- This topic is empty.
-
Posts
-
My Compact Oxford Dictionary defines the word “agent” as any of the following:
- “A person who provides a particular service”
- “A spy”
- “A person or thing that takes an active role or produces a particular effect”
So the word can take on quite a different meaning depending on the context.
It’s also one of those words that’s used quite a lot in the world of commerce, meaning different things depending on the contractual or legal arrangements. And because there is no definitive meaning of the word, you have to understand the contractual and legal arrangements to define the VAT position.
So how does it work for VAT?
I thought that the best place to start discussing this would be to establish the every day meaning of the word, which I’d define as follows:
An “agent” is someone who arranges for his client to buy or sell goods or services by/to a third party, usually in return for a payment, called a fee or commission.
If the agent arranges a sale of goods or services for his client, he’s called a “sales agent”. If he arranges a purchase of goods or services, he’s called “buying agent.
How does this work in practice for VAT purposes?
- This means that the agent provides services to his principal.
- The principal buys or sells goods or services directly from/to a third party
Therefore there are 2 separate transactions for VAT purposes:
- the sale of goods or services from one principle to another; and
- the provision of agency services by the agent to his principle.
So suppose that the transaction involved the sale of goods from A Ltd to B Ltd for £200 plus VAT. The agent, C Ltd, has arranged the sale for its client, A Ltd, in return for a fee or commission of 15% of the net value; i.e. £20. A Ltd, B Ltd and C Ltd are registered for VAT.
The VAT accounting is as follows:
-
A Ltd issues a VAT invoice to B Ltd for £200 plus VAT @ £40.
- A Ltd includes £40 as output tax on its VAT return.
- B Ltd includes £40 as input tax on its VAT return.
- C Ltd includes £6 as output tax on his return
- B Ltd includes £6 as input tax on its VAT return.
C Ltd issues a VAT invoice to A Ltd for £30 plus VAT @ £6.
This is what I’d classify as a “traditional” agency arrangement and we’re probably all familiar with this sort of fee structures.
A good example that most of us have seen is when you buy a house and your solicitor pays the stamp duty land tax on your behalf. He adds it to your invoice as a disbursement.
Other agency situations
However the term “agency” is used in other situations which have different VAT treatments. I’ve summarised 3 of the most common situations as follows:
- Agents acting as principal – undisclosed agency
- When an agent isn’t an agent – particularly in the case of staff agencies
- Sales of goods or services involving EU parties.
Agents acting as principal
In some situations, agents are treated as principal. This normally happens if their client wants to remain anonymous. This often happens when goods are sold at auctions.
So going back to our example above, this is how the VAT invoicing would work:
- the vendor would issue a VAT invoice for the full value to the agent for the item concerned of £200 + £40 VAT;
- the agent would claim £40 VAT on his VAT return as input tax;
- the agent would issue a VAT invoice to his client for the full value of the item plus VAT; £200 + £40 and include the VAT as output tax on his VAT return; /li>
- the agent would also issue a VAT invoice for his agency fee £30 plus VAT £6 and include £6 VAT as output tax on his VAT return; and
- the client would claim the VAT of £40 for the purchase of the goods and £6 on the agent’s fee as input tax on his VAT return.
N.B Sometimes agents acting as principals issue a single invoice for both the goods/services and their agency service. In the above example, the agent would issue a single invoice for the sale of the goods and the agency service to the client for a total of £230 plus VAT @20% £46.
Even though the agent doesn’t take title to the goods concerned, he is treated as both “receiving and making the supply” of the goods for VAT purposes because he acts as principal.
HMRC’s guidance on this subject is VAT Notice 700, section 23.2.2 http://tinyurl.com/keusk28. There is also information about agents acting as principal when invoicing for second hand goods or works of art that are eligible for the margin scheme.
When an agent isn’t an agent
Sometimes the word “agent” is used in a broader sense, when somebody buys or sells something “on behalf” of a “client” but in legal terms is a principal in the transaction. The VAT invoices are the same as any other sale or purchase because the “agent” is buying and selling as principal, taking “title” to the goods and services concerned.
One particular industry using the term “agent” where the arrangements aren’t usually “agency” in the normal sense of the word is that of recruitment or staff where the business provides staff on an interim basis. In this case, it’s all to do with how the employment arrangements of the individuals.
For legal and tax purposes, in most cases, the individuals actually enter into a contract OF service with the staff agency. This is important for the individuals because it gives them rights such as holiday and sickness benefits and legal protection if the agency tries to dismiss them unfairly. For VAT purposes, it means that the “agency” has to charge VAT on the full value of the amount charged to the client, not just the “agency” charge.
It’s still traditional for businesses that provide staff in this way to define themselves as “employment agencies” or “staff bureaux”, but each situation will depend on the contractual arrangements involved. HMRC explain the correct treatment for such arrangements in VAT Notice 701/34: Staff, section 5: http://tinyurl.com/oqdbapd.
Sales of goods or services involving EU parties
The concept of “agency” is different in most other EU and many non-EU countries. This is because their law is based upon Roman law concepts where “agents” are treated as though they buy and sell goods under arrangements referred to as “commissionaire” arrangements. In this case, the law doesn’t recognise any separate supply of agency services to the principal.
This caused problems for UK businesses and therefore since July 2000, all such transactions are treated as made to and by the agents for VAT purposes only. This means that:
- the agent receives an invoice for the goods/services from the original supplier in the agent’s name:
- the agent issues a VAT invoice for the full value of the goods/services to the customer.
This doesn’t change the legal arrangements and only applies for supplies involving EU and non-EU parties. It doesn’t affect UK-UK transactions at all.
Further information is in VAT Notice 700, section 24 http://tinyurl.com/keusk28.
It all depends on the contract!
The subject of agency and whether or not someone is an agent or a principal can be very messy and can cause a real hassle for UK businesses. I’ve only been able to explain the main principles in this annex and you should read HMRC’s guidance, especially that in Notice 700, if you’re at all unsure about whether or not an agency arrangement exists and how it might affect your VAT liability.
Chances are that if you’re buying goods or services for a number of businesses and you’re going to share out the costs between the other parties, then you’re buying and selling as principal. But remember that in any situation, you should always check the details of any contract or other agreement with the other parties to establish whether you’re buying/selling as principal or you’re acting as agent.
And if you don’t have anything written down about the arrangements, you might want to consider setting up some sort of business services agreement to establish who is doing/buying/selling what for whom and avoid confusion for VAT purposes.
- You must be logged in to reply to this topic.