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Most commission arguments in UK sales teams look like arguments about the rate. They almost never are. When someone asks what commission paid on sales should be calculated from, they've hit the question that actually determines the payout: the base — the number the percentage is applied to. Get the rate wrong by a point and you're out by a few hundred pounds. Get the base wrong and you can be out by 60% on the same deal.
TL;DR
UK sales teams pay commission on one of three bases: gross invoice value (the headline number on the invoice), net revenue (invoice value excluding VAT, after discounts, credits and refunds), or gross margin (net revenue minus the direct cost of delivering it). Net revenue is the sensible default for software and product sales where cost of sale is broadly fixed; gross margin is the right base wherever reps can trade price against cost — recruitment contract desks, services with subcontractors, hardware resale. VAT should never sit inside the commission base, because the business is only collecting it on HMRC's behalf and never earns it (HMRC's Business Income Manual, BIM31525). If you change the base, re-rate the percentage so on-target earnings stay the same, and put the method of calculation in writing — the written statement of employment particulars must set out how remuneration is calculated (GOV.UK).
The same 5% rate can pay £7,200 or £4,500 on the identical deal. The denominator matters more than the rate.
What is commission paid on sales usually calculated from?
Commission paid on sales in the UK is calculated from one of three bases, and each one answers a different question about what you're actually rewarding.
| Base | What it is | Best fit | Main failure mode |
|---|---|---|---|
| Gross invoice value | The full invoiced amount, often including VAT and pass-through costs | Simple SMB desks, fixed-price product sales, high transaction volume | Pays reps on money the business never keeps — VAT, third-party costs, later credits |
| Net revenue | Invoice value excluding VAT, net of discounts, credit notes and refunds | SaaS, subscription, product sales where cost of delivery is stable | Ignores margin — a rep can hit target on deals that make no money |
| Gross margin | Net revenue minus direct cost of sale (pay costs, subcontractors, hardware, licences) | Contract recruitment, services, resale, anything with variable delivery cost | Reps can't always see or influence cost data, so the number feels like a black box |
The underlying principle: pay on the number the rep can actually influence, and that the business actually keeps. Everything else is either a windfall or a fight waiting to happen. If you want the wider view of how these bases interact with rate structures, our guide to commission structures explained covers the mechanics layer.
How much difference does the commission base make? A worked example
Take one mid-market software deal. List price £150,000, discounted to a £120,000 annual contract. The customer is invoiced £144,000 including VAT at 20%. Delivery requires an £18,000 implementation partner, billed through at cost. The contract carries a three-month opt-out covering £30,000 of the value.
Hold the rate at 5% and change nothing but the base:
| Base | Calculation | Commission |
|---|---|---|
| Gross invoice value (inc VAT) | £144,000 × 5% | £7,200 |
| Net revenue (ex VAT) | £120,000 × 5% | £6,000 |
| Gross margin (net revenue less partner cost) | £102,000 × 5% | £5,100 |
| Value actually locked in after the opt-out window | £90,000 × 5% | £4,500 |
Same deal, same rep, same rate — a £2,700 spread, 60% of the smallest figure. Now imagine the rep was told "5% of the deal" and Finance paid on the locked-in figure. That's not a maths dispute, it's a trust dispute, and it will consume a week of someone's month.
In practice, the most expensive clawbacks we see start with Finance paying commission on the gross signing-day contract value to hit a payroll cut-off, before the deal's opt-out window has closed. Where a contract carries opt-outs, ramp periods or cancellation rights, the commissionable base should be the value actually locked in — not the number on the press release. Contract complexity spikes past roughly £100k: custom clauses, security reviews and legal redlines appear, and that's precisely where commission errors hide. Comp logic that survives a £10k, 14-day SMB deal does not survive a £350k multi-threaded one.
Why do recruitment agencies pay commission on margin instead of fee?
Recruitment is the clearest case in the UK market, because on a contract desk the invoice value is mostly someone else's money.
Say a consultant places a contractor at a £450 day charge rate against a £360 day pay rate, for 220 billable days. Gross billings are £99,000. The contractor's pay costs £79,200. The gross margin — what the agency keeps — is £19,800.
Pay 10% of gross billings and the consultant earns £9,900: half the entire gross profit on the placement, before you've paid the consultant's base salary, employer's NICs, or anything else. Pay 10% of margin and they earn £1,980, which is a number the desk P&L can survive. That's why contract commission in UK agencies is almost universally margin-based, usually with a cost-of-sale threshold before commission starts — see our breakdown of recruitment agency commission plans and threshold and tier design.
Perm is the exception that proves the rule. On a perm placement the fee is essentially the margin — there's no pay cost to strip out — so perm commission is typically paid on the invoiced fee. The two desks in the same agency are legitimately on different bases, which is exactly why the plan document has to name the base per revenue type rather than say "commission on sales".
Should commission be paid on invoiced or collected revenue?
Invoiced revenue and collected revenue are not the same base, and the gap between them is where clawbacks live. Paying on invoice means the business funds commission out of working capital before the customer has paid; paying on cash collected means the rep waits, sometimes months, for money they consider earned.
