Customer Reward

[aclassey]

Hi...this could well be a stupid question so forgive my ignorance in advance! We’re thinking of rewarding our customers by paying them a small commission if they recommend our product to others which results in a sale. Say they recommended our product to their friend, and that friend purchased the product for £100. We would then want to reward the customer who recommended our product with a £10 commission payment. Can we just write a cheque and send that to them or are their tax implications here?

Thanks...Andy

[PhilLL]

Why not offer them vouchers or something, such as these? http://www.leisurevouchers.co.uk/

[Eric Mc]

Yes you can make such payments (no legal problems).

Yes there are tax implications - the payment is a form of commission and is fully allowable as a tax dductable business expense.
The customer would need to account for the commission as part of their business' taxable trading income.

If the customer and you are both VAT registered, they would need to declare VAT on the income received - and you could claim that VAT back.

[aclassey]

Thanks Eric...so what if the customer was just a normal job blogs consumer who didn't have their own business...? Would they have to declare that as income...I guess they would.

[Eric Mc]

Yes - although many wouldn't - but that's not your concern.

[aclassey]

Great...thanks for that.

[stuthemong]

Eric Mc said:

Yes - although many wouldn't - but that's not your concern.

...unless HMRC want to know where that 10K went, whereby you will be forced to dump one of your best customers in the s**t with HMRC, thereby losing you your best customer/referrer.

I think you need to be a little careful you don't find yourself in that position, so ensure that either the payments are being properly declared, or maybe offer discounts on future orders or something!

I think if the commission payments are expected to be large and frequent, you'll have to pay cash and make sure it is kosher.

If they are literally a tenner here and there to individuals, none of them would ever fill out a SA tax form for a few quid, so will pocket it. In this case, discounts proabably make more sense.

Edited by stuthemong on Wednesday 11th June 13:40

[Eric Mc]

I was speaking from the legal and tax point of view. You have no legal or tax reponsibility for those individuals returning this income for tax purposes. Matters would be different if they were employees as in that case you would be responsible (as the employer) for properly applying PAYE and NI to the commission amounts.

However, the Revenue has absolute power to ask you to whom you pay commissions and you have an absolute responsibility to let them have this information.

Obviously, commercial sensitivity is an entirely different matter so whether you think that paying commissions is "risky" is entirely up to you.

Letting someone have goods and services at a discounted rate as a "reward" might be more workable as has been said although there are still tax and VAT implications if the person receiving such "rewards" is in business.

Edited by Eric Mc on Wednesday 11th June 13:47

[stuthemong]

Eric Mc said:

I was speaking from the legal and tax point of view. You have no legal or tax reponsibility for those individuals returning this income for tax purposes.

Of course. I was just trying to make the point that there maybe slightly wider reprocussions of what he was proposing that need to be considered

[aclassey]

This is all good stuff, so thank you. So...I would need to keep a record of the amount, date paid and customer name in the event that the HMRC wanted that info. I'd also need to inform my customers that we are obliged to do this...whether they declare that income is entirely up to them. We could also let our customers know that should we be asked by the HMRC to inform them of monies paid to customers, then we would inform our customers that this info has been passed to the HMRC...have i got that right?