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HMRC internal manual

VAT Taxable Person Manual

Issues to consider: agency and disbursements: revenue risks associated with agency

Since agents, potentially, only have to account for VAT on the value of their own agency services, incorrect classification of a principal as an agent will mean that output tax is accounted for on a much reduced value: the revenue loss may be considerable. There are also input tax risks associated with agency: in particular, companies may seek to reclaim input tax on expenses which are not their own, but are the expenses of unregistered agents acting on their behalf.

There are a number of circumstances in which traders may seek to become an agent in order to reduce their tax liability. These include the following.

  1. Fragmentation of the business A business with a number of employees may seek to convert those employees into independent operators, with the business itself acting as their agent in putting them in touch with customers. In this way, each individual becomes a principal whose earnings are potentially taxable; but in reality, very few individuals will exceed the registration limits, and thus output tax will only be declared on that part of the takings which is retained by the business itself. This scheme is particularly common in hairdressing salons and driving schools, which are covered in depth in VTAXPER68500and VTAXPER66000respectively.
  2. Employment agencies Employment bureaux which have been acting as principal in the placement of temporary workers with clients may seek to change their contractual arrangements in order to operate as agents. They need then only charge VAT on the commission they receive rather than on the total cost to the client, including the workers’ salaries. This arrangement may be particularly attractive to exempt and partly exempt clients who will then suffer less sticking tax. Further guidance on this can be found in VTAXPER67000.

Alternatively, it may be advantageous for the trader to portray himself as a principal rather than an agent. For example, an agent for the sale of zero-rated agricultural produce, who has to declare output tax on the commission for his selling service, might attempt to portray himself as a principal who assumes ownership of the produce, as a means of zero-rating the whole supply.

You will not be able to combat all of these risks. If a trader has organised his business in a tax-effective way through the use of agency, this is a legitimate tax avoidance device; provided that an agency relationship has clearly been consented to by both parties, and the facts and daily working practices are consistent with that agreement. The key is to determine correctly at the outset whether agency exists. VTAXPER36500, plus the guidance on particular trades in VTAXPER60000, will help you to do this.