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HMRC internal manual

VAT Taxable Person Manual

HM Revenue & Customs
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Agency and disbursements: how to distinguish agency: the double check on consistency

This is a final check which you will need to make where you have examined a written agreement and are satisfied that it creates an agent/principal relationship. You need to make sure that the conduct of both parties remains in accordance with what they have agreed to do. If the parties are not acting in accordance with their agreement, that agreement then does not reflect reality and may be a facade to create an artificial impression of agency. However, the onus is always upon the Department to prove that the agreement is a facade or avoidance device. In order to do so, you will need all the relevant information as listed in VTAXPER36660. The annual accounts of both parties can also be valuable: if, for example, agency commission is simply referred to as ‘sales’ in those accounts, or if purchases said to be made on behalf of a principal actually form part of the agent’s stock figures, this reinforces our argument that the agreement and facts are inconsistent.

Beware, in particular, of agreements which have been recently drawn up in an attempt to portray a long-standing relationship as a newly formed agency agreement. When considering these new ‘agency’ agreements, your first question should always be, does this reflect the past? Have there been any changes in working practice, as opposed, for example, to mere changes in the status of personnel?

A number of tribunal cases have looked beyond the written agreement between the two parties, and have found that an agent/principal relationship did not exist because the actions of the two parties were not consistent with that agreement.

  • In Trafalgar Tours Ltd ([1989] STC 298/ [1990] STC 127), we viewed a UK tour operator as a principal in the supply of holidays which were booked through agents overseas. We based our view on examination of agreements drawn up in 1982. In support of the opposite view, the company produced an agreement dated 1985. Both tribunal and High Court did not accept that this agreement reflected the reality of the situation, and saw it instead as a facade with a view to the avoidance of tax.
  • In Allied Medicare Nursing Services (MAN/89/484), a nursing agency which had previously acted as a principal in the supply of nurses who were its employees, altered these agreements to give the nurses self-employed status, and claimed to now be acting as their agents. The tribunal found that working practices had not altered despite the new agreements, and that the trader therefore remained a principal.