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Is this a valid disbursement? (VAT)

We are invoicing customers on behalf of non-VAT registered artists.

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We provide printing, framing and dispatch services for Artists.

The Artists uploads thier image to our website, and a Customer will buy a print of the image, which we produce and ship.

We deduct the actual cost of printing (including VAT) and a % commision (again, including VAT) from the total paid by the Customer, and transfer the rest to the Artist.

We are VAT registered. If the Artist is not and we have charged VAT on the total cost, then the Artist will lose out on a significant amount of income.

It looks like we can treat the Artist's profit as a disbursement, as long as we make this clear on our invoices to the Customer, but the regs aren't clear to me.

I'd like to be able to consider the Artist's image as thier IP that we're paying them a fee to use. I think in that case it would be acceptable to treat this as a disbersement.

But if it was considered that we are taking thier Artwork and changing it into something else then perhaps it's not ok to treat this a disbursement.

Does any one have any advice or relevent examples of what is acceptale and what's not?

Thanks

 

 

 

Replies (19)

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By Wanderer
19th Aug 2021 22:47
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Replying to Wanderer:
JamieJames
By JamieJames
19th Aug 2021 23:58

It seems the general consensus is a definite NO! but just in case, here's how I think it fits with the regs:

**Disbursements: costs to exclude from VAT calculations**

A payment made to suppliers on behalf of your customers is called a ‘disbursement’ if you pass the cost on to your customers when you invoice them.

You might be able to leave out these payments from your VAT calculations because it’s the customer, not you, who buys and receives the goods or services; you’re just acting as their agent.
>> So we're the agent for the Customer buying a print.

To treat a payment as a disbursement all of the following must apply:

you paid the supplier on your customer’s behalf and acted as the agent of your customer
>> the supplier is the Artist, supplying the image. We're paying them on the Customer's (person buying a print) behalf

your customer received, used or had the benefit of the goods or services you paid for on their behalf
>> benefit of

it was your customer’s responsibility to pay for the goods or services, not yours
you had permission from your customer to make the payment
>> The customer is choosing the Artist's image and there's a fee due to the Artist for that (I'm not sure how you can definitively say that it's the customers cost or our cost though)

your customer knew that the goods or services were from another supplier, not from you
>> We can make this clear

you show the costs separately on your invoice
>> Sure

you pass on the exact amount of each cost to your customer when you invoice them
>> Yep

the goods and services you paid for are in addition to the cost of your own services
>> Yes, printing and commission will be shown separately

So I think I'm not sure about
"it was your customer’s responsibility to pay for the goods or services, not yours"
I think this is just a case of wording on our website?

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Replying to JamieJames:
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By rmillaree
20th Aug 2021 08:39

"it was your customer’s responsibility to pay for the goods or services, not yours
you had permission from your customer to make the payment

>> The customer is choosing the Artist's image and there's a fee due to the Artist for that (I'm not sure how you can definitively say that it's the customers cost or our cost though)"

I think this answer is a bit nonsensical if i am being honest - your customer is clearly not responsible for paying the artist - end of ? - they are simply buying a t shirt of the internet or whatever?

On the other points IMHO it is clearly you consuming these services and adding something to what is provided rather than simply pasing on the item as it was bought in by you and not the end customer so that issue is also a complete fail.

Infact i would go so far as saying what you sell to the customer is a completely different item than what the artist provides to you. You are buying an image and selling a t shirt they are 100% different items there is zilcho being "passed on as it was bought in"
Have a look at tribunal decisions in this regard to see how hard it is to get away with this argument - in one example even search fees which would seem to be an item incurred on behalf of the client and passed on at cost failed the test.

https://www.rossmartin.co.uk/vat/vat-cases/2967-shift-in-vat-treatment-o...

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By David Ex
19th Aug 2021 22:51

I always understood a disbursement to be a payment made to a third party on behalf of another person (often a client).

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Replying to David Ex:
JamieJames
By JamieJames
19th Aug 2021 23:59

My thinking is that the third party is the Artist, the other person is the Customer buying a print.

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Replying to JamieJames:
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By rmillaree
20th Aug 2021 10:38

"My thinking is that the third party is the Artist, the other person is the Customer buying a print."

What is the artist providing you with though ? you are not selling/passing on that exact same item to the customer - what your are selling to the customer is something compeletely different.

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By VATs-enough
19th Aug 2021 23:38

As the learned folks above have already said, where is the disbursement here?

The situation you describe sounds like you are principal in a supply to an end customer, and the artist supplies you the image to use for that purpose. I glean from your post that you charge VAT to the end customer, but this eats into the profit shared back to the artist.

It seems to me that what you are wanting/trying to engineer is a situation whereby you are an agent of the artist, charging the artist for your goods/services, and where the end customer is actually dealing with the artist directly.

But this isn't a disbursement scenario

Thanks (4)
Replying to VATs-enough:
JamieJames
By JamieJames
20th Aug 2021 00:15

Thanks for this. The situation where I'm an agent of the artist is the current situation. I think that's all ok, as long as the Artist is happy for us to produce invoices on their behalf, or to do the invoicing themselves. However, I was wondering if disbursements might be a easier way as we expand.

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Replying to JamieJames:
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By VATs-enough
20th Aug 2021 00:52

It's getting a little confusing now, although that might just be me...

You say you are 'agent of the artist' but for your disbursement scenario to work, you would need to be agent of the end customer. A complete reversal of your current contractual position?

It might be possible to achieve what you are seeking to achieve, but you need to engage someone to give you a proper VAT analysis, looking at the contractual terms between the parties, and suspect it will require someone with decent contract law experience.

