Q: I have a small internet company and we want to offer people 'finder fees' if they sign someone up to our service. How is this seen in terms of taxation?
Oct 21 2010
Answered by: Chas Roy-Chowdhury Ask a question
How you account for the tax on them will depend on how you set the payments up in the first place. Are you planning to actually make payments to your finders, or give them a discount or rebate off their own subsequent purchases?
First, the good news. The payments should be deductible from your trading profits, so at least you will get relief for them in your UK tax computation.
There is no need to withhold tax from the payments (as there would be if you were paying for example royalties). If you pay commission to US residents, they should account for it as 'Self-Employed income', and you should declare it the same way on any US filings you may need to make. I assume you are already registered for VAT and sales tax in all the territories you need to be; you may be able to offset the commissions against your taxable income for those territories, but you would need to check with a locally qualified adviser to be sure.
If you opt to simply discount your referrers' future bills, then the tax position may be a little more complicated. You could end up still paying sales taxes (or VAT in the EU) on the original price, while only receiving the net amount in income. Also, accounting for the discounts could be complicated and might affect your credit ratings if you're reducing turnover, rather than increasing administrative costs (which is how a commission payment would typically show up). However, it would avoid the need to make actual payments to your referrers.
One final point. You should be careful not to inadvertently set up an overseas 'permanent establishment' by creating a regular sales force in your overseas markets. Occasional ad hoc payments to a few different individuals shouldn't cause any problems, but if you find some of your customers converting themselves into a local marketing team you might need to re-assess!
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