Principal or agent: control decides gross or net revenue
A business collects £20,000 from a customer for a service and pays £16,000 to the provider who carries it out. Under IFRS 15 as adopted in the UK, its revenue is either £20,000 or £4,000, and the cash does not say which. The answer depends on what the business promised the customer and whether it controls that specified service before it transfers. If it does, it is a principal and reports the gross amount. If it only arranges for another party to provide the service, it is an agent and reports its fee. This is a conclusion drawn from the facts, not a policy choice.
Identify the service, then test control
Start with the specified good or service. The assessment is made for each distinct good or service, or distinct bundle, promised to the customer, so one contract can make an entity principal for one part and agent for another (IFRS 15, paragraphs B34 to B34A).
A principal controls the specified service before it transfers, and can still use a subcontractor. Control can take the form of a right to a service performed by another party that the entity directs, or of combining inputs from others into the output the customer bought. Holding legal title only momentarily does not by itself establish control (paragraphs B35 to B35A). A principal recognises the gross consideration when it satisfies its obligation. An agent's obligation is to arrange for another party to provide the service, and it recognises its fee or commission (paragraphs B35B to B36).
IFRS 15 lists indicators of control: primary responsibility for fulfilling the promise, inventory risk and discretion in setting the price (paragraphs B37 to B37A). How relevant and persuasive each one is depends on the contract. They are evidence for the control question, not a vote, and an agent can sometimes set prices. Subcontracting does not make a business an agent. Collecting the full invoice, negotiating the price or paying the third party is not conclusive on its own.
The Department of Health and Social Care's group accounting manual for 2026/27 applies the same reasoning to staff secondments, using responsibility for the secondee's work and for cover during sickness to reach principal or agent conclusions (paragraphs 4.34 to 4.35). That guidance is written for bodies in the DHSC group, not as a rule for every business.
Same cash, two answers
This example is hypothetical, in pounds, and shows two independent arrangements. In both, the services and the business's obligations are fully satisfied in the reporting period, the customer pays £20,000 and the provider receives £16,000. There are no taxes, returns, variable consideration, refunds or other costs. The control conclusions come from reading the contracts, not from the money.
As principal, the business records Dr bank £20,000, Cr revenue £20,000, and Dr cost of sales £16,000, Cr payable to provider £16,000. As agent, the receipt is Dr bank £20,000, Cr payable to provider £16,000, Cr fee revenue £4,000. Paying the provider is then Dr payable to provider £16,000, Cr bank £16,000, which settles the payable rather than creating an expense.
Gross profit is £4,000 either way, which is why the error is easy to miss. The principal's £20,000 of revenue is five times the agent's £4,000 fee, and the principal records £16,000 of cost of sales where the agent records only a payable passed through to the provider. Only one answer fits the facts.
| Hypothetical facts established | Revenue | Provider amount | Gross profit |
|---|---|---|---|
| Principal: the business promises completed maintenance, controls the right to the service, directs the subcontractor and remains responsible for delivery | £20,000 | £16,000 cost of sales | £4,000 |
| Agent: the business promises only to arrange a provider, the provider owes the service to the customer and the business does not control it before transfer | £4,000 fee | £16,000 passed through, not this entity's expense | £4,000 |
Write the control memo
We suggest reading both the customer contract and the provider contract and naming the specified service before looking at any indicator. Then trace who can direct the provider's work, who answers to the customer for acceptance, who bears risk before and after transfer, how the price is set and whether the business integrates the provider's work into something larger. Write the control conclusion for each distinct service and link each point to evidence, rather than relying on a label such as broker or reseller, or on whether the payout arrives net.
Map the ledger from that conclusion, gross or fee only, then reconcile collected amounts and provider payables separately. Reassess when substantive terms change.
For the next arrangement
Put the customer contract and the provider contract side by side and write one paragraph per service answering who controls it before the customer receives it. Set up the revenue mapping only after that paragraph is approved.