VAT & commissions

VAT & commissions

If I asked you ‘what is a commission?’ your answer would depend on whether you are an army officer, a sales agent or involved with insurance or finance. So anything to do with VAT & commissions is really a trick question because just as there’s more than one answer to the question, there’s more than one way for VAT to apply to a commission.

When trying to decide what to do about VAT the starting point has to be to work out the nuts and bolts of the arrangement. Who’s doing what for whom and where?  Unless there’s a non-UK aspect, a commission paid for making something happen like a finders fee or a sales agent, introductory fees will always be VATable.  In contrast an insurance or finance commission might – emphasise here ‘might’– be exempt.

This is really where people get into trouble with commissions. It’s commonplace to introduce a client to an insurance broker or a finance broker and if that leads to them doing business then the introducer might receive a commission. Because of the underlying exempt insurance or exempt finance it’s a common misconception that the fee received by the introducer can also be exempt. Most of the time that would be wrong. This is because exemptions are very narrowly applied so that finance and insurance commissions can only be VAT exempt where the introducer is involved in the actual exempt transaction.

Making an introduction will never be enough to bring a commission into the VAT exemption.  Given that the broker paying the commission can’t reclaim any VAT charged by an introducer, the commission received by the introducer will still need to be treated as VAT inclusive, effectively reducing the real value of the amount being received.

If ever you’re not sure about anything related to VAT, please call. It’s never nice to have VAT go wrong so why not check it out first? Remember, sooner is always better.

Posted in Relief.