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What is the correct accounting treatment for commission charged by gallery selling artist's work

I have a new artist client who sells his paintings through a number of established art galleries on a sale or return basis. In delivering the paintings to the galleries my client suggests a guide price for each painting but the actual price achieved may be more or less than this. The galleries deduct a percentage (ranging from 25% to 40%) from the sales price they achieve and remit my client a cheque for the balance. Often the only paperwork my client receives from the galleries is little more than a compliment slip.

He also sells his paintings direct to customers and has plans to set up his own gallery
in the future, but for now is dependent on these other galleries to show and sell his work.

What is the correct accounting treatment within my client's accounts for the commission the galleries take for selling his paintings? Should this be shown as an expense within the artist's accounts or is his turnover simply the (net) amount he receives from the galleries?

Also, what is the correct sales value to take into account in determining his total output for VAT registration purposes?
L Haldane


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Gallery commission
is a cost of sale and shown separartely to turnover which is the gross price charged by the gallery - the inetressting thing here is the VAT and how much if any of the gallery output tax you can reclaim.

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Thanks for your reply
Nicholas, thank you for your reply which has confirmed what I thought but is not going to please my client who doesn't relish the thought of having to be VAT registered and would prefer that his turnover is recorded only as the net value he receives from the gallery in order that he can stay below the VAT threshold for as long as possible.

With galleries taking up to 40% commission on each painting sold, the artist is currently left with only a small proportion of the ultimate selling price and , if his output for VAT purposes is calculated with reference to the ultimate gallery selling price he will have very little opportunity to pass on the extra cost of becoming VAT registered given that the ultimate buyer in almost all cases is a private individual.

Whilst he would be able to recover the VAT he is currently having to pay on the gallery commission my client will undoubtedly be worse off by becoming VAT registered.

Have you faced a similar situation in practice ? Any further advice you can give ?

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margin scheme
sometimes the margin scheme will apply when the gallery takes title

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nick its a small possibility?
there usually is no cost so determining such for the mark up arrangements is difficult. but this is usually for non new goods rather than original ones, though see this link

and NEVER give the gallery title especpially if they dont pay until the end customer does

unfortunately the problem of VAT registration is the same for all business traders what ever they do but at least you can claim back any VAT on commission.

i dont suppose that the flat rate scheme would help as its only up to 150k but its worth a look link

you may be able to pay 5% (6-1) tho yur right to reclaim inputs will be limited but it certainly bears further investigation

the sales value is the gross value of painting sold by the gallery unless you can use of the schemes

obviously the answer is to increase sales tho he may already be working to capacity so that is not easy.

there are a numnber of excellent online galleries so do an online search, anyway i have a client who is toying with the idea of an online gallery with much lower commission rates, will keep you posted

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Be careful, artists and the like are a specialized area.

Linda, from the information you have provided, you say the artwork is on sale or return, which means no risk to the Gallery, the artist only suggest the selling price, the Gallery is free to change/set its own and does so from your posting, I would therefore say your client is actually under a direct purchase at POS arrangement, which means the gallery essentially buys the artwork from the artist at the point it is sold, thus the money received is turnover, not the ultimate sale price as this is decided by the gallery in its transaction with the buyer, an agreement the artist is not a party to nor has influence over.

The big advantage here is it may mean your client can remain under the VAT threshold longer, but it also means the Gallery will be able to control his/her earning potential and the value of the artwork (not so good).

It would of course help if your client had an agreement in place with the Gallery to clarify what the actual arrangement is (not easy either, they don’t like formality for some reason).

Don't forget to advise your client on the droit de suite (artist resale rights).

Holden Associates
A Blog for Small Business

PS The arrangement to which Nicholas is referring is a commission based one where the artists sets the selling prices and in that case he is 100% correct, just a different situation to you Linda.

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Thank you for comments
Thank you all, I very much appreciate your taking the time out to post your comments. You've certainly confirmed for me that nothing is ever black and white when it comes to tax !! Oh how I love being an accountant in January ........

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you and i are looking at things slightlly differently but i see the merits in your comments.

as regards the the D de Suite, this is extremely difficult to police and in any event if you sell to the gallery for say a 'net' price would the gallery then have to pay over more money based on his sale.

this is something we are looking into here.

i think some idea of clients turnover might help us both

nick myles

brand new management
carnmores royalties consultants

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Hi Nicholas, I am not sure how we are approaching it differently, all I have done is reply to Linda on the accounting/tax treatment required based on her information.

It would avoid difficulties, if as I mentioned previously, they actually used agreements whether these are exhibition, consignment or representative agreements.

As to Artists resale rights, I couldn’t agree with you more Nicholas, how on earth anyone is supposed to enforce it is beyond me, but none the less, Linda in her professional capacity as an accountant still has to advise the client of its existence.

Nicholas, The Droit de Suite is on resale after the original sale, which as the arrangement to which Linda refers would appear to be direct purchase at point of sale then this is not caught, as the droit de suite does not apply to the first sale by the artist to the dealer who then sells it for the first time. Before its implementation this particular ‘unintended consequence’ was identified and dealt with.

Linda if you have anymore questions please feel free to contact me, my detail are on my website.

Holden Associates
A Blog for Small Business

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