VAT charging on revenue splits

[Steve Clifton]

I work in the events industry and most of our deals are a percentage split of revenue earned. For example, 80/20, 90/10, 75/25 etc.

So the production company bringing in the show to a venue earns the greater share of the revenue, the venue earns the smaller share. These percentage splits are agreed in advance. Both parties are usually VAT registered.

Normally, we calculate the split by netting the gross revenue first, apply the split, then add VAT to each side. But I’m in dispute with a venue who are VAT registered but who won’t net the gross revenue. They are applying their split to the gross revenue and adding VAT on top. Almost like a rental charge.

For example, if their share is 20% of the gross revenue they are charging me 20% of the gross revenue plus VAT, rather than 20% of net revenue plus VAT. Or, to put this another way, 24% of net revenue. They’ve increased their share by another 4% by calculating the VAT differently.

How do I get around this particular conundrum? I can’t even walk away because they are holding the revenue for over 20 shows I have already produced.

[Trevor S]

First question in VAT is always “who is supplying what to who”. The two types of arrangement that I’ve encountered previously are:

1. Venue is the principal in the sale of tickets to the public – they collect the ticket income and pay VAT on the full sales over to HMRC. Venue then pays the production company for the show. If the production company is VAT registered, they pay the VAT on their share over to HMRC. Either they give a VAT invoice to the venue or the venue produces a self billing invoice – this allows the venue to recover from HMRC the VAT on the production company’s share.
2. Production company is the principal in the sale of tickets to the public – they collect the ticket income and pay VAT on the full income over to HMRC. Production company pays the venue owner for use of the venue. If the venue owner is VAT registered, and use of the venue is a VATable supply, they will pay HMRC VAT on their share and give the production company a VAT invoice which entitles the production company to recover from HMRC the VAT on the venue’s share.

Your post implies that it’s the first of these. But this should be documented in a formal contract with the venue, as the contract is your “proof” that you’re only required to pay HMRC the VAT on your share – rather than on the total ticket sales, as you would be under the second option above.  The contract should also be clear about the calculation method for payments – i.e. whether they’re a percentage of the VAT-inclusive or VAT-exclusive amounts.

Essentially, you don’t have a VAT issue as such, you have a contractual issue. HMRC will just ensure that you’ve declared VAT on whatever you’ve received. The calculation of the amount you receive is a matter for negotiation between you and the venue.  So check the detail of any contract, make sure that the venue are complying with the wording of it.  If the contract is vague about the calculation, you will need to find some way to reach agreement of interpretation with the venue … and make sure that it’s specified more clearly in future contracts.

[Steve Clifton]

Thanks Trevor.

It looks as though the issue may be the wording of the contract. I actually think it can be interpreted in two ways. This is the relevant clause:

“5.2 Box Office Split Fee. A set percentage of the total gross box office takings that the Visiting Company will receive will be agreed prior to issuing the contract. The Box Office service charge, PRS and any Royalties due will be deducted from the gross box office takings before the split percentage that has been agreed is calculated. After the final performance XXXX will issue an invoice to the Visiting Company. This will then be deducted from gross box office takings and the balance returned to you. All payments (unless stated otherwise) are exclusive of VAT which is payable (where relevant) by you.”

Confusingly, they have included contra charges such as PRS, box office service charge and royalties which are subject to VAT, within the same clause. Because I am used to operating in the way I described in my initial post, I disassociated the first sentence from the final sentence as I didn’t regard the box office split as a “payment” or “cost” per se. I read payments in this context to mean  contra charges which a revenue split isn’t.

So are you saying I am wrong to dispute this clause if I have already agreed it? Bearing in mind I assumed (incorrectly on this occasion) that the venue understood what I meant by percentage split of net revenue. 

What I failed to mention is that the venue don’t necessarily sell all of the tickets on behalf of the visiting company. Quite often ticket allocations are given to external ticket agencies to sell tickets. So whereas you are saying that the venue are entitled to charge VAT in addition to their share of sales as the “supplier”, they haven’t necessarily sold all of the tickets. They are not “banking” or declaring 100% of the ticket revenue because the ticket agency revenue goes direct to the production company. They would only be paying VAT on what they have received.

[Trevor S]

Thanks. Obviously this clause needs to be read in conjunction with the rest of the contract, but it appears to me to be more indicative of the second option in my previous post, rather than the first. Particularly if it’s you (rather than the venue) that has entered into arrangements with other ticket sellers, and decides how many are allocated to each to sell. If the venue (and other sellers) are acting as your “disclosed agent” (rather than as a “principal” in their own right) when making sales to the public, the requirement to declare VAT when those sales are made falls on you, not them. If this is the case, the venue won’t have declared any VAT on the sales, so they will calculate percentages based on total selling prices, less the costs mentioned. I assume that these are specifically excluded as they’re fixed costs to the venue which they’ll incur regardless of how many tickets they’re able or allocated to sell.  Essentially they are treating their share a bit like a venue hire (as you suspected in your original question) plus a supply of their other services to you.  But that is what you’ve agreed to in the contract.

If I’m right, then in your accounts you should be declaring VAT on the full ticket sales. The venue will calculate their share, which they’ll send you a “receipted” VAT invoice for, and the balance of the ticket sales income after deduction of that invoice. You can recover the VAT shown on the venue’s invoice via your VAT return.

I would suggest that it’s worth showing a VAT advisor the full contract to check they also interpret it in this way – given that it may well impact on the VAT accounting you’ve already done. Clearly that sort of work would be beyond the scope of a forum and your accountant may be able to recommend an advisor that they’ve worked with before. If I’m correct in my assumptions, the venue has calculated their share in line with the contract – so there’s nothing you can do about that now, but bear it in mind when negotiating the percentage splits in the future – either with that venue or any others operating under a similar arrangement.

[Author]

Posts