Independent VAT Consultant
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VAT: Contracts for three parties are complicated

7th Apr 2017
Independent VAT Consultant
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Neil Warren has practical tips on how to make sure that VAT is dealt with correctly, when three parties are involved in a deal.

VAT can often get very complicated when there are three people involved in a transaction. These complications can often involve both input tax and output tax issues.

Two recent upper tribunal cases which involved three-party contracts went in favour of HMRC: Adecco UK and U-Drive. I won’t consider those cases in detail, because I want to focus on the general principles. However, those cases do offer some interesting conclusions.

Who is the principal?

This is the essential question when dealing with the output tax.

A situation I advised on a number of years ago involved a musical concert where the three relevant parties were as follows:

  • the venue
  • the production company organising the show
  • the customers buying the tickets

The VAT issues were a disaster because both the production company and venue thought the other business was accounting for output tax on the ticket sales. VAT had been totally forgotten!

Key issues

The key issues to consider when deciding who the principal is, when there are three parties involved, are:

  • Customer perception - who does the customer think they are dealing with? In the modern age, where tickets are often booked online, the website details for an event are often a big clue
  • Contracts – what do the written trading conditions and terms of engagement between the various parties actually say? Who would the customer complain to if he had a problem with the goods or services he had purchased?

An analysis of the above should help to identify which business is the principal, and is therefore dealing with the customer.

HMRC approach

What happens if there is a contradiction between the commercial reality of a transaction and what the contracts say? This should not happen very often but in such cases, it should always be the commercial reality that takes priority. This is certainly the approach taken by HMRC.

In other words, if a contract with a customer says that a business is supplying consultancy services but the actual supply is for building work, then the latter is the key factor for VAT purposes.

This is similar to the narrative on sales invoices: If a business has zero-rated a supply because a sales invoice says it relates to building work on a new dwelling, but the actual work was carried out an existing property, then the latter is the relevant factor.

Who is receiving the supply?

This is the question to consider for the input tax.

A landmark VAT case about input tax and three parties involved the travel business: Airtours Holidays Transport [UKSC 2014/0215]. It concerned the cost of accountancy fees incurred after the company bankers insisted on a major review of its financial and trading operations. Did the accountants supply their services to Airtours or to the bank? The invoices were made out to Airtours and it also paid the bill, but that does not necessarily mean it was the recipient of the actual supply of services.

The Supreme Court decided that the accountants were working for the bank because it was the bank who had ordered the work to be carried out, and specified the details of the review. The input tax claimed by Airtours was disallowed.


The law in VATA 1994, s24(1)(a) confirms that input tax is: “VAT on the supply to him of any goods and services”. The word “him” relates to a “taxable person” i.e. a business that is either registered for VAT or should be registered. That was the problem in the Airtours case – the supply of accountancy services was to the bank rather than to Airtours.


It is always important to consider VAT issues at the planning stage of a deal, rather than when the money starts to roll in. Don’t wait until the horse has bolted from its stable. Most importantly, always ensure that the economic reality of a transaction is consistent with the contractual position.


Replies (2)

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By allcarleasing
08th Apr 2017 12:15

They really are!

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Replying to allcarleasing:
By aland
10th Apr 2017 15:34

allcarleasing wrote:

They really are!

Did you mean "rarely"? I assume you are refering to contractual position and economic reality.

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