Business transactions involving three parties can be complicated due to issues around who is supplying whom with a product or service. We look at the complications involved and how to deal with this when advising clients.
Any transactions involving a number of different parties can be complicated from a VAT view point. Often the main issue is determining who is doing what and supplying whom from a VAT view point.
The most common examples are where there is a principal making a supply to an end customer and an agent acting between the two parties.
Tamara Habberley, a senior consultant at The VAT People, a specialist consultancy that provides advice and guidance to businesses relating to all aspects of VAT, regularly offers guidance to accountants relating to VAT.
She has over 25 years’ experience in the industry, having previously worked for HMRC. She says that in a three-way VAT situation it is possible either to have:
- A disclosed agency arrangement with the principal accounting for VAT on the sale to the end customer and the agent only accounting for VAT on its agent fee, or
- An undisclosed agency arrangement where the customer believes it is purchasing goods or services from the agent. In this case there is a deemed supply between the agent and principal each time the agent makes a sale and the agent owes VAT on the total value of any VATable sales of goods/services to the end customer and not just on its agent’s fee.
When it comes to determining VAT, the nature of the supply and consideration are important. This is because a service could be supplied for no consideration.
When VAT arises
“It is a basic rule of VAT that anything done for a consideration is a supply,” Tamara Habberley says.
- Consideration can be monetary such as cash, BACS payment etc or non-monetary – where the party receiving the supply will do something in return for it.
- If what is supplied in return for the consideration is a tangible item – e.g. something you can physically touch, it is a supply of goods.
- If it isn’t a supply of goods then it defaults to being a supply of services.
- This means that where anyone supplies something in return for a consideration VAT will be due. This is unless the supply is one that is zero rated or exempt from VAT.
She says this causes a lot of confusion and sometimes businesses may miss the fact that VAT is due.
For example, take the case of a supply that occurs between two parties. One of the parties has agreed to do something in return for the other party agreeing to do something else, such as management services being supplied within a corporate group in return for writing off of a directors loan, a business agreeing to not trade in an area in return for payment, claiming VAT on fuel and charging an employee for the private fuel that they use.
These are all examples of supplies and consideration.
What’s more, businesses can also create a VAT liability when not receiving any payment. She says this is due to rules that create what is termed a deemed supply. The most common example occurs where a business has incurred and recovered VAT on goods or services that it then gives away for free. This can create a VAT charge on the gift or deemed supply of the asset.
When goods and services are subsidised
The other issue is that organisations may be providing goods and services free of charge, most commonly subsidised by a grant.
This will usually be classed as a non-business activity and potentially prevent the organisation from recovering VAT on costs associated with the non-business activity.
“This point is often missed,” she says. “Many organisations that have charitable and non business activities assume that they can simply VAT register to recover VAT on their costs, but this is not always the case.”
An organisation can only VAT register and recover VAT if they make VATable supplies, and the VAT that they seek to recover is incurred for the purposes of making VATable supplies.
Issues that arise when a trader is acting as a principal or an agent
It is quite common for businesses to assume that if they term themselves an agent they only have to account for VAT on their agent’s fee.
Tamara Habberley says that in fact agents need to review their agreements, terms and conditions to ensure that in reality and contractually they are acting as a disclosed agent. If not they are at risk of an assessment for VAT.
When acting as a self-employed trader
Potential complications may arise for self-employed traders, particularly those involved in supply and fit of household goods or furnishings, she says.
“They may be involved with another business that advertises products, arranges appointments, fulfils customer orders and collecting payments. It is common for the trader to believe that the other business is the principle and they as an agent have no VAT liability as VAT is “taken care of” by the other business.”
This is not necessarily the case. In such business relationships, when the contract terms between agent and principal are examined, the trade person is the principal making the supply to the end customer. This means they are usually liable to account for VAT on the total sales made if these exceed the VAT registration threshold.
When the nature of the supply between the various parties changes
When the nature of the supply changes, the VAT accounting may also change.
“It is always sensible to review any changes to supplies or the VAT treatment of new supplies to ensure that any VAT implications are correctly understood,” she says.
Selling goods and services via the internet
An often overlooked area of VAT is ecommerce.
“The main issue for many businesses is that the rise of the internet has allowed small businesses to trade from people’s front rooms,” she says. “These businesses may supply goods or services via the internet to customers throughout the world. This creates a number of complex VAT issues.”
- Businesses selling e services to end consumers in other EC member states will have an immediate liability to register and account for VAT in the other EC country or alternatively to sign up to account for VAT via a system called VATMoss. There is no minimum threshold for registration in the other member states.
- Those selling goods to end consumers in other EC countries will have a liability to register for VAT in other EC countries if they exceed the distances sales thresholds in the other EC country, or if they have goods that are warehoused in and sold in another EC country.
“These points are often misunderstood and can result in what should have been profit from sales being lost as VAT to another tax authority,” she explains. “A business should always take advice in advance if planning to sell to customers in other EC member states.”
When specialist advice can help
The VAT People have helped a number of clients with complication VAT issues.
Agent or principal? One client was contacted by HMRC on the basis that they were the principal making a supply of services to the end customer and owed VAT on all payments collected rather than on its agent’s fee.
“In fact we were able to prove that it was a disclosed agent simply taking bookings and collecting payments from the customer for the principal,” she says. “It had correctly accounted for VAT on the charge it made for administrative services and not on the total fee paid by the end customer to the principal and collected by the agent. HMRC therefore withdrew a threatened assessment for VAT.”
Grant funding: A grant funded charity recovered all the VAT on costs that it used for non-business purposes resulting in an £87,000 VAT assessment. The VAT People became involved and established that the charity had paid VAT to HMRC out of its grant funding and as a result it gained a refund of £270,000 VAT.
Ecommerce: A client sold goods via an online platform from his front room, and was not aware that the business had breached the distance sales threshold in a number of member states so continued to account for UK VAT on all of its sales.
An HMRC VAT inspector advised the client that UK VAT was due. One of the member states started VAT debt recovery proceedings for VAT due under the distance sales rules using HMRC as its collection agent. The client was unable to pay as it had already paid UK VAT on the same sales to HMRC. The VAT People recovered over £800,000 VAT from HMRC that the client has used to pay the VAT due in the other member state.
Marianne Curphey is an award-winning financial writer and columnist, and author of the book How Money Works. She worked as City Editor at The Guardian, deputy editor of Guardian online, and has worked for The Times, Telegraph and BBC.