Guidance Notes Accounting for Personal Research Account , Consultancy and Royalty Payments

Guidance Notes – Accounting procedure for University Consultancy and Royalty Income

Introduction

This document is designed to give guidance to staff on transactions and accounting entries in relation to handling consultancy and royalty payments.

Definitions

Consultancy is defined as the selling of knowledge services to third party organisations and usually takes the form of academic time being purchased. Two forms of Consultancy exist:

1.University Consultancy in which the University is the consultant and engages in the work under contract with the client; the work is covered by the University’s Professional Indemnity Insurance arrangements, and

2.Private Consultancy in which a member of staff is authorised to undertake a limited amount of consultancy outside their university employment. In Private Consultancy the individual contracts with his/her client, and the university plays no part in this agreement or the private income generated. The staff member will be personally responsible for any insurance required by their client.

Further information on consultancy is available in the University’s External Work Document;

In University Consultancy agreements the contract will state that the client pays the required fee directly to the University; the university recognises these payments as consultancy income. VAT is chargeable on this income and will be included with the price on the invoice.

Under a Private Consultancy agreement a client will make payment directly to the staff member and this is deemed to be his/her personal earnings. VAT may be chargeable on this income depending on the value of the consultancy work and the tax status of the staff member providing the service.

Royalty income is defined as income derived from the sale of intellectual property rights.

Personal research account is a notional term that may be part of an individuals class grant within their School. Personal research accounts are allocated spending rights given to an academic based on University Consultancy or Royalty income. This income is given to the academic staff member by their School for them to use at their discretion to fund research, teaching or other activities.

Tax Implications

The tax implications of consultancy and royalty payments can be split into two main areas. If the money is paid directly to the staff member under a Private Consultancy then there is no tax implication for the University. The staff member does however have an obligation to declare his/her earnings on their annual tax return and will be liable for tax on this income at their marginal rate.

Income to the University under a University Consultancy Contract or Royalty Agreement is treated as earned income on the part of the University and therefore subject to the tax rules associated with being a charitable organisation. There is no tax liability on the academic staff member in this case. If, however the academic staff member seeks and is subsequently paid a personal payment from University Consultancy or Royalty income then this will be paid via the payroll office and will be subject to tax under PAYE.

Income Recognition

The recognition of income is governed by statute and is subject to scrutiny by the University’s auditors. Income recognition can be defined as “the accounting for income in the period in which the income is earned”. The physical payment of cash does not in itself dictate when income is recognised. The main criteria are that the purpose for which the money has been earned has occurred.

Some examples of this are:

Consultancy income is recognised when the physical consultancy days take place.

Royalty income is recognised when the sale of the goods or service take place or when the contracted time passes.

Research income is recognised when the physical research takes place.

The key to all of the above is that the event has occurred even if the money has not been paid or has been paid in advance.

Accounting Treatment

The accounting treatment for University Consultancy income is for the money to be entered into the accounts as follows

Debit:Bank

Credit:100% to the class grant or analysis code of academic staff member’s choice within the school.

1-A*** – ******-0812 Consultancy Income - UK Government

1-A*** – ******-0814 Consultancy Income – UK Industry Large Enterprise

1-A*** – ******-0818 Consultancy Income - Other

1-A*** – ******-0819 Consultancy Income – UK Industry SME (Small to Medium Enterprise)

Debit: 30% to the class grant or analysis code of academic staff member’s choice within the school.

1-A***-******-0801 Consultancy Overhead

From the remainder:

Credit:15% to University overheads.

1-UNV0-000000-0801 Consultancy Overhead

Credit:15% to the School overheads.

1-A**X-000000-0801 Consultancy Overhead

This money should never be coded to a research grant as it is not research income and has already been earned and needs to be declared.

The accounting treatment for Earned Royalty is for the money to be entered into the accounts as follows

Any revenue accruing to the University from a licensing agreement is shared between the University and the inventor(s) after deduction of all legal and patent costs. The following scales will be used for sharing net royalty income

Debit:Bank

Credited: After deduction of legal and patent costs

Net receipts / Inventor(s) % / School % / University %
First £20,000 / 75 / 16.7 / 8.3
Sums >£20,000<£500,000 / 50 / 16.7 / 33.3
Sums >£500,000<£2m / 33.3 / 16.7 / 50
Sums >£2m<£10m / 25 / 20 / 55
Sums >£10m / 20 / 20 / 60

This table is from the External Work Document and the revenue split will change in accordance with this document.

Royalty income should never be coded to a research grant as it is not research income and has already been earned and needs to be declared.

In the case of University consultancy and royalty income any subsequent payment to a staff member will be treated as a salary cost against the analysis code chosen.

Budget Carry Forwards

To allow for academic staff to retain credit for consultancy and royalty allocations a technique called budget carry forward is employed. This means that the balance in each separate analysis code (class grant) is carried forwards as a budget into the next year. This budget is a licence for the academic staff member to spend against. These carry forwards are agreed each year in conjunction with the Head of School but the general rule of thumb is that all consultancy and royalty balances should be carried forward in full and an agreed proportion of the normal class grant (different levels in each school) also carried forward.

Research Grants

Under no circumstances will personal research accounts be available within the research grant system. To do so would contravene the rules governing income recognition.

Conclusions

1. Private Consultancy payments are the responsibility of the individual staff member receiving them and will not be handled through the University’s accounting system.

2. The process of handling University Consultancy payments should not be detrimental to the academic staff member and will allow them to retain the balance (i.e. 70%) for use at their discretion in the furtherance of their individual area of research, teaching or other activity, or if authorised to do so by their Head of School, to draw down a personal payment through salaries.

3. Royalty income will accrue in the Research & Enterprise Services CRE5 Royalties account. The Director and Associate Directors of RES will be responsible for determining the split and disbursement of this income to inventors, School and University. The current split percentages are in the table above.

If you have any queries regarding the correct financial procedures for handling University consultancy and royalty income please contact Keith Otto ext 2594 or Ian Robertson ext 2593.