When an agent completes its VAT return, it usually records only the fee it earns for its agency services. However, it is quite common for the VAT rules to require an agent to record the transactions of its principal as if they were its own transactions.
Such VAT issues are important for any business which acts on behalf of another party. The agent might be helping another business to purchase or sell goods. A less obvious agency relationship arises when paying for a service and recharging as a disbursement. The question of agency might even arise unexpectedly when acting as an intermediary between sellers and purchasers.
This was the issue in Secret Hotels2 Ltd (formerly Medhotels) v Revenue & Customers Commissioners ( EWCA Civ 1571, published on 3 December 2012). The case was not merely about recording transactions correctly: the taxpayer was assessed for a VAT liability it had not been expecting.
A key concept is whether the agent has “disclosed” to third parties that it is acting for someone else. “Disclosure” is not defined, but in essence if the agent deals with third parties in its own name, EC VAT principles require the agent to be treated (for VAT purposes) as if it were the principal itself.
In this case, the taxpayer advertised hotel rooms and similar accommodation. The taxpayer thought it was acting as an agent for the hotels. It stated to the customers in its terms of business that it “acts as Booking Agents on behalf of all hotels, apartments and villas featured on this website and your contract will be made with those accommodation providers”.
HMRC claimed that the taxpayer was behaving like a principal, rather than as an agent. HMRC examined not only various terms of the contracts, but also what happened in practice. This included dealing with customers in the taxpayer’s own name on its website and being responsible for handling complaints without reference to the accommodation providers. Furthermore, no invoices had been issued for agency services by the taxpayer to the accommodation providers.
The court noted that VAT rules applied not to what was written in a contract, but to the nature of the supply, which should in turn be determined by reference to what was done in light of “the whole facts of the case”. The court concluded from the “package” of facts that the taxpayer had behaved like a principal in supplying accommodation to the customers.
The consequence, from a VAT point of view, was that the taxpayer had purchased accommodation (as principal) from the hotels and supplied accommodation (as principal) to the customers. Unfortunately, this qualified as a “Tour Operator Margin Scheme” supply. Therefore, although the accommodation providers were located outside the UK and agency services would ordinarily have fallen outside the scope of UK VAT, the taxpayer had to account for UK VAT on all accommodation purchased by the customers.
In short, it is not sufficient to state in a contract that the taxpayer is acting as an agent. The legal documentation must reflect what happens in practice and the “package” of facts, considered as a whole, will determine whether the taxpayer is acting as an agent or as a principal (from a VAT point of view). As this case demonstrates, this is not easy to judge and each case will turn on its own facts.