Student essay supplier learns lesson in VAT caseby
A business connecting students with academic writers failed to achieve the results it wanted in this VAT case.
Agent vs principal can be a controversial area in VAT and case law contains numerous examples of when misunderstanding it can result in a big VAT bill for the taxpayer. The fundamental principle of VAT is that we always need to return to the question: who is providing what to whom?
All Answers operates a website through which students can order academic work such as essays, dissertations and pieces of coursework, which are then written by third parties. The price is based on the nature of the work, the grade required and the length of the essay.
The writers are not employed by All Answers, and most are trading below the VAT registration threshold and so are not VAT registered.
Those who follow VAT case law may already be familiar with the set-up of All Answers Limited, as this is the third time it has reached our tribunal system. As explained in the upper tribunal case, All Answers generally retains around two thirds of the fee, and pays one third to the writer. The example given in the tribunal was a fee of £240, with £160 retained by All Answers and £80 passed to the writer.
Agent or principal?
All Answers argued that it was acting as agent of the writer in relation to the supply of the academic work. The supply of the work is from the writer to the student, and All Answers merely facilitates it. As such, it argued that VAT should only be due on the £160 paid for the agency services.
HMRC argued that All Answers is acting as principal on the grounds that the contractual agreement for the supply of the essay is between All Answers and the student and the £80 paid to the writer is consideration for a separate supply made by the writer to All Answers. As such, HMRC argued that VAT is due on the total amount paid by the student of £240.
The upper tribunal, in 2020, considered the contractual terms and whether these reflected the commercial and economic reality.
The key points noted by the UT were as follows.
- The writer gave All Answers authority to enter into a contract as their agent.
- However, the “core” obligations to deliver work of a specific standard, and by a specific deadline, were binding on All Answers, not on the writer.
- There was a “no plagiarism guarantee”, which did bind the writer.
- The entire copyright of the academic work transferred from the writer to All Answers.
- All Answers granted the student limited rights to use the work.
Based on the above, the UT held that All Answers was acting as principal and so VAT was due on the full amount received from the student.
Subsequently, All Answers provided HMRC with revised contracts, which it claimed better reflected the economic reality of the suggested agency relationship.
Standard contracts were provided by All Answers to the student, and by All Answers to the writers. There was no written contract between the writer and the student.
All Answers submitted that the key changes to the contracts were the following.
- Copyright was to remain with the writer, rather than transferring to All Answers.
- There was a term in the contract with the writers that stated: “You agree that when you do bid for a project and we allocate it to you, this is a binding contract for services between yourself and the customer.”
A matter of principal
The first tier tribunal (FTT) considered the above two points in detail. It found that updating those clauses did not achieve the objective of transferring the “core” obligations from All Answers to the writer.
In its summary, the FTT stated: “The circumstances of the transactions and overall business operations are the same before and after the updates to the contracts. The reality is that All Answers pays consideration to the writer for the supply of the service of preparing the academic work. All Answers assumes liability for the obligation to provide the customer a limited right to use academic work, of suitable quality, within the stipulated timescale, and are paid in return. We consider the terms of the updated contracts impose those “core” obligations on All Answers, and not on the writer, and are therefore consistent with commercial and economic reality that All Answers delivered the academic work.”
The key takeaway is that no legal relationship had been created between the writer and the student.
All Answers was still acting as principal, and VAT was due on the full amount paid by the student.
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Hilary Bevan has over 20 years of experience working in accountancy and tax. She is a qualified chartered certified accountant as well as a chartered tax adviser and an associate of the Institute of Indirect Taxation.
In 2018 Hilary set up her own independent consultancy firm, providing specialist VAT advice to firms of accountants and...