VAT on commission (again)

[tombbb]

Hey everyone. We recently registered for VAT but I'm a bit confused on how we should go about charging VAT on commissions we pay to our artists. Here's the scenario:

• We sell Product X
• We pay commission (from our net profit) of 20% to John Doe
• We are VAT registered
• John Doe is not VAT registered

1. Product X is sold on different marketplaces
2. We collect Product X income at the end of each month
3. We calculate total sales of Product X, let's say it is £1,000
4. We deduct our immediate expenses (such as bank transfer fees), let's say that is £200
5. We have an agreement with John Doe to pay him 20% of our net profit from Product X (20% of £800 = £160)
6. We charge John Doe a fee of 5% for things like customer support, maintenance etc. (5% of £160 = £8)
7. We invoice John Doe £8+VAT and send him the payment of £160 - £9.6 (£8+VAT) = £150.4

Now my question is related to point 4.: Here we are deducting our expenses to calculate our net profit, from which we pay John Doe his 20% (minus the fees in 6.) - Do we have to charge John Doe VAT on these £200? I suppose not, as the agreement clearly states that we pay commission after we deduct our expenses and then we charge John Doe X% for things like customer support, maintenance and other things related to the Product.

Thanks!

 

[BusinessPlanUp.com]

200 is not a sale and VAT is not relevant there but 5% you charge from him can be VAT liabile

 

[lesvatadvice]

Are your customers aware that they are not buying from you, and that are acting as Agent? What does your website say? Does John Doe have a clear written contract?

 

[tombbb]

Yes, absolutely. We actually own the products and paying ongoing commission to John Doe for his contribution to the product (let's say graphic design, and then he is responsible for all graphic design changes to the product). All of this is of course outlined in the written agreement.

We also want to open our marketplace to artists who want to sell to our audience, but in that case, as you said, we will be acting just as an agent between artist and buyer, where artist is the owner and seller of the product.

 

[tombbb]

Another quick question related to step 4. where we calculate our immediate expenses - is it ok (in terms of VAT rules) to calculate this value as flat rate (let's say 10% of the total income) instead of calculating the actual value of expenses. The main reason being the simplicity, as we deal with multiple suppliers and usually charge our contractors a flat fee in hope that it will cover our expenses.

 

[lesvatadvice]

If you deduct your expenses from the money paid to John Doe, then that is part of your service, and is vatable, and is to be recovered in your turnover. How you calculate it is up to you, and is provided for in your agreement.

 

[tombbb]

So if I get it correctly, both steps 4 and 6 are vatable?

Just to clarify: John's agreement is X% from our net profit, so we don't deduct these £200 (step 4) from his money but ours, therefore does it still qualify as a service and is still vatable?

 

[lesvatadvice]

Correct. That is your 'service' to John Doe, even though it is deducted from the money you pay him.

 

[Clearaccy]

If you are creating a physical invoice for the customer support etc then it has to include VAT.