The scale of the risk is set by your debtor book, not by your comp philosophy. HMRC's guidance on VAT bad debt relief tells you how long a genuine bad debt takes to become recognisable: relief can only be claimed once the debt is over six months old from when it became due and payable, and has been written off in a bad debt account (VAT Notice 700/18). If a chunk of your invoices go bad six-plus months after issue, paying 100% on invoice date means you are structurally over-paying and structurally clawing back.
The pragmatic middle ground most UK teams land on: pay on invoice for the bulk of the deal, hold a defined slice (say 25%) until cash is collected, and write a clawback trigger that only fires on non-payment or cancellation — not on a Finance reclassification. Our commission clawback policy guide covers how to word that so it's enforceable rather than aspirational.
Does VAT belong in the commission base?
No. A VAT-registered UK business charging VAT is, in HMRC's own framing, effectively a collecting agent: the output tax it charges customers is borne by the customer and passed to HMRC, and sales in the accounts are recorded exclusive of VAT (BIM31525). Paying commission on a VAT-inclusive figure means paying reps 20% extra on money the business never earned — and it compounds every time you also credit the deal back out.
The more common version of the same error is subtler: a deal is commissioned on invoice value, the customer later gets a credit note or partial refund, and nobody recalculates. We've written separately on when to pay commission relative to VAT and refunds.
How do you switch commission base without cutting anyone's pay?
This is where base changes go wrong. Moving from net revenue to gross margin shrinks the denominator, so holding the rate constant is a stealth pay cut — and reps will read it as one, correctly.
- Measure the two bases side by side for four quarters. Restate historical attainment on the new base before you announce anything. If margin has swung between 55% and 78% across the book, you need banded rates, not a single number.
- Re-rate to hold OTE. A rep with £15,000 of variable pay at 5% of a £300,000 net revenue quota needs 7.14% if you move to a margin base and the book runs at 70% margin (£210,000 of margin × 7.14% ≈ £15,000). Publish that arithmetic in the plan.
- Define exclusions explicitly. Name what is stripped out: VAT, pass-through third-party costs, freight, subcontractor fees, contractor pay costs, credited amounts. "Net of costs" is not a definition; it's a future dispute.
- Set the measurement point. Invoice date, cash collected, or post-opt-out locked-in value — one of them, in writing, per revenue type.
- Put it in the paperwork and tell people. The GOV.UK guidance on the written statement of employment particulars requires the method of calculating remuneration to be given on day one, and any change to be notified in writing within one month (GOV.UK). Commission counts as wages under section 27 of the Employment Rights Act 1996 (legislation.gov.uk), so unilaterally changing the base mid-scheme is a wages problem as well as a morale one.
Whichever base you pick, a sales manager's job includes sanity-checking the commission calculation against the actual contract terms before Finance sends it to payroll. Once a wrong number has been paid, the correction is what does the cultural damage — reps rarely lose faith because a figure was 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.
Which base should most UK sales teams use?
A position, since most articles on this topic refuse to take one:
- Software and subscription sales: net revenue, excluding VAT, measured on annual contract value rather than total contract value. Paying on multi-year TCV front-loads three years of commission into one quarter and makes churn someone else's problem.
- Contract recruitment, services with subcontractors, hardware resale: gross margin. If the rep can concede on price or specify a more expensive delivery route, they must feel it.
- High-volume, fixed-price, low-discretion sales: net revenue is fine and gross margin is over-engineering. If reps can't move price or cost, a margin base just adds opacity for no behavioural gain.
- Almost nobody should use gross invoice value including VAT. It's the base people default to because it's the easiest column to find in Xero, not because it's right.
If you're setting OTE at the same time, our guide to OTE and salary splits for UK sales roles pairs with this one: the base determines what a quota means, and the split determines what it's worth.
Frequently Asked Questions
Is commission paid on sales calculated before or after VAT?
Before VAT. A VAT-registered UK business collects output tax on HMRC's behalf and records sales exclusive of VAT, per HMRC's Business Income Manual (BIM31525), so VAT-inclusive figures overstate the commissionable base by the VAT rate applied.
Is it legal to pay commission on gross margin rather than revenue in the UK?
Yes. UK law does not prescribe a commission base — it's a contractual matter. What the law does require is clarity: the written statement of employment particulars must set out the method of calculating remuneration from day one, and changes must be notified in writing within one month, and commission counts as wages under section 27 of the Employment Rights Act 1996.
Should SaaS commission be paid on ARR or total contract value?
For most UK SaaS teams, annual contract value (or first-year value) is the safer base. Paying on total contract value pays three years of commission in one quarter, breaks the link between commission and cash collected, and creates large clawback exposure if the customer exercises an opt-out or cancels in year two.
Why do recruitment consultants get commission on margin instead of the invoice?
On a contract placement most of the invoice is contractor pay cost. A £450 day rate against a £360 pay rate leaves £90 a day of gross margin, so commission on billings rather than margin would hand the consultant a multiple of the agency's actual profit on the placement.
What happens if a deal is credited after commission has been paid on it?
The commissionable base has changed, so the payout should be recalculated — which means your plan needs a written clawback or adjustment clause defining the trigger, the window and how the recovery is made. Recalculating without a documented rule is where most commission disputes start.
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