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)
Please login or register to join the discussion.
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.
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.
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.
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.
There we disagree
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.
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.
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
Bad Debt ?
So - at one point, you mentioned a bad debt.
Is there a bad debt ? Just to help clarify matters ?
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 !
Ah - right
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.
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