Splitting revenue 60/40 with soon to be retired supplier - What implications if any?

RichardCEvans

We are a small vehicle parts /repair company, and one of our suppliers (He is a one man band) is retiring in a few months. He has made an offer for us to purchase his remaining stock from him on a 60/40 basis (This would include his current customer data base that we would continue to use)

In other words we sell the remaining stock on his behalf, splitting the revenue with him 60 % to us/40% to him

I guess for our books any sales that we make from the current remaining stock we can assign a new sales nominal code, so when this stock is sold we can keep a track of the sale of this specific stock.

However when it comes to paying the “retired” supplier his 40% I guess we need to either raise a dummy purchase invoice on our accounts system (Sage) in order to record & the payment to the retired supplier

However I’m not sure about the financial implications for the retired supplier in terms of:

• For his own records, should he be raising an invoice to us for the 50% of proceeds (Once we advise him of this figure each month?)

• As he will be drawing a pension – I guess he will need to declare this extra income for tax reasons
I just want to have an understanding of any implications that may arise from this and put procedures in place prior to this commencing.

Any advice would be welcome for both how we should be accounting for these transactions and for the supplier.

With regards

Richard

CeeJaySix

I've not come across this situation in practice, so others may correct me, but I read it as you are not buying the stock, you are selling it on his behalf as agent.

Therefore he should continue to recognise all revenue as trading income, with the payment of 60% to you as an allowable deduction (essentially commission). So yes he will be taxed on the net income (although unless he's selling at ridiculous margins, surely this will be loss-making for him? Or is it only the profit that would be split 60/40 rather than the revenue).

You would need to keep track of the sales separately to your own accounting system, and only recognise the 60% in your own accounts.

The only other way I can see of doing it is that you purchase all the stock from him at his 40% of sale price and treat it as a normal credit purchase. Each month you work out what of his stock you've sold, and make a payment to him to reduce the creditor based on that. Using this method would sort all the tax implications out in one hit, which is convenient but means he will have to pay tax on the full proceeds of his sale to you potentially before he has received all the cash, depending on how long it takes you to shift all the stock. Also if his pension doesn't use all of his nil rate band, or recognising the full amount in one year would tip him into the higher rate, it may be better for him to go with the first option to spread the income and maximise use of unused NRB/avoid HR. Assuming you're Ltd, it's unlikely to affect your overall tax position in the long term (unless you're floating around the cusp of the marginal or main rates, and even then it's minimal), it's just a cashflow advantage to use option 2 as you'll recognise the full expense to reduce liability now but not pay all the cash until the stock's sold (assuming you start a new period whilst still holding some of the stock).

Of course there is always option 3, which is you pay him up front at the 40% of sale price for all the stock in one go, which is tidiest but obviously requires the cash up front and for you to take the stock on risk of it not selling; I'd say the biggest factor in that decision (other than whether the cash is available) is whether you're just doing him a favour in shifting the stock, or whether you intend to keep the business going.

Anyone else care to comment?