In the dynamic realm of business, whether steering a private enterprise or a non-profit organization aspiring to make a social impact, one constant looms large – taxes. Amidst the myriad of taxes, VAT, or the rather awkwardly named Value Added Tax, emerges as a distinct challenge, particularly when entwined with agency relationships. Today, on the I Hate Numbers Podcast, we embark on a journey to decipher the intricacies of VAT within the realm of agent relationships

Exploring Agency Relationships:

As we delve into the podcast, we elucidate the essence of an agency relationship – a scenario where one acts on behalf of another. Drawing from our experience at I Hate Numbers, we often function as agents for numerous clients, engaging in conversations with tax authorities and handling tasks they might not have time for.

VAT Unveiled:

Moreover, VAT, a pivotal player in the tax landscape, manifests in different agency relationships. Two primary types, disclosed and undisclosed, dictate the buyer's awareness of the agent's role. In a disclosed agency relationship, transparency prevails, and the buyer is cognizant of the agent's representation. Conversely, in an undisclosed agency relationship, the agent operates more discreetly, with the buyer potentially unaware of the principal.

Navigating VAT Responsibilities:

The implications of VAT diverge based on the type of agency relationship. In an undisclosed agency setup, the agent shoulders the responsibility for the full VAT, charging it on the entire value of the transaction. Additionally, in a disclosed agency relationship, VAT obligations are limited to the commission, a more common scenario in the art world.

Common Pitfalls and Best Practices:

Consequently, amidst these intricacies, pitfalls often emerge. One common misstep involves failing to distinguish between collected funds and personal sales, leading to accounting headaches. Consequently, proper documentation and record-keeping become imperative, with contracts reinforcing the nature of agency relationships.

Responsibilities of Principals:

For principals, whether artists or performers, vigilance is key. Monitoring supply values is crucial, potentially triggering VAT registration. Simultaneously, robust paperwork clarifies responsibilities and safeguards against misunderstandings.

Conclusion:

In conclusion, we encourage agents and creative entities to seek assistance if navigating these waters seems daunting. Dive into our resources, stay informed, and elevate your financial literacy. Explore more on our website now. Don't miss our Free upcoming tax webinar on December 6th, offering insights into stress-free tax returns.

In the world of business, whether you are a private organisation or a not-for-profit organisation that wants to make a social impact, taxes are the inevitable part of your business landscape. One particular tax, VAT, or Very Awkward Tax, presents a real challenge. And it presents a challenge in a number of areas.

But on today's I Hate Numbers podcast, I'm going to be looking at that scenario where VAT and agency relationships interacts. It causes a bit of a head scratch for many people. And in this podcast, I'm going to be outlining what an agency relationship actually is, and it applies both a private and not for profit, artistic and creative organisations.

What the VAT treatment of that relationship actually is, and how we should approach it.

You are listening to the I Hate Numbers Podcast with Mahmood Reza. The I Hate Numbers podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

Hi folks, my name is Mahmood. I am the founder, director of I Hate Numbers and book of the same name. And my mission over the last 30 years has been helping thousands of business owners like yourself make more money, improve their financial literacy and understanding, reduce that stress and anxiety and tax as well and have the business lives

they aspire to. Who wouldn't want that? As a bit of a spoiler alert, by the way, folks, if you stay to the end, check out the show notes as well. There's a free. Yep. I said that word free webinar on taking the stress out of tax returns. This webinar is scheduled for December the sixth. It's a Q&A presentation about anything you need to do about how to complete your personal tax return, how to reduce your tax liability, and what to do if that situation arises, if you haven't got the money to pay your tax immediately.

More of that later, let's crack on with the podcast. Now, what is an agent? Now, we don't mean the spy type, the James Bond type, certainly, but it's that situation where you act on behalf of somebody else. So in my own business, in my accounting firm, I Hate Numbers,

I act as an agent for hundreds of our clients. So for example, where a conversation needs to be had with the tax authorities, HMRC, we will have that conversation on their behalf with due permission obviously. we can receive tax refunds on their behalf. We can have those conversations with the HMRC, our clients may not have the time or the incentive or the will to have.

