Thoughts on revenue recognition

Thoughts on revenue recognition

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Client runs a venue find business - free service to clients, then invoices the venue a commission.  E.g. client spends £30k at venue (all paid directly by client to venue) that agent found and negotiated with.  Agent invoices the venue a % say £3k.  That's her revenue and the only money that changes hands through her business.

Has been asked to tender for a contract - whereby she will have to pay all of the venue costs on behalf of the client and then bill them on 30 day terms for those costs.  Then she will bill the venue for her commission as normal.

My initial thoughts are she's then going to have to record the full event costs as revenue, (with corresponding expense) as well as the commission.  It won't impact net profit, but will impact her for VAT registration threshold.

Reasoning is that her business is likely out of pocket for this event for almost 3 months.  If she's paid the venue, and then the client refuses to pay some of the costs for any reason  she's out of pocket, so risk is with her.

Just want to confirm others agree my viewpoint on this?  

Replies (19)

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By jndavs
21st Apr 2015 12:13

Disbursements?
On the face of it, your treatment is correct. However if the invoices are made out to her client, she may be able to treat the costs as disbursements.

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By Taxhurts
21st Apr 2015 15:39

If they don't pay?

Yes agreed - but what happens if the client doesn't pay part of the invoice? Can it be bad debt if disbursement?  There also wouldn't be any other invoice to that client, as the client isn't the revenue stream if you see what I mean. So no invoice to attach the disbursements to as it were.

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RLI
By lionofludesch
21st Apr 2015 16:36

So ?

You don't need an invoice to claim a bad debt.

You just need a bad debt.

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By Taxhurts
21st Apr 2015 18:03

See your point, but from HMRC's perspective:

Income £10k

Disbursements £100k??

It's not a case of handling cash for the client - if they decide not to pay, agent is out of pocket - so surely the risks and rewards (albeit no reward on that part of transaction) have passed and should be revenue?

TBH VAT registration is just one of the considerations - other consideration really is around how to fund it for potentially 90 days, and should client not pay any of the bill - business would basically fold!

 

 

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By cparker87
21st Apr 2015 20:16

Agency / Principal
Your client, if acting as agent, will need a suitable agreement with indemnity and authority to bind the principal (his/her client) in law. If doing so this gives your client recourse to the principal. It's (in my opinion anyway) more of a query for a solicitor than an accountant.

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By Greenheys
21st Apr 2015 21:12

Careful ...

Seen this a few years ago ... end user went bust shortly after gig, leaving the agent, who had failed to clarify that they were the agent such that they were held to be acting as principal, with £100k of costs.  They went bust too.

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RLI
By lionofludesch
22nd Apr 2015 11:00

Why not ...?

Why not invoice the bad debtor for the disbursements if it bothers you so much ?

He won't pay - but you've accepted that and moved on to the next problem.

You say there's no invoice yet only you can correct that.

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By Taxhurts
22nd Apr 2015 16:53

VAT registration

Lionofludesch - That gets me back to my original point though - if invoice for the disbursements - hits VAT registration threshold - which will likely eat into commission with some venues.  So would rather avoid for now.

Cparker and Greehays - yes they were my thoughts exactly, which I brought up with client straight away - I personally think it's risky- ties up (and puts at risk) a lot of cash and more work than other clients that would generate the same income overall.  

Thanks everyone!

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Replying to JHC:
RLI
By lionofludesch
22nd Apr 2015 18:57

There we disagree

Taxhurts wrote:

Lionofludesch - That gets me back to my original point though - if invoice for the disbursements - hits VAT registration threshold - which will likely eat into commission with some venues.  So would rather avoid for now.

I disagree there.  Disbursements on behalf of someone else aren't part of your turnover.

If I pay a £13 filing fee for a client and add it to his bill, I'm not trading in filing fees.

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By Taxhurts
23rd Apr 2015 17:46

Oh yes I definitely agree with you there, what concerns me is the ratio of disbursements to revenue, and the revenue comes from the hotel, the disbursements are for the end "client" who do not pay anything to the agent for her services... However this is exactly why I posted, I can't come to a decision on my viewpoint! So I much appreciate your input on this!

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RLI
By lionofludesch
23rd Apr 2015 18:23

Letting the strap out

I'm surprised that the client was prepared to expend huge sums on disbursements for what appears to be a relatively small fee with no payment on account from the customer.

No doubt the client will learn from that but - also - no doubt the client can justify that the expenditure was a disbursement, that they sought no profit and billed it out at exactly the price they paid.  It is thus not part of their turnover.

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By Taxhurts
23rd Apr 2015 22:55

No client hasn't done it, they've been asked to tender to do it, I've suggested perhaps not best idea for the reasons mentioned above.

however if they do go for it, I now agree with you, and we'd treat as disbursements. Takes away VAT element, now just whether it's a viable business decision.
Thanks for your help!

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By PKan
23rd Apr 2015 23:23

commercial sense

Why would you want to fund a venue cost for the client at zero % margin anyway on a credit line  ? They want it they pay for it directly or prepay ..end of..then just charge for commission as per normal, sounds  like someone is being used to bank role for free ! stay strong...or say that you will take all the   bar, merchandise and ticket sales at source if that seems like a good earner 

 

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RLI
By lionofludesch
25th Apr 2015 11:18

Bad Debt ?

So - at one point, you mentioned a bad debt.

Is there a bad debt ?  Just to help clarify matters ?

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By Taxhurts
26th Apr 2015 19:48

no - hypothetical

Client has been asked to tender for the contract- we are just considering the implications of her paying for everything in advance.

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Replying to Wanderer:
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By PKan
26th Apr 2015 20:18

Tred carefully
First and foremost this has nothing to do with bad debts , revenue recognition or disbursements and everything to do with risk vs pay off and minimising and protecting the risk aspects.

I would urge you and your client to think of these first and apply commercial sense before debating the accounting principles.

Consider possible methods of mitigating the risk before you think of anything else. e.g. possible protection may be for the client to pay into a protective bond.

The outcome(s) following your commercial due diligence will assist to determine the billing method not the other way around !

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Replying to Wanderer:
RLI
By lionofludesch
27th Apr 2015 11:07

Ah - right

Taxhurts wrote:

Client has been asked to tender for the contract- we are just considering the implications of her paying for everything in advance.

Well, the answer is - keep asking for stage payments.

As others have said, this is about risk minimization, not bad debts.

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By Taxhurts
26th Apr 2015 21:20

Agree PKan

100% agree and was the first thing I said to her, however I am her accountant and ultimately it is her business.  It would be incorrect of me to not consider the accounting implications also, the potential requirement for VAT registration is an important factor.

 

My initial advice to her was that it sounds like a lot of risk and more work than her existing set up, and perhaps she would be best focusing on winning new clients that stick to the current way of working and  earn the same commission levels.

 

 

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By kiwilondon99
27th Apr 2015 09:58

 

 

note if they are tendering + should win.. they'll have additional OWN costs like their venue insurance / public liability etc + may have to provide addon services ie lighting  equipment[hiredin ?]  etc.

apart from the cashflows of this and the admin - do they have experience in such matters ?

OP - would on face value as you have thus far indicated to be a risky new activity

and even if values per annum allowed them to use Flat rate scheme  it may still expose PAYE + VAT site issues as well

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