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HMRC internal manual

VAT Taxable Person Manual

Agency and disbursements: how to distinguish agency: the six indicating factors

The following are six factors which we say are normally present in an agent/principal relationship.

  • Title This is the most important consideration when dealing with supplies of goods. In a true agency relationship, title always remains with the principal; the agent never assumes ownership of the principal’s goods, but merely buys and sells them on the principal’s behalf.
  • Identity The goods or services bought or sold by the agent on behalf of the principal must be clearly identifiable.
  • Value The principal must know the exact value at which goods or services have been bought or sold on his behalf and any discounts which the agent obtains must be passed back to the principal.
  • Separation The value of the agent’s service must be separately identifiable from the main supply, and should normally be known to the principal; although it can be based on an agreed percentage of the sale or purchase price. It is an established legal principle that a true agent cannot make a secret profit from his agency; but the fact that the exact amount of the agent’s commission is not disclosed to the principal would not, of itself, invalidate an agency arrangement. However, the agreement between them must make it clear that a charge is to be made and establish the basis of its calculation at least.

There is an important case in this area which tested the consideration for VAT of the agent’s supply to his principal. In PBK Catering LON/91/2688Y Nov 93 (11426), the appellant, a caterer, provided catering services to the residential homes of a charity. Besides being paid a management fee, the appellant was allowed to keep the discounts it had obtained on the bulk purchase of foodstuffs, the food being purchased on behalf of the home. The appellant had accounted for VAT only on the management fee and not the discounts alleging that it was acting as an agent of the charity when actually supplying meals to the charity and that when purchasing the food, it was acting as an independent principal. The tribunal accepted our view that the discounts retained by the appellant were further consideration for its services to the charity, its principal.

  • No change The direction of the main supply between buyer and seller cannot be altered by the intervention of the agent.
  • Nature and value Agents cannot alter the nature or value of supplies which they arrange for their principal - although the principal may give his authority for the agent to negotiate a different price. (Currently, this would not include liability, as it is possible that in some instances the intervention of an agent, particularly where goods are concerned, can alter the liability of the supply.) Examples here would be the export of goods where the zero-rating may be applied by the last party in the chain who actually exports the goods and in other instances, where certain specified goods for the disabled are sold through agents who are able to zero rate the supply because of the disability status of the recipient.

If there is a written agreement, you need to test that agreement against these factors. If each factor clearly indicates agency, agency will exist subject to the consistency check at d. below. Similarly, if each factor clearly indicates a relationship of two principals, agency will not exist. If findings are contradictory, you should check whether your trade is listed in VTAXPER60000, as this explains the key indicating factors within particular trades.

In some trades, we may need to accept that one or more factors do not exist or bear less weight than in other trades, although the agreement will still show that overall an agent/principal relationship exists.  

This was demonstrated in the High Court case of Music and Video Exchange Ltd ([1992] STC 220). This concerned a shop selling second-hand musical instruments, who drew up an agreement by which they acted as the agent for a number of private, unregistered vendors. This agreement operated from the outset and was never altered. The court acknowledged that the agreement contained a number of factors not normally consistent with agency, but found that these factors were not ‘wholly inconsistent’, and that therefore agency (although of an unusual type) existed.

Although it is important to begin by examining the written contracts between the parties involved, it is possible that even after considering the six indicating factors listed above, the agreements do not themselves determine conclusively the VAT position. In this situation you will need to look beyond the agreements at the wider picture and consider all the facts, including the trader’s working practices, in reaching a decision about agent/principal status. Each case will depend on its own circumstances.

  • The case of Reed Personnel Services Ltd, [1995] STC 588, established that a trader’s status for VAT purposes is not necessarily determined by the contractual agreements. In this case, the Tribunal found that the trader acted as agent in the placement of nursing staff with its clients - primarily NHS hospitals. Because of the lack of clear evidence of agency in the contracts, we took the view that Reed was supplying nurses as a principal. The High Court however agreed that in this case the written contracts were not determinative of the issue and the Tribunal was correct to step outside the contracts and look at all aspects of the trader’s operation in reaching its conclusion. Since the Tribunal’s finding had been one of fact there was no basis for the High Court to interfere and our appeal failed. In his judgement, Justice Laws observed that, although contractual documents set out the rights and obligations of the parties concerned in private law, they do not necessarily establish the VAT position. This can only be ascertained by examining the whole of the facts of the case.