Building in sunlight

VAT: Agent vs Principal

Rob Janering, Partner, VAT and Customs Duty services
Building in sunlight

The matter of ‘agent’ vs ‘principal’ is one closely monitored by HMRC, and continues to impact the indirect tax landscape. This is because, depending on which side of the line a business’ supplies fall, it can have a big impact on pricing, VAT liability, and general accounting procedures.

This VAT issue is booming in the digital age, particularly impacting businesses in the technology and media sector, where each layer of intermediary and intangible digital supplier involved in sales can further complicate the matter. Sector giants such as Uber and OnlyFans have all had issues in recent years, with matters of principle in this area showing that it needs to be managed carefully regardless of the size of business.

What does it mean?

In a nutshell, to be a VAT ‘agent’ means to be acting as an intermediary, bringing together two parties and not be involved in the supply chain. This is distinct from being a VAT ‘principal’ which means to be a party in the supply chain, buying in and selling on the goods or services.

A working example of this would be the relationship between a hotel and a booking app. Normally, a hotel provides a room, for a fixed period of time, at a fixed fee directly to a consumer. It will charge VAT when supplying the room to the consumer. It is a straightforward, taxable supply, clearly being made by the hotel to the consumer.

But, what if instead of a consumer booking their stay directly with the hotel, they make a purchase through a booking app, as many of us do? Let’s say in this example, the booking app generates its revenue by making a charge for its services, adding their ‘booking fee’ on top of the cost of the hotel room. It is charged to the consumer using the app and collected at the same time as the app collects the charge for the hotel room.

The booking fee’s character is relatively clear, it is supply made by the app company enabling consumers to make their booking, for which they are charged a fee plus VAT. The VAT liability of that can be defined without too much trouble. But what about the income received by the app company for the supply of the hotel room – should output VAT be accounted for on the supply of that room by the booking app, by the hotel or both?

This is where the agent vs principal argument comes in.

Were the booking app to be found the principal of the supply, it would be liable to treat the revenue of both the hotel stay and booking fee as its own. This would also make it liable to account for output VAT on both of these supplies. We would expect the hotel to make a charge to the booking app which has VAT on it.

However, were they found to be acting as an agent and instead just assisting with the booking of the hotel, they would only need to account for the revenue and corresponding output VAT on their booking fee. The hotel would account for VAT due on the hotel stay revenue (passed on to it by the app).

Clearly, the impact of having to account for VAT on more revenue than a business is legally required to, will mean a bigger VAT bill. This can also seriously impact businesses’ ability to price effectively in the market place as, on part of its supplies, a business could be 20% more expensive than their more VAT-savvy competitors.

Worse still, were a business to misidentify themselves as a VAT agent, then they may be at risk for being assessed for the VAT which should have been due under their supplies made as ‘principal’. This would probably constitute a sixth of profit erosion on any affected supplies, a material reduction in many sectors. 

What are the tests?

The issue when determining agent or principal status is that it is very much judged on a case-by-case basis, meaning that potentially-affected businesses need to monitor their position carefully, so as not to be met with any surprises during an HMRC audit.

There are no set definitions of what it means to be either an agent or principal. However, following many years of case law on the matter, there are key hallmarks which businesses can use to help identify and confirm their position.

The following, non-exhaustive list, provides some of these indicators to be considered.

  • What are each party’s commercial roles and responsibilities? E.g. legal liability, commercial influence on pricing, etc.
  • Would the consumer know whose supply is whose?
  • Could businesses be making themselves appear to be the principal by holding themselves out as the supplier?
  • Is the business altering the suppliers good/service in any way? Is there value being added or a new supply being created?

An additional challenge for businesses to manage is that the VAT rules contain a number of provisions that create a ‘VAT fiction’ and push agents back into the supply chain as a principal. These rules primarily affect online marketplaces (such as Amazon, eBay, etc) which supply goods and telecoms, broadcasting and online services. They exist to help tax authorities better manage tax compliance and collection, alongside reducing fraud. The effects of the rules is to make the marketplace responsible for VAT collection on the supply to the consumer even where contractually, it is not a party to that supply.

This area of law has most recently been under the tax spotlight with the “OnlyFans” platform operator, Fenix International Ltd, having had a case heard in front of the European Court of Justice where it was contesting HMRC’s application of these rules.

OnlyFans provides a platform for digital content creators to share their electronically supplied services in return for one-off and monthly subscription payments. OnlyFans had taken the view that, whilst they facilitated these supplies, the underlying EU law was not expressly clear in suggesting the criteria for a party such as themselves to be deemed to be acting as the supplier of the services facilitated, i.e. a ‘marketplace’.  Therefore, they believed that the suppliers of the content had a liability to account for any VAT due.  HMRC were of the opposite view, that being that the OnlyFans operator was liable to account for the VAT.

Ultimately, the court has confirmed that, where such a platform sets the terms and conditions of its content creators’ sales, and furthermore arranges for the customer’s payment of said services, that it can be assumed to be acting as the deemed supplier.

The result of this decision is further confirmation to all businesses operating a marketplace/agency service, particularly within technology and media, that their revenue may be liable for VAT, despite their inactive involvement of the actual supplies made.  It also makes clear that it is particularly difficult for businesses to extract themselves from that position, so it is almost as though the agent or marketplace having liability to account for the VAT is the starting position to work from.

What should businesses do?

Businesses which think they may be acting as an agent in making their supplies should first look to review their contractual position. Analysis will be required so as to understand the legal relationship between the potential principal, agent, supplier and consumer, as well as the commercial impression given by the business, for elements such as its invoicing and promotion of its activities.

Once this position has been confirmed a review of the deemed supplier rules should also take place, to cover that no further obligations have been created. If there is any doubt as to which party should be accounting for VAT or the values of these, discussion should take place to ensure all parties are sure on their obligations and role.

Where possible this should be completed up front before any supplies are made. This is to ensure that any VAT registrations required are obtained, VAT costs are understood with provision made to recover them (where possible) and reporting and invoicing obligations can be confirmed. These actions should help businesses to have a well-prepared VAT reporting position and allow them to then concentrate on their business instead of worrying about tax reporting.

How Crowe can help

Our experienced VAT team can help you with your VAT queries. Please get in touch with Rob Marchant, Rob Janering or your usual Crowe contact.


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Rob Janering
Rob Janering
Partner, VAT and Customs Duty services