Tax Talk: Who is liable?

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Two court cases demonstrate the subtleties of VAT in the context of agents and principals.

Discovering a gripping French TV series during lockdown added a touch of glamour to my tax day job as well as a dose of inspiration for today’s topic. Call My Agent follows the ups and downs of demanding actors and their weary agents. These frequently fraught interactions remind us that the agent versus principal relationship can be complex from a VAT perspective.

UK legislation does not define the term agent. But in essence an agent is someone who acts for, or represents, someone else (the principal) to arrange supplies of goods and services. The relationship between the principal and agent can be disclosed or undisclosed to the third party customer. A disclosed agent acts in the name of the principal, whereas an undisclosed agent acts in their own name.

How is VAT applied with a disclosed agent?

Here, the supply of goods or services takes place directly between the principal and the customer. The principal accounts for VAT on its supply to the customer in line with the relevant VAT law. The agent supplies its ‘agency services’ (whatever they may be) to either or both of the principal and the customer, and its services are subject to VAT accordingly.

Is it different for undisclosed agents?

In this case the principal and agent must pretend (for VAT purposes) that the principal supplied the goods or services to the agent, and the agent then supplied them to the customers. The agent’s purchase price is typically the sales price to the customer less the agent’s fees and/or commission.

The agent must then account for VAT on these deemed (for VAT purposes) purchases and supplies in accordance with the applicable VAT law.

Agent or principal?

There have been many cases over the years where a business has thought itself to be acting as an agent arranging supplies for another party. But the reality is that it is acting as the principal in a supply chain.

The 2014 UK Supreme Court (UKSC) decision in Secret Hotels2 provides guidance on the distinction between an agent and a principal. Secret Hotels arranged non-UK hotel accommodation through its website for UK travellers.

HMRC sought to apply VAT to Secret Hotels on the basis that it was a travel agent acting as an undisclosed agent. In other words, it was effectively acting as a principal for VAT purposes. This would have meant that it had to pay VAT in the UK. Secret Hotels maintained that it acted as an agent and was only supplying ‘agency services’ to non-UK hoteliers, so it didn’t owe any UK VAT.

The UKSC, basing its decision on a strict interpretation of the appellant’s written contracts with hoteliers and the customer terms and conditions on its website, ruled that it was a disclosed agent.  It also helpfully confirmed that the written contractual relationship between the parties ultimately governs the VAT treatment. Unless, of course, those written contract terms are a sham or are significantly different to the economic and commercial reality – in other words they are just plainly incorrect.

Uber interesting

Even though it’s an employment law case, the UKSC’s decision in Uber BV and others v Aslam and others, in 2021, also raises an interesting VAT question. The legal structure of Uber’s arrangements is that it acts as an agent for customers and drivers by introducing them to each other through the use of its app.

Passengers are not contracting with Uber to get them from one destination to the next. Instead, Uber is providing the passenger with use of its app so they can contract with the driver to supply transport services directly to the passenger. So, the driver supplies the transport services as principal and Uber is the agent. Uber also provides a service to the driver which enables them to provide their transport services.

The responsibility for charging VAT to the passengers rests on the driver as the supplier of the transport services. That said, many Uber drivers will not breach the annual UK VAT registration threshold of £85,000, and so the ride is VAT-free.

The court concluded (from an employment law perspective) that the drivers are workers and are hired to perform the bidding of Uber, which effectively provides the transport service to the passenger as principal. So, in theory, Uber should pay UK VAT on its supplies of transport services to UK passengers that are delivered by its ‘employees’, the drivers.

But the UKSC’s comments in the Secret Hotels case indicate that the current VAT treatment by Uber and its drivers is the right one.

With the rise of the gig economy, it is probably only a matter of time before a similar VAT case comes knocking on the Tribunal’s door. In the meantime, PKF VAT Team is well versed in the VAT issues and opportunities relating to agency arrangements and we’d recommend seeking advice before concluding contracts in such cases.

For more information, please contact Natalie Braier.