VAT on commission earnings

[Rusty]

Hi

Another quick VAT question if I may.

If you are selling a product and receiving commission for doing so, ie, we don't stock the product only advertise it. Do we just declare VAT on the amount we earn (the difference between the trade amount we give the merchant and the amount we have sold the item for). Also, and here is where it gets more complicated, sometimes there will be a third party whereby we split the profit 50/50 with them, do we just declare the VAT on the 50% of the profit and leave the third party to declare his bit of VAT assuming he is registered.

Now I've confused myself even more with just asking the question and I don't think it is a quick question either.

Kerry

 

[yorkshirejames]

You've confused me. Do you process the payment (made by whoever buys it) or do you just direct them to a website (or whatever) where they do their transaction completely away from you?

 

[SmilePrint]

Who invoices the customer? You or the supplier.

To whom are the payments made? You or the supplier.

If the supplier invoices and receives payment, they charge VAT, and pay your comission out of the profits.

Your business turnover would only be the comission.

If your business is VAT registered you would send the supplier an invoice for the comission including VAT. So you should be paid comission and VAT.

YOU pay VAT on turnover in your business, they pay VAT on turnover of their business.

You don't 'declare VAT' as such, you collect VAT (in your invoices) and you pay some VAT (on your purchases), you pay the VAT man the difference (as most businesses collect more than they pay in any period)

Also, YOUR business must have a turnover in excess of £70K(?? whatever the current limit) to be required to be VAT registered, Quite a comission!!!

Clear as mud? re-read from the start.

brendan

 

[Rusty]

Wow, thanks for trying to unravel the confusion and sorry for being so confusing.

In answer to the first question, we process the order and take the payment. Then purchase the item from the supplier who will charge us VAT. The supplier does the fulfillment, dropshipping effectively.

So, I'm guessing that we charge VAT to the buyer but (and I know this is a dumb question but my head hurts) do I just charge 15% on the difference between what we pay for the product and what we sell it for (ie our earnings) or 15% on the full cost to the buyer.

And here's where I get really confused, what happens when there is a third party involved who would take a 50% share of the profit?

We are already VAT registered with the main business, although it is all a bit new to me. I can handle the everyday VAT stuff quite easily (she says with fingers crossed) it's these grey areas I'm having trouble with.

Thanks again for answering my silly questions.

Kerry

 

[yorkshirejames]

Also, YOUR business must have a turnover in excess of £70K(?? whatever the current limit) to be required to be VAT registered, Quite a comission!!!

Clear as mud? re-read from the start.

brendan

Brendan, Rusty can register voluntarily (which I would probably recommend here, based on the limited information provided) if she wishes.

Wow, thanks for trying to unravel the confusion and sorry for being so confusing.

In answer to the first question, we process the order and take the payment. Then purchase the item from the supplier who will charge us VAT. The supplier does the fulfillment, dropshipping effectively.

So, I'm guessing that we charge VAT to the buyer but (and I know this is a dumb question but my head hurts) do I just charge 15% on the difference between what we pay for the product and what we sell it for (ie our earnings) or 15% on the full cost to the buyer.

And here's where I get really confused, what happens when there is a third party involved who would take a 50% share of the profit?

We are already VAT registered with the main business, although it is all a bit new to me. I can handle the everyday VAT stuff quite easily (she says with fingers crossed) it's these grey areas I'm having trouble with.

Thanks again for answering my silly questions.

Kerry

Okay, I think I understand. Joe Bloggs goes onto your website and orders a widget. He writes a cheque (or whatever) to your company - for £115 - which is £100 net plus £15 VAT.

Lets assume that you make a decent margin, and that you buy this from the widget maker for £60 plus VAT - £69.

Assuming you only buy and sell one of these in your VAT quarter, you need to pay the tax man £6 (i.e. £15 less £9).

Your splitting the profit with another party - lets assume your gross profit is £40, and lets also assume that once you've taken off your operating expenses your net profit is closer to £30 (if you don't understand this bit then ignore it for now - I'm going off at a tangent and trying to help you further).

The simplest way to get your third party to account for their commission is to get then to invoice you for £15 plus VAT - £17.25.

So in this quarter when you've bought and sold one widget and received an invoice for one commission, you'll pay to the VAT man £3.75 (£15 less £9 less £2.25).

Presumably you do the widget sales through the same limited company as the one your presently operate through with your main business?

 

[SmilePrint]

You charge the customer 15%VAT on the full value of the invoice.

(But remember you are paying VAT out to your supplier on the cost- the Net effect is you paying VAT on your profit- is this where the confusion comes from perhaps?)


The third party who earns a 50% comission should present you with an invoice for this.

If they are Vat registered it will include vat.

If they are not, it will not

 

[Rusty]

Now I feel a complete idiot as you make it sound so straightforward. I was clearly over complicating the issue and going around in circles.

Thanks again for your advice, will go and put it into practice now.

Cheers

Kerry

 

[yorkshirejames]

Now I feel a complete idiot as you make it sound so straightforward.

Noone is an idiot. I imagine us accountants would look stupid if we were asked to go sell your widgets.