VAT: Agent or principal dilemma

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HMRC was successful in a case concerning a taxi-firm which claimed to act as the agent for the taxi drivers. Neil Warren explains why HMRC won, and the lessons to learn.

The tricky VAT issues of three-party deals are often best highlighted by the classic question of whether a taxi firm is acting as agent or principal when it provides transport services to its account customers.

Is the self-employed taxi driver providing the taxi ride to the account customer, and paying the taxi firm a commission for providing the lead? Or is the reality that the driver is working for the taxi firm, and the firm applies a mark-up when it charges the final customer?

Tax yield

The above questions are of particular interest to HMRC because the individual drivers don’t tend to be VAT registered, as they trade below the £85,000 threshold. The best tax outcome for HMRC is to collect the maximum output tax from the taxi-firms, which are usually VAT registered.

The tax yield is even higher if the account customers cannot claim back input tax. This was the situation with the customers of the taxi firm run by Bryn Williams (TC06953), which were mainly local authorities and government departments.

Late registration

The unusual twist in the Williams case was that his taxi firm was not VAT registered. Then one day HMRC came knocking at the door with the shock news that it considered his relevant turnover for account customer deals was the gross turnover, rather then the commission he claimed he received from the drivers, which was between 10% and 40% of the fare price.

As a result of this extra turnover, HMRC backdated his VAT registration to 1 March 2009, and issued an assessment for the period between this date and 16 August 2016.  He was also charged a penalty for failing to register for VAT.

Taxpayer’s argument

Williams argued that he was only acting as an agent: he did not control the vehicles; the drivers took some of the bad debt risk with account customer deals, and past cases had found in favour of taxpayers on this issue.

While it is true that some FTT decisions have gone in favour of taxi firms, a lot of cases have also been won by HMRC. The classic line ‘too close to call’ is certainly relevant to many such cases.

HMRC opinion

The arguments in favour of the principal outcome were more convincing, as all of these factors applied:

  • Williams negotiated contracts with the account customers as his own deal

  • The taxi cars bore his business logo

  • Williams received payment from the customers and paid the drivers

  • There was a shared risk with any bad debts, rather than the driver taking all of the bad debt.

But most importantly (in my opinion) if Mr Williams could not find one of his own drivers to carry out a job, he used another firm instead, with that other firm billing him rather than charge the final customer directly.

HMRC victory

The key question when three parties are involved with a transaction is simple: “Who is supplying what and to whom - and for what consideration?” The court decided that the taxpayer was providing the rides to account customers and the contractual and commercial facts supported that conclusion. To quote from the tribunal report:

“At the time when the contract with the local authority was entered into, the driver would not have been identified to perform the contract…Mr Williams was making a taxable supply to the authority.”

The appeal was dismissed.


My first thought about this case was that it was a shame that Mr Williams acted as a sole trader rather than a limited company. I am guessing that the backdated VAT registration of over seven years produced a massive bill (the figure was not quoted in the case report), which would be personal debt of Mr Williams.  

The case also highlights that the starting point with any VAT challenge should be to look at the highest ‘VAT payment’ outcome of a deal, then consider the specific circumstances of an arrangement to see if a lower tax payment might be relevant. The lower tax scenario must take into account both customer perception and contractual realities.

Finally, don’t forget that HMRC has the power to backdate a late VAT registration by up to 20 years.    

About Neil Warren

Neil Warren

Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.


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10th Mar 2019 06:23

Just wondering, if the customers are local authorities, they most definitely can reclaim the VAT, and so may accept a VAT only invoice, with no effective time limit as the 4 years starts from the VAT only invoice date.

Thanks (0)

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