Who Gets Paid for the Introduction? Documenting Referral Economics Before Scrutiny Arrives

Ask a managing partner where last year's new clients came from and the answer will usually be a mixture of reputation, tender and — mentioned last, and somewhat vaguely — 'contacts'. That final category is where introducer arrangements live. They are frequently lucrative, rarely documented to the standard the firm would apply to any other commercial contract, and almost never reviewed on a fixed cycle.

The consequence is a category of risk that sits awkwardly between three disciplines. It is a contract problem when the fee is disputed, a regulatory problem when disclosure is inadequate, and a tax problem when the invoice arrives from an unexpected jurisdiction. The purpose of this article is to set out a framework that addresses all three at once, rather than in sequence after something has gone wrong.

The quiet engine

Referral income and referral expenditure are structurally attractive. An introducer who understands a sector can deliver a pre-qualified client at a fraction of the cost of a business development function, and the fee is usually contingent, which keeps it off the fixed cost base. For firms without a large marketing budget, the arrangement can be the difference between a credible growth story and a static one.

What makes the arrangement attractive also makes it fragile. Contingency means the fee is calculated on something, and the something is often disputed. Informality means the terms are remembered differently by each side. And because introducers are, by definition, outside the firm, their regulatory status and tax position are frequently assumed rather than verified.

First question: is the fee permitted at all?

Before pricing, the firm needs to establish that the arrangement is permissible in its sector. The answers differ sharply.

In legal services, the position is restrictive and well known: referral fees in personal injury claims are prohibited, and the SRA's transparency requirements impose specific obligations around the publication of complaints procedures and price information that interact with how referrals are described. For financial services, the inducements rules under the FCA's conduct framework require that any payment or benefit be assessed against the client's best interests and, in many contexts, disclosed. Accountancy bodies apply an ethical code that treats referral fees as permissible but requires that the client be informed and that objectivity not be compromised. Property and surveying practices operate under comparable expectations from their own regulator.

A single introducer agreement rolled out across a multi-disciplinary firm is therefore a false economy. The permissibility analysis should be done service line by service line, and the conclusion recorded.

Second question: what exactly is being paid for?

Introducer fees come in four broad shapes, and each carries a different risk profile.

A percentage of first-year fees is the most common and the most contentious, because it requires the parties to agree what counts as first-year fees — disbursements, VAT, success uplifts, fees from follow-on work. A flat fee per introduction is cleaner but invites disputes about what constitutes a qualifying introduction. A trail over multiple years aligns incentives but creates a long tail of obligations that survives the relationship. A success fee on completion suits transaction work but raises questions about what happens if the transaction completes in a later accounting period.

Whichever shape is chosen, the definition of the fee base should be written down with the same precision as a fee schedule in a client engagement letter. Where it is not, the argument is usually resolved in the introducer's favour, because the firm holds the records and carries the evidential burden.

Third question: how is it evidenced?

The single most common weakness in introducer arrangements is the absence of contemporaneous evidence that an introduction actually occurred and that the client knew about it. A short, standardised record solves both problems:

• A dated introduction note identifying the client, the introducer, the nature of the work and the date of first contact.
• A client consent record — an express acknowledgement, in the engagement letter or a separate note, that the firm pays a fee to the introducer and that the client has no objection. In some sectors this is a regulatory requirement; everywhere it is a defence.
• A conflicts entry recording the introducer relationship in the firm's register, so that it is visible to anyone reviewing a subsequent matter involving the same counterparty.
• A fee calculation sheet retained with the invoice, showing the base, the percentage and the arithmetic.

None of this is onerous. It is, however, the difference between a defensible arrangement and one that depends on recollection.

Fourth question: what does the tax position actually look like?

Referral fees are consideration for a service and are generally standard-rated for VAT where the introducer is VAT-registered in the UK. Where the introducer is not registered, the firm still pays the fee — but should hold the invoice and be able to explain the position on review. Where the introducer sits outside the UK, the reverse charge mechanism may apply and the firm's own VAT accounting needs to reflect it; a common failure is to treat an overseas invoice as a simple disbursement.

On the direct tax side, fees paid to individuals can fall to be reported, and payments to overseas introducers may raise withholding questions depending on the treaty position and the characterisation of the payment. Firms with international referral networks should apply a standing test rather than a case-by-case judgement made under time pressure at invoice stage.

Fifth question: when is it reviewed?

Introducer agreements have a tendency to outlive their commercial rationale. The introducer who opened a new sector five years ago may now be sending work that the firm would win unaided, at a rate agreed when the firm was a fraction of its current size.

A three-year maximum term, with a break right and a fee review at each anniversary, is a reasonable default. Where the arrangement has no term at all — and many do not — the review should be initiated from the firm's side, with a written variation rather than an informal understanding.

A framework, not a formality

None of these five questions is difficult in isolation. The risk arises from sequence: firms typically price an introduction before checking permissibility, and document it after the first invoice has been paid. Reversing that order costs perhaps an afternoon per arrangement. Leaving it as it is costs considerably more when the first dispute, disclosure query or VAT review arrives — and the firm is asked, reasonably, to produce the paperwork it never created.