Revenue recognition for VAT threshold

Revenue recognition for VAT threshold

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My client is very near the VAT registration threshold. I would just like to check how I am able to classify revenue given the following circumstances:

My client acts as an agent for online web busineses advertising assistance for individuals who have used the wrong type of fuel to fill up their motor vehicle whilst refueling at petrol stations. For example using diesel instead of petrol. Once the online business has been contacted by an individual that online business then contacts my client who goes out to fix the problem ie drain the petrol tank and start again. He then takes a payment for this service but then is required to pass on a commssion to the online business.

Under FRS 102, Revenue Recognition, as an agent you only include revenue which is actually yours ie net of commssion.

In order to keep his revenue below the VAT threshold, can I apply this logic to my clients situation and report his revenue net of the commssion he pays the online business?

 

 

Replies (12)

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By Duggimon
29th Jun 2017 11:13

Your client is not an agent in this transaction.

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Euan's picture
By Euan MacLennan
29th Jun 2017 11:23

I agree. Your client is paying the online agent a commission.

The client's turnover is the total amount charged to his customers (the drivers who have put the wrong fuel in their vehicle) - not the payments received, although assuming that he receives payment immediately, it amounts to the same thing.

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By Ruddles
29th Jun 2017 11:46

As above

Furthermore, your penultimate paragraph is incorrect. Not that it is relevant in this case, it ought to have read:

Under FRS 102, Revenue Recognition, as an agent you only include revenue which is actually yours ie commssion

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By Portia Nina Levin
29th Jun 2017 12:26

Where are the contracts, that everybody appears to have read?

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By Jdopus
29th Jun 2017 15:42

If he's contractually obliged to make the payment to the online business then I would personally make the case that his revenue is net of the amount owing to the third party and leave it to HMRC to challenge my assertion if they disagree.

As per FRS102:
"An entity shall exclude from revenue all amounts collected on behalf of third parties "

This seems to me to support your treatment of the client's revenue.

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By spidersong
29th Jun 2017 16:35

Yes but that's an accounting standard and not VAT law. VAT law doesn't mention 'revenue' or FRS102 as a defining principal, it just says the value of a taxable supply is "such amount as, with the addition of the VAT chargeable, is equal to the consideration", and consideration is whatever the customer pays for the supply.

So the important point is still to decide who is contracting for what with whom e.g. is the customer contracting with the client and the company is owed a cut, or is the customer contracting with the company for whom the client collects money and takes a cut as his payment for doing work for the company. As it says in FRS102 is the money actually being collected on 'behalf of' the company or the client.

Just because he's contractually obliged to make a payment when he makes a supply doesn't mean he collects on someone else's behalf. An author (or actor/footballer etc.) may be contractually obliged to pay their agent 10% of all their income it doesn't mean that when their publisher pays them their royalties that they're only really paying 90% to them and 10% to the agent.

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By Jdopus
30th Jun 2017 12:43

I agree with you that the contract is the ultimate deciding factor here but in lieu of anything which gives a concrete definition of the nature of this transaction and given it seems to fall into a grey area, I would be naturally inclined to take the position that protects the client's interests rather than the position which forces them to register for VAT and lose a large chunk of their income.

I think it's entirely possible to make the case that the client's consideration is equal to the proportion of the payment he actually gets to keep.

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By Alex999
29th Jun 2017 16:07

I interpreted this situation as him collecting the money on behalf of the online business and when paying it over to them he deducts his commission. This is pretty much what the contract says. Hence my original though of him acting as an agent for thus only counting his income (commission) as revenue.

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By Ruddles
29th Jun 2017 16:28

I think, as Portia says, the key will be in the contract wording. Just because the online business is charging him commission doesn't in itself lead one (certainly not me) to the conclusion that he is collecting monies on behalf of someone else. But the contract may say otherwise.

Tax analogy - if someone charges £100 plus £20 VAT then they are collecting £20 on behalf of HMRC. However, they are not collecting a further £20 in CT on behalf of HMRC - that £20 is a charge on the company's own profits. The £100 belongs to the company - until such time as a liability to pay HMRC arises and it hands it over.

So, is the commission in this case "VAT" or is it more akin to "CT"?

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By ruth.julian
29th Jun 2017 21:06

Your client is not an agent as they are providing the end service. Surely the commission is a cost of obtaining the business (and income) of "repairing" the customer's vehicle from the online service? Just as, say, advertising for business is an expense of the business. The total received by your client istherefore their income for VAT turnover purposes. One assumes that the online agent is only declaring the commission earned as their income, not the whole amount paid by the end customer less (as an expense) what your client retains in respect of their services.

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By Portia Nina Levin
30th Jun 2017 13:06

For the avoidance of doubt this may or may not be complete b0ll0x. Without an understanding of the contractual relationships and documentation that gives the end client their understanding of what those relationships are, nobody is in a position to determine who is supplying what to whom in these transactions.

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By ruth.julian
29th Jun 2017 21:18

#comment deleted

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