Commission on Sales: Pay on Signature, Invoice or Cash?

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Most pages that rank for "commission on sales" are definition exercises: commission is a payment based on sales, here are five structures, thanks for reading. That's not the question UK finance and sales ops teams actually have. The question is when — and on what number. Commission on sales becomes a real operational problem at the moment someone has to decide whether a deal signed on the 28th, invoiced on the 2nd and paid (partially) on the 45th belongs in this month's payroll run.

TL;DR

Commission on sales should be calculated on the VAT-exclusive value of the deal, not the headline invoice total — VAT is money you collect for HMRC, not revenue you earned. The payment trigger (contract signature, invoice raised, or cash collected) is a business choice, not a legal one, but it determines your clawback exposure: the earlier you pay, the more you will claw back. For deals with opt-outs, ramps, instalments or refund rights, pay on the value actually locked in rather than the signing-day headline. Once commission is paid it is taxed as earnings, and HMRC's Employment Income Manual (EIM42260) treats money earnings as received on the earliest of actual payment or the date the person became entitled to payment — so a badly worded plan can trigger tax before you've seen the cash.

The trigger event is the plan. Everything else — rates, tiers, accelerators — is arithmetic sitting on top of it.

Should commission on sales be paid on the VAT-inclusive or VAT-exclusive value?

Commission on sales in the UK should almost always be calculated on the VAT-exclusive (net) value of the deal. VAT charged to a customer is collected on behalf of HMRC and passed on; it never belongs to the business and it should never widen a rep's payout. Paying commission on a gross, VAT-inclusive figure means you are paying reps a percentage of the tax you're about to remit.

The error is easy to make because reps read totals off the invoice PDF and finance reads net revenue off the ledger. Take a £24,000 invoice at the standard 20% rate. Per HMRC's VAT guide (Notice 700), where a price already includes VAT you extract the tax using the VAT fraction — 20/120, or one-sixth. So the £24,000 contains £4,000 of VAT and £20,000 of net revenue. At a 10% rate:

That's £400 per deal. On a 12-rep team closing four deals a month each, it's roughly £230,000 a year of commission paid on tax you never kept — before employer NICs on top. The fix isn't complicated, but it does need to be stated explicitly in the scheme document, because "10% of the deal value" is not a definition.

Commission on sales: signature, invoice, or cash collected?

There are three defensible trigger events for paying commission on sales in the UK, and they trade off rep motivation against your clawback exposure. There is no legally correct answer — what matters is that one of them is written down and applied consistently.

The conventional SaaS advice is "always pay on booking, it's cleaner and reps hate waiting". For UK mid-market teams that advice is often wrong. It's imported from a market with different payment norms and, frankly, from companies that could absorb the write-offs. If your average payment terms are 45 days and 5% of invoiced value ends up disputed, credited or written off, paying on booking guarantees you a steady stream of clawback conversations — which is the most corrosive thing you can do to a comp plan.

In practice, once a mid-market deal crosses roughly £100k it stops being a clean closed-won number. Custom clauses, opt-out windows, security reviews and legal redlines appear, and that's exactly where commission errors hide. Comp logic that works fine on a £10k, 14-day SMB deal does not survive a £350k multi-threaded one. A sensible hybrid: pay on invoice for deals under a threshold, and on cash collected (or on the value locked in after the opt-out window) above it.

Three worked scenarios with real numbers

Scenario 1: the customer pays in instalments

A rep closes a £60,000 ex-VAT annual contract billed monthly at £5,000 (£6,000 including VAT). The rep is on 8%, so total commission is £4,800.

• On booking: £4,800 in the month of signature. Motivating, but you've paid out 12 months of commission against one month of cash.
• On cash collected: £400 per month for 12 months. Self-funding and low risk, but a rep who leaves in month 5 will argue hard about the remaining £2,800 — so your rules for commission during a notice period need to say what happens.
• The middle option: pay 50% on the first cleared instalment and the balance across the remaining term. It caps your exposure without making the rep wait a year to be whole.

Scenario 2: the customer never pays

A £40,000 ex-VAT invoice goes out, £48,000 including VAT. The rep is paid 10% on invoice date: £4,000. Four months later the customer goes into administration.

The VAT is recoverable, eventually. HMRC's Notice 700/18 on relief from VAT on bad debts sets out that you must wait at least six months from the later of the date payment was due and the date of supply before claiming relief, with claims generally needing to be made within four years and six months of that date. So the £8,000 of VAT comes back on a future return.

The £4,000 of commission does not come back automatically. It comes back only if your scheme has a written clawback trigger for non-payment, and only via a lawful deduction. And the true cost is higher than £4,000 once employer NICs are counted — worth modelling with the current secondary rate, which we cover in our note on the employer NIC cost of commission.

Scenario 3: the deal shrinks after signature

A rep closes £120,000 TCV with a three-month customer opt-out clause. They're over quota, so their accelerator has lifted the rate to 9%. Finance, rushing to make payroll, pays on the gross signing-day total: £10,800. At month three the customer exercises the opt-out and the contract reduces to £30,000. The correct commission was £2,700. The clawback is £8,100.

