Dilemma: Declaring gross income or net income with cash basis method

[qwercy]

Hi,

I'm an artist represented by an agency that takes 35% of my earnings. Up to now the agency invoiced the client for the full amount of the project and then I invoiced the agency for my cut (so total £- 35% commission). I have no record of the full £ in my invoices or anywhere else, my invoices only show my cut. The payment received on my bank account is my cut.

The agency is now changing their way of doing things in order to connect the artists directly with clients. So they will invoice the clients (on my behalf) for the full £ and they will send me a separate invoice for their 35% commission. All good but the problem is, I'm still getting paid the same as before! I only receive my cut in my bank account.

How do I record these transactions now if I'm accounting with the cash basis method?

Option 1 (the easiest way):
Keep recording my payments as I receive them and attaching the full £ invoice and my agency's invoice to each transaction as proofs. When I file my self assessment I only declare what comes in and out of my bank account as usual (so total £ - 35% commission).

Option 2:
I manually record a payment for the full amount and record the agency commission as expense. This would be more complicated for me as I use an accounting app that automatically syncs with my bank account. So I would have to go and delete every received payment and create new ones.

At the end of the day the math is the same, my taxable income will be the same. If it is relevant at all, I'm not earning enough to pay taxes yet, only NI contributions.

I hope I've explained myself properly, English is not my first language


Thank you!

 

[Ziggy2024]

Hi,

I'm an artist represented by an agency that takes 35% of my earnings. Up to now the agency invoiced the client for the full amount of the project and then I invoiced the agency for my cut (so total £- 35% commission). I have no record of the full £ in my invoices or anywhere else, my invoices only show my cut. The payment received on my bank account is my cut.

The agency is now changing their way of doing things in order to connect the artists directly with clients. So they will invoice the clients (on my behalf) for the full £ and they will send me a separate invoice for their 35% commission. All good but the problem is, I'm still getting paid the same as before! I only receive my cut in my bank account.

How do I record these transactions now if I'm accounting with the cash basis method?

Option 1 (the easiest way):
Keep recording my payments as I receive them and attaching the full £ invoice and my agency's invoice to each transaction as proofs. When I file my self assessment I only declare what comes in and out of my bank account as usual (so total £ - 35% commission).

Option 2:
I manually record a payment for the full amount and record the agency commission as expense. This would be more complicated for me as I use an accounting app that automatically syncs with my bank account. So I would have to go and delete every received payment and create new ones.

At the end of the day the math is the same, my taxable income will be the same. If it is relevant at all, I'm not earning enough to pay taxes yet, only NI contributions.

I hope I've explained myself properly, English is not my first language


Thank you!

You have to do option 2. It sounds like the relationship with the agency has changed (to their benefit). You are the principal in the relationship which means the whole of the income legally belongs to you.

Its important for VAT purposes (although you may be nowhere near that threshold you need to know about it).

Make sure you have the legal contracts in place, maybe get those reviewed?

 

[qwercy]

You have to do option 2. It sounds like the relationship with the agency has changed (to their benefit). You are the principal in the relationship which means the whole of the income legally belongs to you.

Its important for VAT purposes (although you may be nowhere near that threshold you need to know about it).

Make sure you have the legal contracts in place, maybe get those reviewed?

Thanks for replying!

Yes, I'm the principal now as specified in the contract and my agency said we can apply their commission to the total job figure as supplier invoice. I guess my confusion comes from the fact that I'm still paid my cut and not the gross amount.

I'm not earning anywhere near the VAT threshold so I thought maybe it didn't matter in the end.

Does this complicate how I record payments in foreign currency as well now? A lot of my clients are based in mainland Europe and I get paid in a separate euro account. What I've been doing is:

Transfer the payment the moment it arrives to my UK business account. I attach the invoice in € to the transaction + the bank statement showing the amount in €, corresponding amount in £ and the exchange rate conversion of that day.
I then add what my bank charges as expense (after converting it myself in £ using the same exchange rate)

Would it be easier to be paid directly to my UK bank account in £? My agency can do the conversion themselves but then I'll have no idea of what exchange rate is used nor what I'm losing in bank charges.

I hope this make sense, it's giving me major stress at the moment!

 

[pentel]

'm not earning anywhere near the VAT threshold

But are the agency? If so they may charge you VAT.

 

[qwercy]

But are the agency? If so they may charge you VAT.

As far as I know they're not registered for VAT. My invoices only show their tax ID and company registration number (the invoices are automatically generated by the agency on my behalf).

My main concern at the moment is how to record profit and expense accordingly with their new system, as it looks like it could be potentially a nightmare for foreign payments.

 

[Ziggy2024]

Thanks for replying!

Yes, I'm the principal now as specified in the contract and my agency said we can apply their commission to the total job figure as supplier invoice. I guess my confusion comes from the fact that I'm still paid my cut and not the gross amount.

I'm not earning anywhere near the VAT threshold so I thought maybe it didn't matter in the end.

