VAT legislation recognises two types of agents; disclosed and undisclosed.
The agent acts on behalf of another, referred to as the Principal. The Principal authorises the agent to act on his behalf and under his direction. The agent represents the Principal in its dealings with third parties. The relationship between the Principal and agent can be disclosed or undisclosed to the third party. A disclosed agent acts in the name of the Principal, whereas an undisclosed agent acts in his own name.
VAT For Undisclosed Agents
Article 28 of the EU VAT Directive refers to an undisclosed agent stating that ‘where a taxable person acting in his own name but on behalf of another person takes part in a supply of services, he shall be deemed to have received and supplied those services himself’. The sale of goods by an undisclosed agent is treated as a simultaneous supply to, and by, the agent. Where undisclosed agents are involved in non-EC, or intra-community, supplies of goods or services, the agent is treated as both the purchaser and seller. The agent must treat the sales of its Principal's goods or services as if it had bought them from the Principal and sold them to the customers (with the purchase price being the sales price less the agent’s fees / commission). The agent must account for VAT on these sales in accordance with the place of supply rules. The agent can recover VAT on their purchases which reduces the administrative burden on the Principal, whereby the Principal is not put in a less advantageous position by operating through an agent.
VAT For Disclosed Agents
A disclosed agent acts in the name of the Principal, the customer is aware that they are dealing with an agent of the Principal. The supply of the goods / service takes place directly between the Principal and the customer. The agent does not make a supply to the customer; the agent supplies its service to the Principal. The Principal must account for VAT on these sales to its customers in accordance with the normal place of supply rules.
Recent Case Law
A recent UK tribunal case released in March 2010 between Secret Hotels 2 Limited (previously Med Hotels Limited (MED)) and the commissioners of Her Majesty's Revenue and Customs (HMRC), addressed the issue of when a person may be acting as an agent or as a Principal.
It was argued that if MED acts as a Principal supplying accommodation services in his own name, as the Commissioners allege, then MED is required to account for output VAT on its commission in the Member State where it is established, in the UK in this case. But if MED is an undisclosed agent, as MED contends, then the supplies are treated as taking place in the jurisdiction in which the hotel belongs, and therefore, outside the scope of UK VAT. The hotels only accounted for VAT on the amounts they received but no VAT was accounted for on MED’s commission as agent, so a part of the amount paid by the travelling customers escaped VAT.
The appeal case released in July 2011, contended that the terms of the written contractual agreement between MED “as agent” and the hotel operators “as Principal” could not be ignored. The First Tier Tribunal (FTT) concluded that the hotel operator is the “Principal” acting through the agency of MED - “the hotel operators are the suppliers of that accommodation both for the purposes of the law of contract and for the application of the VAT provisions.” Therefore the hotel operators could only account for VAT on income received for their supplies of accommodation.
The FTT also stated that “in the absence of an allegation that the written agreements were shams or superseded by later agreements on different terms, I do not see that I am able to disregard the effect of the written agreements”, indicating the importance of the legal agreements for VAT purposes.
The question as to whether the agent is disclosed or undisclosed effects where the goods or services are deemed to be supplied for VAT purposes. The place of supply of the goods or service impacts upon the VAT registration and on-going compliance obligations of both the Principal and the agent.
Consideration should be given to the terms of the contractual legal agreement between the agent and its Principal so that they reflect the commercial reality of transactions between them.