How to account for commission payments

[dandomains]

My accountant doesn't seem to be able to give a clear answer on how I need to handle commission payments.

So basically, I'm writing a wholesale platform where we will have Resellers, who can also have subresellers.

Currently the plan is that Subresellers will topup their account by paying us directly, we add account credit to the subreseller.

The subresellers pricing is set by their parent reseller.

When the subreseller makes an order, the parent reseller will earn a "commission" which is the difference between the price the subreseller paid, and the parent resellers own cost price.

What I am unclear on is how to properly pay this commission credit to our reseller.

We are VAT registered, and will be charging VAT where applicable for invoices once prepaid funds are spent.

Can we simply pay the commission directly to the reseller, or apply it as account credit and have the reseller take responsibility for any VAT required - or do we require an invoice from our reseller for their commission amount + VAT, and we then payout commission + VAT and claim the VAT back from HMRC based on the invoice they issue to use for "commission" ?

I'm also considering another, option which may be easier to account (although also in it's own way more complex) where we could pass on responsibility for taking payment from subresellers to our direct reseller - and when a subreseller makes an order, we deduct from their balance the amount set by their parent, and also deduct the parent resellers cost price for the product from the parent resellers balance.

We then completely disregard all transactions and invoices issues to subresellers and only account for those under our direct resellers (and provide options for our resellers to download their subresellers invoices for their own accounting).

Any advice on how to best handle this in a clear, simple way and avoid too much accounting headache!

 

[Nochexman]

Who is receiving payments in this arrangement? Are you receiving them directly from consumers? Do consumers contract directly with you or with your re-sellers and sub re-sellers?

 

[Ecomccountant]

Your accountant should really be helping with this, otherwise what are you paying for?

So working through your explanation.

You are selling to a parent seller for £12 (£10 Sales £2 VAT), then you are effectively selling "credits" to Parents and resellers - regardless of who is doing the selling. So any of these sales will also attract VAT. So if the reseller sells credits of £15 (£12.5 Sales £2.5 VAT) these are your sales.

You are then giving credits out for commission and if i understand correctly, you would give the parent resller £3in this example (cost/credit value of £2.5 Commission and £0.50 VAT) - you would have to supply a statement to them stating this or a credit note for this. The £2 cost would be classified as Cost of Sales.

Now I would need more info on this, but if these are credits which they can use in the future, then you would classify the revenue as Deferred Revenue until they have "spent" the credits which you would then recognise as income.

In summary
Regardless of who sells what - its all income or deferred income if they are credits which can be used on something in the future.
The commission from the sales are treated as cost of sales and you would record a liability for the credits which would then be released via revenue (ie netting off Cost of sales & Revenue as it doesnt really cost you anything) (barter rules for non cash amounts as per HMRC guidance - nets off to zero VAT)

The example above would look like this

Initial sale to parent -£12 CR £10 Revenue DR CR £2 VAT £12 Cash
They then resell for £15 CR £12.5 Revenue CR £2.5 DR£15 Cash
The Commission is £3 CR £3 Liability DR 0.5 VAT DR 2.5 Cost of Sales
Once used commission of £3 CR Revenue £2.5 and DR Liability £3 CR 0.5 VAT

Therefore the above example would result in this
CR £25 of revenue
DR £2.5 Cost of Sales
DR £27 Cash
CR £4.5 VAT

Now this all depends on if the commission is non cash and just a credit for a service. If its just cash it will be easier.

 

[dandomains]

Thanks for the answers, I'll try to clarify the business model I'm looking at as I think I may have been a bit too abstract.

So it's a wholesale services platform (domain names), where CompanyA Ltd can sign up with me directly to sell services, they can also setup sub-resellers under them on my platform.

Due to the nature of the services, the end-user will always have to be bound by my terms and conditions, and the reseller is obligated to ensure everyone below them agrees to my and my suppliers terms. BUT parent-resellers are responsible for support to those below them.

So CompanyA can sign up, they get .com for say £10+vat because they are a UK company too.

They set their pricing for their subreseller Company B to £12+VAT.

