Splitting Payments and Taking a Commission

[topmonkey]

I have a client who wants to set up a website doing administrative work for various businesses - the client would receive payments from the business' customers, take a small commission and pass the rest of the money onto the business. The problem is that, because my client is initially receiving the complete sum of money (before taking the commission only), he may have to pay VAT, because of the high turnover - is this correct? If so, my client has asked me whether there is a payment processor that offers a split payments system?

[ralph.m]

I don't mean this as a criticism, but it sounds like he'd be better off asking his accountant than his web designer. I'm not sure how tax works in the UK (that's where VAT applies, right?) but I think here in Australia you total everything that's come in and everything that's gone out, and the difference is your taxable income. But TBH, I let the accountant worry about all this, so I could be wrong.

[Mikl]

Ralph is absolutely right. This is a question for an accountant, not a web designer. You should tell the client to seek appropriate professional advice.

That said, is this really an issue? Your client is registered for VAT (if he wasn't, then the issue wouldn't arise). Given that his clients are businesses, then they are presumably registered for VAT as well. So nobody will be out of pocket, as everyone concerned will simply reclaim the VAT.

Mike

[topmonkey]

From speaking to my client he thinks that if he took payments in this way, he would have to become VAT registered, though, I agree, this is more of a question for his accountant. VAT is different from income tax - it is based on turnover as opposed to profit. That's why he asked me about a split payments system.

[TechnoBear]

It's many years since I worked in a VAT office (sorry ) but yes, it sounds to me as if your client would need to register for VAT if his turnover exceeded the limit. I agree he should talk to his accountant - or even the VAT office. In my day, we really liked people who came and asked for advice up-front, rather than guessing and getting themselves into a fankle which we then had to sort out. Maybe things have changed with all the cut-backs, but it's worth a try.

[topmonkey]

It's many years since I worked in a VAT office (sorry ) but yes, it sounds to me as if your client would need to register for VAT if his turnover exceeded the limit. I agree he should talk to his accountant - or even the VAT office. In my day, we really liked people who came and asked for advice up-front, rather than guessing and getting themselves into a fankle which we then had to sort out. Maybe things have changed with all the cut-backs, but it's worth a try.

Thanks, I'll get my client to enquire and then get back to me.

Presumably a payment processing system that divides the payment between 2 recipients doesn't exist then?

[shadowbox]

Actually I'm in the process of setting up an e-marketplace, like ebay/Amazon marketplace where I accept payments from customers on behalf of a third party seller, and I can confirm the advice I got directly from HMRC is that as long as I am acting as an agent, they are happy to consider the 'taxable supply' to be between the parties I am facilitating the transaction for. It doesn't matter if I'm the one initially receiving the money, it matters who the invoice is made out to for that 'supply'

The 'agent' only needs to consider the invoices they raise, i.e. that of their commission to their client for facilitating the transaction.

So if your client isn't vat registered, it's likely they could remain so unless they choose to (which may be advantageous) or if exceed the vat threshold via their commissions and other income . I have this in writing from HMRC, so it would be worth your client doing the same - it needed several phone calls and emails before I got it sorted, because it's not run of the mill advice. Unfortunately asking an accountant got me the quick, safe accountant answer 'it's turnover, you'll be liable for VAT'. But that didn't make sense to me, because the supply is what attracts the VAT and the initial supply is between the customer and seller, not the agent.

I have a client who wants to set up a website doing administrative work for various businesses - the client would receive payments from the business' customers, take a small commission and pass the rest of the money onto the business. The problem is that, because my client is initially receiving the complete sum of money (before taking the commission only), he may have to pay VAT, because of the high turnover - is this correct? If so, my client has asked me whether there is a payment processor that offers a split payments system?

[shadowbox]

Presumably a payment processing system that divides the payment between 2 recipients doesn't exist then?

Yes it does - Paypal offers a way to split the money automatically, and can even retain your commission from what gets sent to the other party (or parties). I believe its called paypal adaptive payments

Also note that if your client is offering 'electronically supplied services' to anyone outside the EU, it will most likely be 'out of scope' of EU & UK VAT, so even if the commissions begin to build up, any commission earned from businesses who are based outside the EU would not be deemed a taxable supply and would therefore not count towards the VAT threshold.

[topmonkey]

Actually I'm in the process of setting up an e-marketplace, like ebay/Amazon marketplace where I accept payments from customers on behalf of a third party seller, and I can confirm the advice I got directly from HMRC is that as long as I am acting as an agent, they are happy to consider the 'taxable supply' to be between the parties I am facilitating the transaction for. It doesn't matter if I'm the one initially receiving the money, it matters who the invoice is made out to for that 'supply'

The 'agent' only needs to consider the invoices they raise, i.e. that of their commission to their client for facilitating the transaction. To clarify:

So if your client isn't vat registered, it's likely they could remain so unless they choose to (which may be advantageous) or if exceed the vat threshold via their commissions and other income . I have this in writing from HMRC, so it would be worth your client doing the same - it needed several phone calls and emails before I got it sorted, because it's not run of the mill advice. Unfortunately asking an accountant got me the quick, safe accountant answer 'it's turnover, you'll be liable for VAT'. But that didn't make sense to me, because the supply is what attracts the VAT and the initial supply is between the customer and seller, not the agent.

