B2B VAT on royalties/commission from an app store app

[Gegster]

Hi all,

I’m in the process of setting up a limited company to receive royalty/commission payments from an app’s proceeds that was developed jointly between myself and another company. The other company is paid directly by the app stores (e.g. Apple/Google) for any sales that take place (sales are worldwide). Every month the other company then pays me a percentage of those sales, that payment does not include VAT.

My question is – where do I stand regarding VAT, assuming my revenue is greater than 85k ? Should those payments include VAT ?

Thanks in advance.

[Trevor S]

VAT is linked to the supplies of services, so you do need to be certain who is supplying what to whom. The fact that the app store is only paying the other company implies to me that the only supply of services that you’re making is assisting the other company with the development. It doesn’t sound like you have any direct contractual link to the app store or app users?

If I’m right about the structure, where is the other company based?

If it’s in the UK, then the income is likely to be subject to VAT (assuming you’re over the £85k threshold). If the other company is VAT registered, it shouldn’t be a problem to them, as they’re likely to be able to recover the VAT from HMRC on their VAT return, based on a VAT invoice that you issue them. If it’s only them that knows the amount due, you could even enter into a self-billing arrangement which would allow them to draw up the VAT invoice on your behalf – see HMRC’s notice 700/62 https://www.gov.uk/guidance/self-billing-notice-70062

But if the other company is based overseas, you need to determine what the place of supply is for VAT purposes. This can depend on exactly what is being supplied, and you should refer to the guidance in HMRC’s Notice 741A https://www.gov.uk/guidance/vat-place-of-supply-of-services-notice-741a. If the place of supply is the UK, it will be liable to UK VAT, as above. However if the place of supply is deemed to be overseas, the other company may be liable to account for a similar tax there.

[Gegster]

Thanks for responding so quickly Trevor!

The other company is based in the UK (is VAT registered), and the contractual link to the app store/users is with the other company only. I’m not sure if this is relevant but it’s also my understanding that the payments from the app stores do not include any form of VAT.

Regarding my supply of services to the other company, I am not invoicing them for any services supplied, but rather receiving a % of sales. Additionally, there may not be a continuous supply of service (e.g. further work from myself on improving the app), not sure if that makes any difference? The lack of invoicing from my side of things, is what made me question my VAT liability in the first place.

Thanks again.

[Trevor S]

Thanks for the confirmation. The fact that you are only involved with the other company and that they’re UK based does avoid some potential complications!

The VAT treatment of payments by the app store to the other company isn’t relevant in determining the treatment of the payments to you – they are separate transactions under separate agreements. Bear in mind though that it’s the supplier who is responsible for determining VAT liability, not the customer – so even if the app store doesn’t show VAT on documents it issues, the other company might still by liable to declare VAT. But a lot will depend on the contractual arrangements between the app store and the other company – so it’s best not to speculate on that aspect without sight of the documentation.

Back to the payments you receive… Whenever any business receives income, they need to determine whether it is “consideration” (payment) for any supply they’ve made. If it is, the VAT treatment of the payment is based on the nature of the supply – usually subject to VAT unless it’s covered by a specific exemption or zero rating. Even though you’re not raising invoices to the other company for the work you’ve done, I suspect HMRC would deem that the payments you’re receiving from the other company are still consideration for the work done on the app. The amount of income you get may not be fixed (as presumably it depends on the popularity of the app) and you may continue to receive income for some time after you stop working on the app. But (I assume) you wouldn’t have freely given the time to jointly develop it without some entitlement to a share of the income, the other company wouldn’t be paying you had you not been involved in the development, and any future involvement in further development may benefit you if improvements increase sales of the app. Essentially the services provided and income received are sufficiently connected.

HMRC’s guidance in Notice 700 (extract below) anticipates such situations, and deems that VAT would be due on the receipt of each payment:

Quote:

15.8 Royalties and similar payments
If at the time when you supply services, you cannot work out the royalties that you will subsequently receive, and which are in addition to any amount already payable for the supply – then there will be a further tax point:each time you receive a payment or issue a VAT invoice, whichever happens first.

[Gegster]

Thanks again for the information Trevor.

I’ll have a chat with the other company to get their thoughts and update this thread with an outcome at a later date.

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