Does this complicate how I record payments in foreign currency as well now? A lot of my clients are based in mainland Europe and I get paid in a separate euro account. What I've been doing is:

Transfer the payment the moment it arrives to my UK business account. I attach the invoice in € to the transaction + the bank statement showing the amount in €, corresponding amount in £ and the exchange rate conversion of that day.
I then add what my bank charges as expense (after converting it myself in £ using the same exchange rate)

Would it be easier to be paid directly to my UK bank account in £? My agency can do the conversion themselves but then I'll have no idea of what exchange rate is used nor what I'm losing in bank charges.

I hope this make sense, it's giving me major stress at the moment!

You will have to convert the figures into sterling for your UK accounts but other than that it is not an issue. The accounting shouldn't be a factor in a commercial decision IMO.

 

[qwercy]

You will have to convert the figures into sterling for your UK accounts but other than that it is not an issue. The accounting shouldn't be a factor in a commercial decision IMO.

Yes, I do that and keep record of exchange rates and bank fees.

It's been straightforward so far, but now I have to also account for my agency's commissions as the the whole income belongs to me like you mentioned

 

[NortonBishop]

So I would have to go and delete every received payment and create new ones.

In Xero, for example, you can categorise a bank receipt with more than one income or expense category. So a £75 receipt might be categorised as £100 sale, -£25 commission.

 

[Paul Kelly ICHYB]

My invoices only show their tax ID and company registration number

Then they are not your invoices!

As indicated, this will increase your turnover by 35% and brings the VAT requirement even closer!

What the supplier is doing is reducing their turnover, maybe bringing them below VAT threshold?

 

[qwercy]

Then they are not your invoices!

As indicated, this will increase your turnover by 35% and brings the VAT requirement even closer!

What the supplier is doing is reducing their turnover, maybe bringing them below VAT threshold?

The invoices are mine, they have my name and address and everything else expected.
What I meant was that the only details ABOUT my agency are their name and address, tax ID and company reg number.
If they were indeed VAT registered surely it would show?

Yes my turnover would be 35% higher but also their commission now counts as expense.
So is the VAT threshold calculated on turnover or profit after expenses?

 

[Paul Kelly ICHYB]

VAT threshold is based on gross turnover.

The invoice should only show your legal information or theirs, not a bit of both.

 

[DontAsk]

The invoices are mine, they have my name and address and everything else expected.
What I meant was that the only details ABOUT my agency are their name and address, tax ID and company reg number.
If they were indeed VAT registered surely it would show?

Yes, if they issue VAT invoices then they must show their VAT number.

Yes my turnover would be 35% higher but also their commission now counts as expense.
So is the VAT threshold calculated on turnover or profit after expenses?

Turnover.

 

[DontAsk]

The invoice should only show your legal information or theirs, not a bit of both.

That doesn't make sense.

The invoice needs to show who is being invoiced AND by whom.

 

[Paul Kelly ICHYB]

My invoices only show their tax ID and company registration number (the invoices are automatically generated by the agency on my behalf).

Maybe I read this wrong or it needs clarification.

I read this as the invoices to the end client are being rasised by the agents with agent & OP's details on it!

 

[qwercy]

Yes, if they issue VAT invoices then they must show their VAT number.


Turnover.

Many thanks!

Oh no, the old invoices I'm talking about are between me and the agency. With the new system they will be between me and the client.

Does the calculation for VAT change if I'm accounting with the cash basis method?

At the moment I'm light years behind the VAT threshold even with the increase of turnover, and I don't expect to get there anytime soon

Thank you everybody!

 

[Paul Kelly ICHYB]

On cash accounting, VAT is calculated at the point of transaction i.e. money moving.

For accural, it is when the invoice is dated (buyer or seller).

 

[qwercy]

On cash accounting, VAT is calculated at the point of transaction i.e. money moving.

For accural, it is when the invoice is dated (buyer or seller).

So I carry on as usual with cash basis and if my turnover gets to £90k I register for VAT. Got it

 

[Ziggy2024]

Maybe I read this wrong or it needs clarification.

I read this as the invoices to the end client are being rasised by the agents with agent & OP's details on it!

Its a self billing arrangement so effectively shows both supplier and customer details on it.

So I carry on as usual with cash basis and if my turnover gets to £90k I register for VAT. Got it

Turnover for the VAT threshold is determined by supplies not what you have received. Cash and accrual basis is determined when you are actually registered.

 

[DWS]

So I carry on as usual with cash basis and if my turnover gets to £90k I register for VAT. Got it

You say you are nowhere near the VAT threshold so this does not matter, but for future reference the rolling turnover threshold for VAT is based on which is earlier between when the work was completed of when the money was received, invoice dates have nothing to do with it.

 

[qwercy]

You say you are nowhere near the VAT threshold so this does not matter, but for future reference the rolling turnover threshold for VAT is based on which is earlier between when the work was completed of when the money was received, invoice dates have nothing to do with it.

The invoice is generated once the work is completed (the client has typically 30 days to pay but sometimes longer) so in this sense the invoice date and completion date are the same. What would I need to do then?