitment business has over the amount charged to the client.

For example, does the recruiter independently negotiate the charge rate with the client and separately agree the pay or contractor rate?

Having discretion over pricing may indicate that the recruitment business controls the service and is therefore acting as principal.

By contrast, where the recruitment business simply receives a fixed percentage or predetermined fee for introducing or arranging the worker, this may be more indicative of an agency arrangement.

3. What does the recruitment business actually promise the client?

This is an important question and requires consideration of the contractual terms. 

Is the business promising to supply temporary resource to fulfil the client's requirements, or is it simply promising to identify or introduce an individual who will then provide services directly to the client?

The wording of contracts with both clients and workers or contractors will therefore be important.

An example

Consider a recruitment business supplying a temporary worker to a client.

The client is charged £1,000 for the worker's services and the recruitment business pays £800 to the worker.

If the recruitment business concludes that it is acting as principal, it would generally report:

Revenue: £1,000
Cost of sales: £800
Gross profit: £200

If it concludes that it is acting as agent, it would generally report:

Revenue: £200

The underlying £200 generated by the arrangement has not changed, but reported turnover is significantly different.

For recruitment businesses with substantial temporary or contractor books, the impact on reported revenue could therefore be considerable.

Don't rely on one indicator

The assessment is not a checklist where one answer automatically determines the accounting treatment.

For example, raising the invoice to the client does not, on its own, mean the recruitment business is principal. Equally, paying the temporary worker before receiving payment from the client does not necessarily determine the conclusion.

Businesses need to consider the contractual arrangements and the overall substance of the service being provided.

Different revenue streams within the same recruitment business could also result in different conclusions.

Why does this matter beyond the accounts?

A change from gross to net revenue presentation does not necessarily mean that the underlying economics of the business have changed.

However, it could have a significant impact on:

• reported turnover

• gross margin percentages

• KPIs and management reporting

• banking covenants

• bonus arrangements

• earn-outs

• investor reporting

• business valuations or transaction metrics

Recruitment businesses should therefore understand the impact well before their first accounts are prepared under the revised standard.

What should recruitment businesses do now?

If you have a temporary, contractor, RPO or other arrangement involving third parties in delivering services to clients, now is a good time to review it.

As a starting point:

1.   Identify the different types of recruitment services you provide.

2. Review the contractual terms with both clients and workers or contractors.

3.  Clearly identify the service being promised to the client.

4. Consider who controls that service before it is provided to the client.

5. Document the factors supporting your principal or agent conclusion.

6. Quantify the potential impact if your current gross or net presentation changes.

For many recruitment businesses, the existing accounting treatment may remain appropriate. However, the revised FRS 102 places greater emphasis on the control assessment, so businesses should not simply assume that their historic treatment will continue without reviewing and documenting the position.

Menzies is an APSCo Trusted Partner and works with recruitment businesses across the UK. If you would like further information or would like to discuss, click download.