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VAT Treatment of Royalties

Your assistance in untangling the following is appreciated.

A VAT registered client enters into an agreement with a third party to develop a film. The third party gives the Client £x in order to get on with the task. Some time later (9 months or so) the project begins to gather pace and the scope of the project is better understood. At this point the client and the third party enter into an agreement, whereby in return for the £x, the third party is paid x% on the future sales of the film.

My question is what is the tax point for VAT? Is it the time the £x was received by the client from the third party, or is it the time the royalty agreement is signed? The third party does not register for VAT until the royalty agreement is signed.

Many thanks in advance for your comments


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By Rob Fox
12th May 2011 12:41

VAT treatment of royalties
Hi Jim,
From your description, I'd ay there are two supplies here:
1. Your client appears to surrender the right to receive all income from the film in return for a payment rom the 3rd party. This follows normal tax point rules (earlier of invoice or payment) so - unless your client issued a tax invoice before this - VAT was due when the payment was received.
2. A supply by the 3rd party, the consideration for which are the royalty payments. This is a continuous supply of services, tax point the earlier of tax invoice or payment.
You might find it helpful to look at two parts of HMRC guidance:
Tax points for royalties and repeat fees, at
VAT on capital contributions, at (the taxable example)

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