An essay-writing business was acting as the principal, and not as an agent, between the students and the authors. The VAT assessment for over £900,000 was correct.
I am glad that I was sitting down when I read the case of All Answers Ltd (TC6845) because I never realised that the services offered by the taxpayer existed.
The company supplies completed essays, coursework and dissertations to students studying for exams. The essays are written by academic experts in the particular subject, enabling the students to submit them to their course providers for assessment.
To add an extra layer of intrigue, the student can specify what grade they want to achieve with the work – ie setting the academic standard of the essay. Although the student is not supposed to claim the work is their own, it was accepted this happens in practice.
The VAT challenge was simple: it came down to the classic three-party arrangement that causes so much confusion in the VAT world about “who is supplying who”. Accountants who act for taxi firms, hairdressers and event promoters will be familiar with this issue.
Was the taxpayer acting as agent in bringing together the author and the student? In this case, the output tax is only payable on two-thirds of the commission retained by the agency.
Acting as principal
Was the reality that the author was working as a subcontractor for the taxpayer, and the taxpayer was supplying a completed essay as principal to the student? In this case, the output tax is due on the full payment made by the student. This is what HMRC concluded, hence the disputed assessment for £904,168 in relation to VAT underpaid between January 2012 and September 2015.
1. Consider contracts
The court spent a lot of time considering the terms and conditions ticked by the student placing the order and concluded that: “contractual documents … are designed to disguise the nature of the business” and also referred to the “artificiality of the terms and conditions”. This is a key feature of the VAT world, namely that contracts are irrelevant if they do not reflect what is happening in practice.
2. Establish the economic and commercial reality
The economic and commercial reality of a deal always supersedes what is said on a contract or sales invoice. To give an easy example, if I provide VAT consultancy services to an accountant but the terms of engagement say I am a cricket coach, it is what I do that counts – ie my consultancy work.
The court highlighted a number of key factors in concluding that the taxpayer was acting as a principal:
- The student and author did not know each other’s identity.
- Customer perception from the company website was that the students thought they were dealing with the taxpayer and not the author.
- The author invoiced the taxpayer and was paid from the taxpayer’s own bank account.
- There was no evidence that the taxpayer was fulfilling an agency function; it was supplying a completed essay to the student, which it had acquired from an expert it had hired as a subcontractor.
Handbags at dawn
I recently reviewed a website that gave owners of expensive handbags the chance to hire them out to people who temporarily needed them eg for a posh wedding. I had to weigh up all of the arguments for and against the agency argument.
I concluded in the end that it was an agency arrangement, with output tax due on the commission, because all of the dealings were done between the handbag owner and hirer – and if there was any problem with the item (for example, if a fake rather than genuine handbag was supplier) then the dispute was sorted out between the two parties and not the agency. If you act for any websites, now is a good opportunity to check that the VAT accounting is correct.
I can confirm that this article is all my own work - even if you think it is only worth a D-minus!
About Neil Warren
Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.