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Does referral commission belong to the business?

Director has referred our clients to a third party and wants to keep the commission for themselves.

A company director has recently referred our clients to one of our suppliers under a commission scheme.  The director believes they should keep this commission for themselves.  Who has the legal right to receive this money: the individual or the business?

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22nd Aug 2017 23:02

Starting point. What are the terms of the scheme?

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By bobuk
to andy.partridge
22nd Aug 2017 23:16

Hi Andy, I'm not privy to the full details of the scheme at this point, but I'm told the commission is a percentage of the fees charged by our supplier to our clients. This could amount to thousands of pounds. We originally used their services and they asked if we had any referrals. The director dealt with the entire process on their own, but as part of their duties.

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23rd Aug 2017 08:04

If I was a director or shareholder in this company I would insist strongly that the commission income belongs to the company. Are there any other directors or shareholders in this company, and if so what do they say?

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By bobuk
to johngroganjga
23rd Aug 2017 08:53

There's one other director and they're not bothered by the claim, perhaps even leaning towards thinking they deserve it. I find their stance a little baffling, but these two directors always stick together. From my point-of-view, I believe they've carried out the work on behalf of the business, made no special effort outside of their regular work commitments, and have obviously used access to our clients to facilitate the referrals. They also tried to hide it and I only found out when a client mentioned it. I believe it should be business income, but am outnumbered within our business on the issue so a legal or accounting precedent would be useful to have.

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23rd Aug 2017 09:36

If you're not a shareholder or director (assumption) and the 2 directors/shareholders have decided this - why are you concerned ?

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By bobuk
to bernard michael
23rd Aug 2017 09:43

Hi, I am both a shareholder and director. I'm concerned because I believe the individual is trying to claim this income for themselves when it should belong to the business.

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By mrme89
to bobuk
23rd Aug 2017 09:49

Hmmm. So why were you attempting to come across as a third party?

And it didn't bother you two minutes ago, apparently:

'There's one other director and they're not bothered by the claim, perhaps even leaning towards thinking they deserve it. I find their stance a little baffling, but these two directors always stick together. '

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By bobuk
to mrme89
23rd Aug 2017 10:01

Quote:

Hmmm. So why were you attempting to come across as a third party?


Sorry for the confusion – perhaps my wording wasn't clear enough. For clarity, there are three director-shareholders and I am one of them.
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By DJKL
to bernard michael
23rd Aug 2017 09:55

I suspect because the arrangement likely has certain tax implications that I strongly suspect the directors wish to airbrush from history.

It may be a mindset view, but I, as a mere employee, keep a close eye on the business I work for and tend to tell my directors what they can and cannot do.

If I were the employee I would also be somewhat concerned if they ignored my advice regarding a financial matter, after all that is my area of responsibility;maybe the OP feels the same way.

Edit-now see OP is director and shareholder. Maybe a read of CA 2006, s182 would be a good place to start

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By bobuk
to DJKL
23rd Aug 2017 10:10

Quote:

Maybe a read of CA 2006, s182 would be a good place to start


Thank you for the reference. It's interesting you should quote this, as we have a similar issue with the same director concerning undeclared income from another supplier. I'm facing the same problem with that issue, in that I don't have the support or interest of the third director and risk alienating myself by pursuing it.
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23rd Aug 2017 10:06

That was a waste of a reply

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23rd Aug 2017 10:23

Who does the supplier think they're paying the commission to?

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By bobuk
to Duggimon
23rd Aug 2017 10:31

I don't know, as I don't have any direct dealings with them.

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23rd Aug 2017 10:26

At the time of your previous thread, you apparently thought the commission was paid by the company to whom you sold; now you have established it's paid by the company from which you buy.

That's important, in reading John's previous answers.

I wonder why you are discussing these matters on AW though; do you not trust the advice of your solicitor?

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By bobuk
to Tax Dragon
23rd Aug 2017 10:38

Hi, my previous thread is a different issue. Granted, there are similarities in their nature, but they are different. On this thread, I'm purely trying to ascertain whether there are rules regarding ownership of business commission.

I'm discussing the issue on AW, as I'm after some casual insight at this stage and the public comments and expertise may also help someone else along the way.

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By mrme89
23rd Aug 2017 10:28

Perhaps you need put this a different way to the other directors.

The commission has arose because of their directorship at your company.

If your client receives a poor service from the supplier, you are potentially going to lose goodwill.

Why should the company risk losing goodwill and clients, without being remunerated for the referral?

I cannot see why it isn't the income of the company.

Incidentally, there could also be VAT issues to deal with.

If the director wants to earn money outside of the company, perhaps they should resign as director and go on to other pursuits. Piggy backing the company, and expecting this commission to be yours isn't on in my opinion.

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By bobuk
to mrme89
23rd Aug 2017 10:48

Thanks – that's an interesting alternative angle to look at it. I obviously agree with your assessment that it should be company income, but would love to be able to quote a definitive ruling to help my cause.

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By mrme89
to bobuk
23rd Aug 2017 10:57

Do you need any legal reference? It's just common sense.

The clients were that of the company. The director, as an individual, did not have any clients to introduce to the supplier.

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By bobuk
to mrme89
23rd Aug 2017 11:06

Again, I completely agree. However, the other directors aren't of the same opinion and I will likely be outvoted on it, hence a desire for something legal to back it up.

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to bobuk
23rd Aug 2017 11:29

Aren't you going to be outvoted anyway, regardless?

