Sharing Profits

[Deleted member 227742]

Hi,

My business partner and myself are setting up a limited company which will publish specialist written content. The content will be provided by a core group of individuals within this sector and known to us. Rather than pay the contributors for this content our intention is to reward each contributor for their intellectual property with a fixed percentage of operating profit, similar to a royalty model but not based on sales.

My question relates to whether these payments can be made from operating profit and thus be a tax allowable business expense? The intention would be to calculate operating profit at year end and then make payments to the contributors reflecting the agreed percentage. These payments would then appear as a business expense. That is our ideal scenario.

Or, would this not be allowed? If not, would we have to make their payment from post-tax profits? This would not be ideal as it would reduce the amount of money available to reward them and it would effectively be taxed twice (corporation tax and personal tax). They are not shareholders so cannot receive a dividend, so how would this be accounted for in the books? We are new to this so not clear how net profits can be distributed other than by dividends.

Thanks for any help with both aspects of this query.

Matty

 

[james_firmsites]

If they are effectively staff or contractors but on a commission rather than fixed fee then it is still tax deductible. The only issue would be if they owned some form of share in the actual company (in which case these would be dividends)

 

[Deleted member 227742]

Thanks. They will not own any share of the company and will not be staff. They all have their own successful careers and will provide material to us on an ad hoc basis.

 

[james_firmsites]

Then they are just freelancers, and their payment (like staff) is part of your business costs regardless of the terms of payment being percentage rather than fixed.

 

[David Griffiths]

Normally they would just be freelances but the water might be muddied by the fact that they get paid a share of the net profits of the company. I've never seen that before - in most cases where a freelancer is paid the reference point is the revenue generated by that freelancer, either gross or net of expenses. The fact that the payout for any given contributor depends in part on the contributions of others is highly unusual.

I can't put my finger on anything specific where this might lead to problems but I can imagine that HMRC might take a greater interest in it. Does it mean, for example, that there is effectively a partnership between the company and all of the contributors?

As I said, nothing specific but it could attract interest

 

[Deleted member 227742]

Thanks for that. You are right that the total pot available will ultimately rely on everyone's input. I guess it might be similar to a film or theatre production when profit is shared with various stakeholders involved but ultimately relies on the collective effort.

 

[stevo5678]

Agree with the reply!