Is VAT due on commission?

Is VAT due on commission?

I have heard this question asked countless times: ‘Is VAT due on commission?’.  Such a simple question but with a real can of worms for an answer.  The reason for that is, not only can commission be paid on just about anything, it is often paid when there is a link to an exempt transaction. For example, commissions on insurance, finance and even funerals all often giving rise to VAT problems.  Hopefully this article will provide you with an alarm bell that rings loudly in your ear every time a client claims that their commission is VAT exempt.  Often it will not be and VAT actually falls due.

While having a VAT exemption that might also apply to commission can be good news, it can equally be a huge man-trap for the optimistic foolhardy.  

Why do I say this?  Imagine someone hears that finance, insurance or funerals are exempt.  They know that their own supplies are linked in some way to those broad exempt headings and then go on to believe, as in really really believe, that their commissions must, therefore, as a matter of course, also be exempt.  Here is where their optimism to not charge VAT gets in the way of reality and they dive blindly into a commission shaped man-trap.

If we step back to a good viewing point we can see that VAT works on the basis of guilty until proven innocent.  Basically VAT always applies unless a supply squarely falls into one of the reliefs, be that exemption, zero or reduced rating.

You have to think about all of the reliefs as lead lined boxes.  There is no leakage around the edges.  The only grey areas are those involved in deciding whether something is inside the box or not.  It is not sufficient to be related to something that is in the box.  What you are doing, for example to earn your commission, has on its own merits to also fall in the box otherwise VAT is due.

In order to be in one of the relief boxes any supply needs to be covered by the wording in the VAT legislation.  Each relief has a small number of words setting out what is relieved and it is this wording that gets debated in all of the arguments and court cases about whether something is VATable or not.  What is an insurance intermediary exactly?  When is a person acting in an intermediary capacity in a finance transaction?  When is someone making arrangements for or in connection with the disposal of the remains of the dead?  These short descriptions have led to vast debates and there is an enormous amount of case law that goes to define what is in the relief box and what is not.

So with so much debate, commentary and case law there is no safe space for someone to assume their commissions are exempt.  It really does need careful consideration.

The rules surrounding insurance and finance exemption for intermediaries are complex but basically acting as an introducer is too far removed from the actual transaction for any commission to qualify as being exempt.  The main transaction itself could well be exempt but that does not mean that all of the activities surrounding it and all of the people involved also benefit from the same exemption.

This is the essential problem with VAT and commissions as very many commission earning situations are too far removed from the actual transaction to fall in the exempt relief box.  It follows that any commission then has to be VATable but without any way to pass the cost on the principal.

Let us say commission is at 5%, if the introducer has to treat that as VAT inclusive all of a sudden their commission rate drops dramatically to 4.16%.  This is because the principal exempt supplier cannot reclaim VAT and will therefore generally define commission as including any VAT that falls due.  As a result they not allow VAT to be charged on top of the commission so if VAT is properly due this becomes the agent’s responsibility and cost.

We have recently advised on funeral plan related commissions and here there seems to be a general belief that because the funeral itself is exempt, it must follow, as night follows day, that commissions earned for selling funeral plans must also be exempt.  This is simply not the case and in fact the position is made very clear in HMRC’s public notice (see para 4.2.3 of HMRC’s Notice 701/32).

In a nutshell this is the problem with commissions.  The determined, foolhardy optimism that flows from just knowing finance, insurance, funerals, health, welfare, education, betting & gaming, land are all exempt and then assuming that any payments simply must also be exempt.  I hope this provides you with an alarm bell so that next time you hear the word commission, you sit up tall and ask a lot of very objective questions.

Written by Melanie Lord of AVS VAT originally for the ICPA.  Working for accountants to stop VAT problems from happening.  Sooner is always betterPlease get in touch with any queries or concerns.
Posted in Relief, VATable?.