What is the mechanism for paying the commission (eg. company raises an invoice, or director collects cash in his back pocket? Isn't who has been paid the indicator of who the payers believe they are transacting with?

You appear to be after legal references but without supplying or knowing the framework on which to base a judgement (edit, good ref mrme89). Morally, I agree with you, but it's not a moral issue.

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By bobuk
to andy.partridge
23rd Aug 2017 11:33

I may well still be outvoted, but at least I can present something as fact, rather than my opinion.

Unfortunately, all I've been told is that a percentage-based commission scheme has been arranged and that a number of our clients have been referred to the supplier. I have no knowledge of how these payments will be made or who they will be officially paid to.

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to bobuk
23rd Aug 2017 12:03

Then surely you need to get a handle on what is intended before you can know that you have a problem with it.

If it transpires that you are the 'odd one out' then it seems to me equally important that you have the skills to resolve the ensuing conflict you are in danger of creating.

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By bobuk
to andy.partridge
23rd Aug 2017 12:22

Quote:

Then surely you need to get a handle on what is intended before you can know that you have a problem with it.


Well, I know that the director is intending to claim it for themselves, so the issue is whether they're allowed to continue with these intentions unchallenged.

Quote:

If it transpires that you are the 'odd one out' then it seems to me equally important that you have the skills to resolve the ensuing conflict you are in danger of creating.


Yes, I agree. I'm only too aware that my opposition – rightly or wrongly – is creating tension and conflict that has the potential to escalate quickly. That's partly why I'm here and not speaking to a solicitor.
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to bobuk
23rd Aug 2017 11:16

Quote:

Thanks – that's an interesting alternative angle to look at it. I obviously agree with your assessment that it should be company income, but would love to be able to quote a definitive ruling to help my cause.

That's a step up from the "casual insight" you wanted just a few minutes ago.

Anyway, you have clearly raised this with your colleagues and got nowhere. If you are not planning to go legal, what are you intending?

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By bobuk
to Tax Dragon
23rd Aug 2017 11:40

Quote:

That's a step up from the "casual insight" you wanted just a few minutes ago.


Things escalated quickly. :)

I'm just after some casual advice and pointers – things for me to look at and refer to, or opinions from people who know better than I do. I want to avoid 'going legal' if I can, hence posting on here. However, I will have to consider it as one of my options if I'm unable to make progress on my own.

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23rd Aug 2017 12:58

Do the directors have contracts of employment / service contracts with the company? Are there any shareholders' agreements?
RM

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By bobuk
to runningmate
23rd Aug 2017 21:51

Unfortunately not. We've always been verbal in the agreements between ourselves, so none of this documentation exists.

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23rd Aug 2017 14:34

1.I assume the receiving director knows that the commission will be taxable on him
2. Your opinion that it should be company income should be put in writing to both your co-directors and also logged with your solicitor so that if in future problems occur you are on record as a dissenting voice.
3. One question to bring to the other directors attention is what is the legal/insurance position if the service provided on which the commission is paid is inadequate and legal actions ensue. The company needs cover for this

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By bobuk
to bernard michael
23rd Aug 2017 22:00

1. I also assume this, but obviously the content of their tax return is their private business and shouldn't impact our shared interests.
2. This is a good suggestion, thank you.
3. I wasn't aware that we could potentially be held liable for a referral-gone-wrong. I will raise this issue with them.

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23rd Aug 2017 16:11

I assume that the other director is backing the first director up because he will be getting a share of the commission.

It looks like they are trying to fleece you out of your share.

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By bobuk
to Samantha20
23rd Aug 2017 22:12

On the face of it, this is a reasonable assumption. However, whilst I'm clearly baffled by the second director's stance, I've not seen anything to suggest they will gain privately from it. I think they're just not willing to criticise or question the first director.

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24th Aug 2017 09:36

One question that is possibly causing curiosity is how much money is involved in the commission payment
Also
If he gets away with it this time a precedent will be created for future decisions not just about commission

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By bobuk
to bernard michael
24th Aug 2017 09:49

I'm not sure of the exact value, as the work is yet to be completed for our clients. However, it's likely to be in the thousands of pounds.

Exactly right regarding the precedent, too.

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24th Aug 2017 10:06

The customers he is referring are customers of the business. He would not be able to refer them if the business did not exist so the commission should belong to the business.

As someone else has said, there is also the question of goodwill - if the supplier upsets the customer the business could end up losing the customer. The business is taking the risk of this and should therefore also get the reward/commission.

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By bobuk
to Samantha20
24th Aug 2017 11:11

This seems to be the general consensus and is what I felt before I posted. I just seem to be in business with the two exceptions. :)

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By mrme89
24th Aug 2017 10:17

Show them this thread and then tell them to stop being greedy, selfish bar stewards.

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By bobuk
to mrme89
24th Aug 2017 11:11

So tempting! :)

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25th Aug 2017 11:23

Whoever the commission belongs to, if the director keeps it I would suggest it was income arising out of his employment and so taxable as earnings. it is then either the director's income from a third party or the company's income paid out as remuneration.

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By bobuk
to tonyaustin
29th Aug 2017 09:13

If the payment goes straight to the director, presumably the money is never considered part of the business and wouldn't need to be mentioned in our accounts. The onus is then on the individual to declare the income and pay the appropriate tax on it. I will obviously check this with our accountants if that's what ends up happening.

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