Is the income net of commission?

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A potential client has come to me, I'm fairly sure that their income has been correctly recorded in the past. 
 

They are an eatery in a venue. All payments are by card, which go to the venue. The venue then produce a spreadsheet saying, say: £100 takings, £25 us, £75 you(gross), £71.42 you (net).[NB whilst the numbers are for example purposes, the words I've used are literally the column headings]. The client raises a sales invoice for £71.42+VAT, which is paid by the venue. 
 

The contact says 'income split 25/75' ... 'we will retain 25% commission'.

I would want to treat their income as £75 gross, current accountants say £100 gross, £25 gross (but claims input vat) rent expense. I think this is wrong and means their VAT returns are wrong. 

 

I think that the '25/75' and 'retain 25% commission' in the contact are contradictions. The spreadsheet/invoice process seems to agree with the first of those 2 statements. So I'm inclined to say income is 25/75, that 'commission' is confusing wording. 

How would you treat it?

 Thanks 

Replies (15)

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By tom123
04th Apr 2021 18:43

Customer pays eaterie, who pay agreed lower amount to supplier.

If commission was described as margin it would be better.

I am with you.

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By atleastisoundknowledgable...
04th Apr 2021 19:23

Thanks.

Client decides the price of the food, not sure if that makes a difference to anyone’s opinion.

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By Tax Dragon
05th Apr 2021 00:10

I don't follow your maths (no idea where £71.42 comes from), but what your words seem to be saying is that venue has - and presumably reports - income of £100 (and is invoiced by potential) and potential reports income of the same £100 (and treats itself as invoiced by venue).

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blue sheep
By NH
05th Apr 2021 07:10

I dont really understand what is going on here, if your clients has raised a SI for 71.42 + VAT thats what goes on the vat return (where on earth that number came from I don't know)
If the client raises a SI for £100 and the venue in return gives them an invoice for £25 , those two items go on the return, and the accounts just follow on from that.
Forget the spreadsheet and follow the paper trail, assuming both entities are vat reg the net number is the same

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By atleastisoundknowledgable...
05th Apr 2021 08:37

NH wrote:

I dont really understand what is going on here, if your clients has raised a SI for 71.42 + VAT thats what goes on the vat return (where on earth that number came from I don't know)

£75 netted down at 5% VAT.

NH wrote:

Forget the spreadsheet and follow the paper trail


Paper trail matches the spreadsheet. Contract is a contradiction to itself.

NH wrote:

... assuming both entities are vat reg the net number is the same


No it’s not, 5% VAT on the food (sale), 20% on the commission (expense?)
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Replying to atleastisoundknowledgable...:
blue sheep
By NH
05th Apr 2021 09:05

When the VAT rate dropped did they drop their £100 gross or are they just making more money net than they did before?
Either way you still need to follow whatever the sales invoices and purchase invoices say - if you think those are incorrect that needs to be corrected with both the customer and supplier first.
But on the face of it you have a supply of £100 at 5% to the end customer by the venue which is then split 25/75 - I dont see how that could be treated as £100 less £25 rent - are you sure your customer can have the £75 at 5%?

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By atleastisoundknowledgable...
05th Apr 2021 10:48

NH wrote:

Either way you still need to follow whatever the sales invoices and purchase invoices say -


There isn’t a purchase invoice.
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Replying to atleastisoundknowledgable...:
blue sheep
By NH
05th Apr 2021 11:33

Edit - read section 5 of vat notice 709/1 one of those scenarios will apply

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By atleastisoundknowledgable...
05th Apr 2021 13:09

Thank you very much for this.

I think the relevant section is:
5.4 Catering provided by a catering contractor acting as both principal and agent
just with no ‘fee for providing service’.

Re the 5%, I’m taking about the temporary hospitality rate. I’d say the food element would be 5%, the fee element 20% (although there is no fee charged).

This being the case, I think that I’m right. The venue should be treating the £100 gross of 5% and my clients £75 (gross of 5%) as an expense.

Thoughts?

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Replying to atleastisoundknowledgable...:
blue sheep
By NH
05th Apr 2021 14:48

If that is indeed what is happening yes under 5.4 your client supplies the venue the food for £75 and the venue in turn supplies the end customer for £100.
If that was the case I would expect your client to be paying for the food and claiming back input tax accordingly and their sales to be £75 gross

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By atleastisoundknowledgable...
05th Apr 2021 15:10

This is the situation in practice and how I want to treat it.

Would you expect the client to be invoicing their £75 gross of 5% VAT or 20%?

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By jonharris999
05th Apr 2021 12:05

If these things aren't made explicit in the contract between the parties, they become a nightmare like this one.

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By Tax Dragon
05th Apr 2021 13:36

But I don't think potential should be invoicing venue. It's not providing entertainment to venue.

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By Hugo Fair
05th Apr 2021 15:49

"They are an eatery in a venue. All payments are by card, which go to the venue."
So whose name appears (as 'supplier') on the bills & receipts that clients (eaters) receive? If the name is that of the Venue, then any VAT concerns regarding this transaction are irrelevant to your prospective client.

"The venue then produce a spreadsheet saying, say: £100 takings, £25 us, £75 you(gross), £71.42 you (net)."
Does this actually specify anything else about the £25 amount - such as a description of what it is or, more importantly, whether it includes a VAT component? If not (on the latter point) then I can't see the basis on which prospective client can claim part of it as input VAT.

In which case you are left with a single transaction (between Venue and prospective client), which includes an amount of output VAT but no input VAT.

Personally I wouldn't be happy with the (apparent) lack of T&C details (or that the VAT component of what client is charging Venue is being decided by the Venue) ... but I'm no longer clear as to what (original) question remains unanswered?

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By atleastisoundknowledgable...
05th Apr 2021 17:45

Hugo Fair wrote:

... but I'm no longer clear as to what (original) question remains unanswered?

Thanks. Nothing unanswered - Tom, NH & you have all agreed with my analysis of the situation.

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