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HMRC internal manual

VAT Taxable Person Manual

Agency and disbursements: how agents should account for VAT - Section 47 of the VAT Act 1994: Section 47(3)

47(3) Where services are supplied through an agent who acts in his own name the Commissioners may, if they think fit, treat the supply both as a supply to the agent and as a supply by the agent.

This subsection provides that agents may be treated as both receiving and making supplies of services which they arrange, in the same way as for goods under section 47(2A). However, while section 47(2A) has mandatory effect in relation to goods when an agent is acting in his own name, application of section 47(3) is discretionary. In theory the provision can be applied where the Commissioners think fit; but in practice we allow agents to choose for themselves whether or not to adopt the procedure.

Until 1 June 1995 and the introduction of section 47(2A), this provision covered both goods and services supplied through agents. It was originally intended to overcome difficulties in situations where agents act for undisclosed principals by providing a mechanism for any VAT on the transaction to flow through with the invoices. For example, where an agent acts as a selling agent, he may arrange for his principal to issue an invoice to him, deduct the VAT charged and then treat as an onward supply to the customer, thus preserving the anonymity of his principal and ensuring that the customer receives a valid tax invoice for his own input tax purposes.

Although of particular benefit where the principal wishes to remain undisclosed, we would not refuse use of the arrangement in any situation provided that the two basic conditions set out in the VAT Guide are met:

  • both the principal (that is, the supplier) and agent are registered for VAT and;
  • the supplies are taxable.

The provision is only appropriate where the supply of services concerned is taxable at a positive rate. There is no need to adopt the arrangement in respect of a supply which would be exempt or zero-rated if made to the agent, because there would be no tax to flow through. It can, however, be used if the invoiced supply from the agent would be zero-rated or exempt even though the supply to the agent is standard-rated: for an example of this, see below.

Where the section 47(3) procedure is used, the following points should be remembered.

  • The agent who uses section 47(3) remains responsible for output tax on the value of his own supply of agency services to the principal, regardless of how this is described or calculated.
  • If the agent reclaims input tax under section 47(3) but fails to declare output tax, the correct remedy is to disallow the input tax. To assess for output tax is incorrect - the agent cannot be compelled to declare output tax on what are only deemed supplies of services under this provision, as this would amount to HMRC imposing section 47(3).
  • If the agent incorrectly generates tax on a supply made by an unregistered principal, this also cannot be assessed as output tax. You should instead take action to recover the tax under Schedule 11, paragraph 5(2), and consider the issue of a penalty under section 67(1)(c) of the VAT Act 1994: see VCP11213.
  • The input tax claimed by the agent on the invoice to him must exactly equal the output tax declared on the agent’s own invoice, unless the liability changes. The agent must account for output tax at the same time as he deducts the input tax. He may, however, delay reclaiming input tax until he is ready to declare the output tax. In the latter event, the tax point for the onward supply is fixed by reference to the time of the underlying supply of services by the principal or the third party.

Our view that

  • input and output tax must be declared in the same tax period, and
  • the tax point is fixed by reference to the time of the underlying supply by the principal or the third party

was upheld by the High Court in the case of Metropolitan Borough of Wirral, QB [1995] STC 597. This case involved the local authority acting as an agent in procuring the services of a contractor for its principal (a finance company). The local authority deducted the VAT charged by the contractor but did not charge on the output tax to its principal until a much later date. The tribunal had previously accepted our view that where section 47(3) deemed what would have been a single supply to be two simultaneous supplies, the tax point must be the same as the tax point for the single supply. The High Court agreed with this and confirmed that when using section 47(3), the time of supply is fixed by reference to the time of the underlying commercial supply, in this case, the supply made by the contractor.

Where agents using 47(3) are involved with zero-rated supplies, they may zero rate their supply to the buyer if that supply would have been zero rated had the principal made it direct. An example might be where an agent passes on zero rated construction services on behalf of his principal. The principal would normally be entitled to zero-rate the supply, but cannot because that supply is now to an agent not directly involved in the construction. The principal must therefore charge output tax to the agent, but the agent may zero-rate the onward supply.

In this situation, the agent may reclaim the input tax on the principal’s supply to him; but this is not actually his input tax. He must therefore refund it to the principal; if he does not, the input tax retained is further consideration for his agency services. This is a separate supply on which tax is normally due.