This is the pattern worth internalising: an accelerator that rewards over-attainment also multiplies the damage when a big deal later shrinks. The rep was paid an enhanced rate on a number that fell, so the clawback is larger than the original overpayment would have been at base rate. The steeper the accelerator and the larger the deal, the more it pays to hold the payout until the value is firm — see how accelerators and decelerators interact with clawback.

The root cause here isn't the accelerator. It's paying commission on gross signing-day value before the opt-out window closed. Commission should be calculated on the value actually locked in — not the headline — whenever a deal carries opt-out, ramp or cancellation clauses.

When is commission on sales taxed — and does the trigger date change it?

Commission paid to an employee is earnings and goes through PAYE and NICs with the pay run it's included in. HMRC's CWG2 employer further guide states the general rule that PAYE and National Insurance are operated when a payment of earnings is made, with the point of payment being when earnings are placed unreservedly at the employee's disposal.

The trap is that entitlement can bite before payment. EIM42260 sets out that money earnings are treated as received on the earliest of several dates, including the time when a person becomes entitled to payment — and where more than one date applies, you take the earliest. EIM42265 applies the same logic to arrears: they're taxable at the point the employee first became entitled, even if the money lands later. So if your scheme says commission is "earned on contract signature, paid 60 days later", you may have created an entitlement in one tax month and a payment in another. Wording it as "becomes payable on receipt of cleared funds" keeps entitlement and payment aligned.

Two more points UK operators miss. First, commission counts as remuneration for National Minimum Wage purposes, and HMRC's NMW manual (NMWM09150) warns that because commission often relates to earlier pay reference periods, care is needed to allocate it correctly — and that a deduction to recover earlier commission is treated like any other deduction. Second, clawback isn't a free-for-all: Acas guidance on deductions from pay sets out that under the Employment Rights Act 1996 an employer can deduct where it's required by law, where the contract specifically allows it, where the worker agreed in writing beforehand, or where they were overpaid by mistake — and that an employer should not deduct without telling the worker first.

On mechanics, the Low Incomes Tax Reform Group explains that recovering an overpayment by reducing later gross pay generally leaves the employee's net position roughly where it should be. That's the practical route — you can't unwind PAYE already operated on a payment that was genuinely made.

How does Xero invoice status affect commission timing?

If you run commission on invoice or on cash collected, Xero is your source of truth and its invoice status is your trigger. An invoice in Xero moves from Draft to Awaiting Approval to Awaiting Payment to Paid, and can be part-paid, credited or voided at any point. Anchoring commission to a status rather than a date is what makes the process auditable.

Doing this in a spreadsheet is possible; doing it consistently is where teams fail. Someone exports Xero on the 3rd, someone else on the 5th, a credit note lands in between, and the two versions never reconcile. That's not a maths problem, it's a versioning problem — and it's why reps end up shadow accounting their own numbers.

Why the trigger event matters more than the rate

Reps don't lose faith because a number is occasionally wrong. They lose it when they can't see how it was built and a correction lands with no warning. Real-time visibility and an audit trail prevent more disputes than a cleverer plan ever will.

The trigger event is where that visibility starts. If a rep knows commission on sales becomes payable when cash clears, they can watch the aged debtor report and predict their own payslip. If they only find out the rule when £8,100 comes off it, you've bought yourself a clawback dispute you didn't need.

Frequently Asked Questions

Is commission on sales calculated before or after VAT in the UK?

Commission on sales should be calculated after VAT is removed — that is, on the net, VAT-exclusive value. VAT is collected on behalf of HMRC and isn't business revenue, so including it inflates every payout. Per HMRC's VAT guide (Notice 700), you strip VAT from a 20%-inclusive price using the VAT fraction of one-sixth.

Can an employer refuse to pay commission if the customer doesn't pay?

Only if the commission scheme says so. If the plan makes commission payable on invoice or on signature, the rep's entitlement has already crystallised and non-payment by the customer is the employer's risk. If you want that risk shared, the scheme must state that commission is payable on cash collected, or set out an explicit clawback trigger for non-payment — and any recovery must be a lawful deduction under the Employment Rights Act 1996, as Acas explains.

When is commission on sales taxed in the UK?

Commission is taxed as earnings through PAYE and NICs. HMRC's Employment Income Manual (EIM42260) treats money earnings as received on the earliest of several dates, including actual payment and the date the employee becomes entitled to payment — so a plan that creates entitlement well before the payroll date can accelerate the tax point. Our guide to how commission is taxed in the UK covers this in more depth.

How should commission be handled when a customer pays in instalments?

The cleanest treatment is pro-rata: pay the rep a proportionate share of the commission each time an instalment clears. This keeps commission self-funding, removes clawback risk if the customer stops paying part-way through, and matches the cash. Set out in the plan what happens to unpaid instalment commission if the rep leaves.

Does a refund or credit note automatically trigger a clawback?

Not automatically — it depends entirely on the wording of your commission scheme. A credit note reduces commissionable revenue, but whether that generates a recoverable overpayment, a netting-off against the rep's next payout, or no adjustment at all is a policy decision you have to make in advance. Netting off against future commission is usually less damaging to trust than a standalone deduction.