So as I see it there are 2 models I could use for how the accounting works, either:

a) They setup a subreseller, they have access to the subreseller account to manage etc but both CompanyA and CompanyB prefund their accounts by paying me and get account credit.

When CompanyB processes an order for a .com domain, I charge them £12+VAT to deduct from their credit and issue an invoice. This transaction should then result in CompanyA being entitled to commission for the difference (£2) - which I need to somehow pay to CompanyA.

Invoices issued to both CompanyA and CompanyB come from me.

The confusion, is then how to properly handle the £2 difference, do I simply allow CompanyA to add this "commission" to their own prepaid credit balance - where they can later withdraw this - but without me in anyway handling VAT and/or somehow make CompanyA responsible for VAT on their profit made through commission?

It seems others in the industry simply allow this to be paid out, although they seem to be mostly American companies and I haven't seen any UK examples of how this kind of payment is handled.

It seems like I should be getting an invoice from my customer for their commission+VAT (if they are VAT registered UK business) for my own accounts, where I then pay their invoice and claim back the VAT companyA charges me on their commission - although this seems impractical - perhaps I could somehow issue an invoice on behalf of CompanyA to myself which I use for this and then it's down to CompanyA to pay the VAT i paid them to the taxman?

b) CompanyA can create subresellers (companyb) but CompanyA is responsible for collecting funds from their reseller CompanyB, they add credit to the reseller account for their subreseller to spend.

When companyb makes an order, the system removes from their credit and later issues an invoice for the months orders on behalf of CompanyA. AND it also adds a charge to companyA for £10+VAT, I then issue an invoice from me to CompanyA for all of their, and their subreseller transactions.

I only account for direct customer invoices and CompanyA can export invoices i issued on their behalf for their own accounting.

This model seems easier to account for, but adds further complexity to the system transactions.

And yes, I have noticed my accountants don't seem well versed in this kind of arrangement, also had issues with EU VAT MOSS - I suspect they are used to simple UK only trade businesses. Although they also offer a good online accounts system as part of the package which generally makes things easier for the day to day.

 

[Ecomccountant]

Okay - simpler method based on explanation.

Your Company sells to Company B for £10 + £2 VAT (invoiced by you)
Company B sells to Company C for £12.5 + £2.5 VAT (invoiced by you)
You then issue a credit note to Company B for £2.5 + £0.50P VAT (Credit noted by you)

The result being revenue of £20 & £4 VAT with Company B having a Credit value of £2.5

This is most simple way, this means they don't have to invoice you, you still handle all the cash as you are technically invoicing either Company B direct or Company C. Any Commission you attribute to any of the resellers is a credit note (ie a negative sales invoice).

How you display that physically on their account can be up to you.

Result being they don't have to invoice you - you can handle all the invoicing and you dont have to worry about their status.

So i effectively the reseller is just telling you to issue them an invoice and their commission is paid via a credit note.

 

[dandomains]

Would this not result in accounting for significantly more revenue than I'm actually making, with company be effectively paying £7.5+VAT and companyC £12.50+vat ?

 

[Ecomccountant]

Would this not result in accounting for significantly more revenue than I'm actually making, with company be effectively paying £7.5+VAT and companyC £12.50+vat ?

No so:
Your Company sells to Company B for £10 + £2 VAT (invoiced by you)
Company B sells to Company C for £12.5 + £2.5 VAT (invoiced by you)
You then issue a credit note to Company B for £2.5 + £0.50P VAT (Credit noted by you)

In this case you would have revenue of £20 and VAT of £4, the credit note is negative revenue.

Super simple and reflects your VAT proportionately to your sales without having your subsellers to invoice you.

 

[justintime]

No so:
Your Company sells to Company B for £10 + £2 VAT (invoiced by you)
Company B sells to Company C for £12.5 + £2.5 VAT (invoiced by you)
You then issue a credit note to Company B for £2.5 + £0.50P VAT (Credit noted by you)
SO company B gets an invoice for £10 + VAT. Then gets a credit note for £2.50 + VAT so effectively pays £7.50 + VAT. How does Company B generate an income?

Surely a better idea would be for the Hosting Co to invoice B who is then responsible for invoicing C. I do a spot of reselling and that's how it's always worked for me.