Commission Paid on Sales: Pay on Booking, Invoice or Cash?

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Most UK commission schemes get the rate right and the trigger wrong. Commission paid on sales can be earned at signature, at invoice, at cash collection, or at some milestone in between — and the choice you make quietly decides how much clawback litigation, spreadsheet reconciliation and rep mistrust you sign up for over the next two years. It is a plan design decision dressed up as an accounting detail.

TL;DR

Pay commission on the net, ex-VAT value of the sale — never the VAT-inclusive invoice total, because the VAT you charge is output tax you account for to HMRC, not revenue you keep. Choose the trigger by asking who controls the risk: if customers can cancel, refund or churn early, pay on cash collected or on a defined locked-in value; if reps have no influence over payment terms or credit control, pay on invoice and manage bad debt with a holdback rather than punishing the rep. Whatever you choose, write the trigger, the clawback window and the leaver treatment into the scheme document, because HMRC treats commission as earnings at the earlier of payment or entitlement (EIM42265) and a deduction to recover an overpayment needs contractual authority under section 13 of the Employment Rights Act 1996. Timing ambiguity, not rate generosity, is what produces disputes.

The trigger decision tree

Work down this list. Stop at the first rule that matches your business — the questions are ordered by how much financial damage getting them wrong causes.

Pick the trigger that matches who carries the risk, not the one that suits this month's cash flow.

Booking, invoice or cash collected: how the three triggers compare

The conventional finance answer — "always pay on cash, it's safest" — is right about the balance sheet and wrong about behaviour. A rep on a £48k base with £24k on-target commission who waits 90 days for money already earned starts building their own tracker, and once reps are shadow accounting you have two versions of the truth and a dispute queue. If you must protect cash, protect it with a holdback on the portion at risk rather than delaying the whole payment.

Why VAT should never be inside the commissionable base

Commission paid on sales should be calculated on the ex-VAT value of the supply. The VAT you add to an invoice is output tax that you account for to HMRC — HMRC's VAT Notice 700/18 on bad debt relief exists precisely because a business has already paid that output tax over even when the customer never pays. It was never the seller's margin, so paying a rep a share of it is a straight leak.

The arithmetic is unforgiving. On a £50,000 net sale at 20% VAT, the invoice total is £60,000. A 10% commission rate applied to the gross figure pays £6,000 instead of £5,000 — a 20% overpayment on every single deal, compounding across the team, plus employer National Insurance on top. Our deeper treatment of the base question sits in commission on sales: before or after VAT and refunds, and the same logic applies to whether you pay on gross margin or net revenue, covered in gross margin, net revenue or invoice value.

Bad debt is where the invoice trigger bites. If that £50,000 invoice goes unpaid, HMRC's bad debt relief rules let you reclaim the output tax only once the debt is over six months old (measured from the later of the payment due date and the date of supply) and written off in a refunds-for-bad-debt account. You get the £10,000 VAT back eventually. You do not automatically get the £5,000 commission back — that depends entirely on what your scheme document says.

Worked example: a £50k ARR deal, invoiced January, cash in March, rep leaves February

Take a SaaS rep, £45k base, 10% commission on first-year net ACV. They close a £50,000 ARR deal. The invoice is raised on 15 January (£50,000 net, £60,000 gross, 60-day terms), the customer pays on 20 March, and the rep resigns and leaves on 28 February. Commission at stake: £5,000.

Under a booking trigger, the £5,000 hits January payroll. The rep leaves with the money. If the customer later exercises an opt-out or the invoice goes bad, you are pursuing a former employee for a debt — and you cannot deduct it from wages, because there are no more wages. Recovery becomes a civil claim, or a write-off.

Under an invoice trigger, the £5,000 lands in January or February payroll depending on your cut-off. Same exposure as booking, minus deals that close but never invoice. If your scheme has a 90-day clawback window and the invoice sours in April, you are again chasing a leaver.

Under a cash-collected trigger, nothing is paid before the rep leaves. On 20 March you owe £5,000 to a former employee, and it is a payment after leaving. HMRC's CWG2 employer further guide states that where a P45 has already been issued you deduct PAYE using code 0T on a week 1 or month 1 basis, report it on an FPS with the "payment after leaving" indicator set and the original leaving date, and do not issue a second P45. The rep will very likely be over-taxed in-month and reclaim later — expect the "why is my commission short?" email and pre-empt it.

There is a second wrinkle. HMRC's guidance at EIM42265 confirms earnings are treated as received at the earlier of actual payment or the point the employee becomes entitled to payment. If your scheme says entitlement crystallises when cash is collected, March is the tax point. If it says entitlement arises on invoice and you merely pay later for cash-flow convenience, you have arguably created a January entitlement — which matters most around 5 April, when it moves a payment between tax years.

What actually prevents the argument

In practice, the clawbacks that do real cultural damage almost always trace back to one thing: commission calculated on the gross signing-day value in a rush to hit payroll, before the deal's opt-out window had closed. Once a wrong number is paid, the correction — not the original error — is what breaks trust. Past roughly £100k in mid-market, deals stop being clean closed-won numbers: custom clauses, phased starts, security reviews and legal redlines appear, and comp logic that survives a £10k 14-day SMB deal does not survive a £350k multi-threaded one.

So the highest-leverage control is not a cleverer trigger. It is a manager or RevOps lead sanity-checking the payout against the actual contract terms before payroll runs, and reps being able to see how each number was built. Disputes are a visibility problem far more than a maths problem: reps tolerate the occasional error, they do not tolerate a correction landing with no warning and no audit trail. If you are running this in a spreadsheet, that check is a person with an hour and good intentions; automated, it's a rule that fires every cycle and posts a clean journal into Xero (see Xero commission integration).

When you do need to reverse a payment, the policy needs to be written before you need it — how to write a commission clawback policy covers the drafting, and commission during a notice period covers the leaver case that the £50k example above walks through.

Frequently Asked Questions

Should commission paid on sales be calculated before or after VAT?

Before VAT — on the net value of the supply. The VAT charged on an invoice is output tax accounted for to HMRC rather than the seller's income, so including it inflates every payout by the VAT rate. On a £50,000 net sale at 20% VAT, paying 10% on the £60,000 gross figure overpays the rep by £1,000.

Is it legal in the UK to pay commission only when the customer pays?

Yes, provided the condition is set out in the contract or scheme document before the work is done. A cash-collected trigger is a term of the commission scheme, not a deduction, so it does not engage section 13 of the Employment Rights Act 1996 — but recovering commission already paid does, and that requires contractual authority or prior written consent.

How is commission taxed if it is paid after a rep has left?

HMRC's CWG2 employer guide states that where a P45 has already been issued, PAYE on a later payment is deducted using code 0T on a week 1 or month 1 basis, reported on an FPS with the "payment after leaving" indicator and the original leaving date. National Insurance is still due, and the employee often reclaims over-deducted tax later in the year.

What happens to commission if the customer never pays the invoice?

Commercially the sale is gone, but recovering the commission depends on your scheme. HMRC's VAT Notice 700/18 allows a business to reclaim output VAT on a bad debt once the debt is more than six months old and written off in a bad debt account; the commission element can only be clawed back if the scheme contains a written clawback term covering unpaid invoices.

Does paying on cash collection stop commission disputes?

No. It removes bad-debt exposure but adds lag, leaver complications and arguments about part-payments and credit notes. Disputes fall when reps can see how each figure was built and when payouts are checked against real contract terms before payroll — not when the trigger moves later in the cycle.