Thanks (2)
Replying to VATs-enough:
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By Paul Crowley
20th Aug 2021 01:16

Agree
Car MOT is a good example
Driver gets Garage to deal with MOT as agent for driver
MOT station working backwards dos not make any sense at all

Thanks (0)
Replying to VATs-enough:
JamieJames
By JamieJames
20th Aug 2021 01:39

I think you are spot on, that we're currently the 'agent of the artist' but I've been looking at the different options, and if the disbursement scenario was an option then we could reverse that. But! Clearly everyone is pointing me at disbursement's NOT being an option :)

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By DKB-Sheffield
20th Aug 2021 01:12

Hi

I think you are clutching at straws here!

It seems to me that your customer is buying a framed printed image. That is made up of the artist's image, your paper/ canvas/ wood (etc.), your inks your equipment and your time. The customer pays the stated value for the item as a whole. Hence I believe that "whole" is entirely within the scope of VAT.

1. Can the customer buy the image from the artist without you printing it? If so, is this clearly stated at point of sale - with full details of the seller?

2. Can the customer buy your paper, canvas, frames etc. without the image?

3. Are there two very separate transactions i.e. artist invoices customer (not you) their fee (the artist's invoice then being provided to the customer in addition to including a line on your invoice) as well as you charging the customer your (separately identifiable) fee?

4. Are there potential issues whereby, as part of the "package" the customer is buying, a commission is deducted from the apparent disbursement?

I personally don't buy the idea that you are acting as agent, or that this is a disbursement. You are buying from the artist, you are adapting (printing & framing) what you are buying, you are charging the customer a premium for the product. On the face if it, the customer would be unable to purchase the image direct from the artist otherwise, hence how can they have a separately identifiable supply.

There may be options to improve your current tax position. However, based on the suggestions you have made, I personally believe classing this as a disbursement is fraught with problems.

I would add however, this is a question that should be referred to your accountant. They will know more about your positon and may be able to look at alternatives. That would be better, and safer than trying to make legislation fit your situation.

Thanks (1)
Replying to DKB-Sheffield:
JamieJames
By JamieJames
20th Aug 2021 02:11

Thank you so much for this detailed reply. It's really useful.

1. No, the Customer cannot (necessarily) buy the image from the Artist in any other way. That's because the Artist is only giving permission for the Customer to get one print at a certain size. You're not buying the original / a digital image. Perhaps that's case closed? Is that what you would say?

I'll reply to the rest anyway:

2. I guess they could, but in the case of an unmounted A4 print it would be a rather expense piece of A4 paper! Without the Artist's contribution it's fairly pointless. Is think that's relevant in your option in terms of it being a "whole" ?

3. I guess I had thought that disbursement negated the need for the Artist to invoice the Customer. Perhaps this is wrong. And this was to be honest, my main reason for looking into this in the first place! :/

4. The commission would be a % of the total (printing + disbursement), but we'd charge VAT on all of the commission.

So anyway I think I'm with you, I concede defeat :)

So that you know though, the process isn't quite as you imaged it: It's much more geared towards the Artist. It's 99% branded as them, with us as a side note and just connecting the dots in the background. I guess this does show more than anything that we should just stick with the non-VAT registered Artist invoicing the Customer, and us helping to automate this.

Thanks again to you, and everyone else for all your thoughts. I realise that I would need to get official legal advice if I were to act on anything, but it's so useful to gather your thoughts first.

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By jonharris999
20th Aug 2021 06:54

This doesn't fly, for the reasons others have given. You would not say that a theatrical or TV agent is engaged with the producer to supply an actor which is therefore a 'disbursement'. It's the other way round. The risk of trying to fly in this way is that you bowl along for years and then HMRC bring a simple objection which will easily stand up, and then you're in trouble.

I also question your premise that "the artist is losing out on significant income". Everyone turning over less than 85K pa must make their own calculation about whether there is any advantage to them or not in registering for VAT and if there is, then they can.

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By johnhemming
20th Aug 2021 09:49

There is an interesting and important point about this discussion.

What the OP is proposing is something that runs a risk of HMRC making some form of determination that tax has been underpaid.

The individual sums may be small, but over time it will build up to a material amount of money. In any attempt to sell the business it could prevent a sale going through as it would be something to identify in due diligence.

If someone on a forum on the internet thinks it might work then there really is no protection in terms of a claim for negligence.

If, however, a legal or accounting advisor has advised as part of a paid contract then professional indemnity insurance could come in to handle any consequences.

Hence real dangers arise from doing this sort of thing without professional advice.

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RLI
By lionofludesch
20th Aug 2021 11:36

I agree with everyone else that this isn't a disbursement.

But it could be an agency agreement if structured properly.

Invest in a lawyer to draw up a water-tight contract.

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Jason Croke
By Jason Croke
20th Aug 2021 11:43

As others have posted, you should forget about this being a disbursement, even traditional disbursements by solicitors when you buy a house are under query following Brabners loss at the Tribunal. Disbursements are now very narrowly defined.
https://www.brabners.com/blogs/vat-treatment-disbursements

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By kestrepo
20th Aug 2021 12:23

Perhaps I am having one of those days but can't the artist invoice you and then you pay the invoice?

Thanks (1)
Stepurhan
By stepurhan
21st Aug 2021 11:46

I hire a builder to build me a wall. They only charge VAT on their labour, since the bricks and mortar they bougt to build the wall are clearly "disbursements".

That is the argument you appear to be running with. There is a reason why builders will sometimes suggest their customer buy the materials direct. If your customers purchased specific image rights from an artist and came to you for the printing/framing etc, then you would be fine.

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