Thanks shadowbox for your clear and concise explanation - that totally makes sense to me. I'll pass your advice onto my client and get him to contact HMRC to get the same in writing as you suggest.
Thanks again.

[Mikl]

One other point:

Topmonkey, you don't say what country you are in. We've been assuming you're in the UK (and so is your client). I'm not sure why we assumed that. If you are in another EU country, then then the principles of VAT are broadly similar, but the details might vary.

Mike

[topmonkey]

One other point:

Topmonkey, you don't say what country you are in. We've been assuming you're in the UK (and so is your client). I'm not sure why we assumed that. If you are in another EU country, then then the principles of VAT are broadly similar, but the details might vary.

Mike

Yes I am UK based and so is my client, who will be dealing with businesses in the UK - at least to start with. Thanks for your help. Much appreciated.

[TheRedDevil]

Actually I'm in the process of setting up an e-marketplace, like ebay/Amazon marketplace where I accept payments from customers on behalf of a third party seller, and I can confirm the advice I got directly from HMRC is that as long as I am acting as an agent, they are happy to consider the 'taxable supply' to be between the parties I am facilitating the transaction for. It doesn't matter if I'm the one initially receiving the money, it matters who the invoice is made out to for that 'supply'.

This sounds interesting, however am I correct that your commission for facilitating the transaction will be VAT based? As unless your not VAT registered, I cannot understand how you would get away from charging your customers VAT on your part of the sale?

Also, considering you are facilitating the transactions, I assume that if your third party seller is VAT registered, you would charge the purchaser VAT on their behalf? And only pass the VAT back to the third party?

Also note that if your client is offering 'electronically supplied services' to anyone outside the EU, it will most likely be 'out of scope' of EU & UK VAT, so even if the commissions begin to build up, any commission earned from businesses who are based outside the EU would not be deemed a taxable supply and would therefore not count towards the VAT threshold.

You are most probably wrong there, unless the UK VAT rules are completely different from the base EU ones. I run a company from within Bulgaria as well, and while the invoices sent outside EU is 0% VAT based, they do count towards the company VAT threshold (in the regards to if the company needs to be VAT registered). This is also how it works here in Norway for any invoices I send to foreign clients.

On a side note, what disadvantages are it you guys see with being VAT registered?
As from a company side point I see only benefits with this, and all the companies I'm running I have elected to make them VAT registered from the start (since I knew we would pass the threshold withing the first few months anyway). This has really saved the companies money on the initial purchases for hardware/services etc.

[shadowbox]

This sounds interesting, however am I correct that your commission for facilitating the transaction will be VAT based? As unless your not VAT registered, I cannot understand how you would get away from charging your customers VAT on your part of the sale?

Yes, the commission you charge the client would be a taxable supply.

Also, considering you are facilitating the transactions, I assume that if your third party seller is VAT registered, you would charge the purchaser VAT on their behalf? And only pass the VAT back to the third party?

The third party would include VAT in their pricing on my site, so the total price paid would include the VAT and would be passed on to the third party in full. The VAT for this supply would not be any of my concern as the contract is between the customer and this third party seller, so it is up to the seller how he accounts for VAT.

You are most probably wrong there, unless the UK VAT rules are completely different from the base EU ones. I run a company from within Bulgaria as well, and while the invoices sent outside EU is 0% VAT based, they do count towards the company VAT threshold (in the regards to if the company needs to be VAT registered). This is also how it works here in Norway for any invoices I send to foreign clients.

If I supply electronically supplied services to customers 'enjoying' those services outside the EU, they are not even zero rated, they are out of scope, they are not even taxable supplies - there is a big difference between 0% rated and 'out of scope' - out of scope means it doesn't even exist as far as VAT accountability is concerned. Check this PDF for UK businesses, or this for EU businesses. I am not aware of the rules in Norway, but my understanding is that UK and EU VAT laws are the same so these should apply to Bulgaria.

On a side note, what disadvantages are it you guys see with being VAT registered?
As from a company side point I see only benefits with this, and all the companies I'm running I have elected to make them VAT registered from the start (since I knew we would pass the threshold withing the first few months anyway). This has really saved the companies money on the initial purchases for hardware/services etc.

We sell digital goods mainly to consumers, 25% of whom are in the EU. These customers would see a 20% increase in our product prices if we were VAT registered, so if we can avoid it, it's definitely beneficial compared to the saving we'd make in reclaiming a comparatively small amount of VAT each year from hardware or services we purchase in the course of running the business.