We aren't actually the client as far as HMRC is concerned, we're the intermediary party. Now in another situation, let's say for example for a theatre, the theatre itself may act as an agent collecting revenues on behalf of the performer, on behalf of the artist. You may have an organisation like an employment agency, which puts together employee and employer, they act as that intermediary, the agent, acting on behalf of, in that situation, probably two parties, both the employer and the employee.

When artwork is sold, the gallery that's hosting that piece of work will be acting as an agent, selling the artwork on behalf of the artist. In a former life, I used to be a music manager. And I would manage bands. I'd act on their behalf. I would be the intermediary, organising the gigs, the tours, the events, doing all of the logistics, promotion, making sure the artists had the best experience they could do.

And in that situation, I'm acting as an agent. Now having got a feel for what an agency relationship actually is, how does that impact on VAT? Now VAT rears its head in a number of ways. And the official, by the way, translation of VAT is Value Added Tax. Bit of a history here for you. VAT arose in the United Kingdom when we joined the European community in 1971.

It became effective in 1972. We have since left the European Union, but VAT rules still abound. A VAT, by the way, or sales taxes in some other jurisdictions, is one of the most popular methods for governments and tax authorities to collect tax revenue. VAT is the second biggest contributor to the coffers of HMRC, just below income tax.

Now for VAT situations, first of all, there are two main agency relationships that can exist. There's something called a disclosed agency relationship, and there's an undisclosed agency relationship. Such distinction is not too complicated in terms of naming, but what does that actually mean? Now in a disclosed agency relationship, the buyer,

the customer is fully aware and made aware that the agent is acting on behalf of the principal. The principal, by the way, being effectively the seller of the art, the performer, the actual employee, or the employer if you're an employment agency. The client is in my example that I quoted earlier. So if a shop is selling works of art on behalf of an artist, and this information is transparent to the buyer.

The buyer is made aware of that, then it falls under the category of a disclosed agency relationship. There might be some paperwork involved, in fact there should be here, reinforcing what that relationship is. I'll touch more on that later on. Now, on the flip side, in an undisclosed agency relationship, the buyer may not be aware of the actual principle in the transaction, and they may be under the impression the agent is actually the person who owns that work of art, operating under their own auspices.

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And the agent here is probably a little bit of spy language and terminology, operating more in the shadows. And the true nature of the relationship may not be apparent to the parties involved. In this particular case the agent becomes the principal certainly in terms of representation. So what's the VAT implications?

If you are a undisclosed agent and you're considered to be the principal then in the eyes of the VAT, the responsibility of the full VAT falls on your shoulders. You charge the VAT for the full value of the work that you're selling the value of the supply if we're going to put on our VAT hats. You recover the VAT in full and you're responsible for accounting for that, disclosing it and remitting it to the requisite authorities.

Not only did you charge the full amount of VAT on the value of that supply, you can also recover any VAT that's linked to that transaction as well. Now, on the other hand, if you're operating as a disclosed agent, which is more common, by the way, especially when it comes to selling works of art, managing performers, employment situations, then the VAT situation is a slightly different approach.

In this case, the VAT for the agent is due for them only on the commission they charge. So a typical relationship in a disclosed agency relationship, for example, a piece of work may be sold, a commission is charged based on the value of that piece of art. The agent would pay VAT on the value of that commission, not the entire value of the work of art.

Now, the principle, whether it's an artist, a band, a performer, has the responsibility for the VAT on the complete value of the supply, the value of that piece of work. So if a piece of work, a painting, for example, is valued at a thousand pounds and the agent has a commission of 20%. The agent will be charging VAT on the 20% of that 1000 pounds i.e. 200 quid, and the artist would be responsible for the 1000 pounds.

Now, this presupposes by the way that the artist is VAT registered. If they're not VAT registered, there's no VAT for them to pay out. Obviously, if the agent isn’t VAT registered, then VAT is not relevant. However, you've got to keep a track on these values, by the way, because it may reach that trigger point where you have to register for VAT in the future.

Check out the show notes, by the way, for a link on a previous podcast recording on that. Now, here's where mistakes can happen, and I've seen it before. Now, for example, if the sale of a piece of art or tickets to performance, sometimes what will happen is that the agent will record the money they take for that transaction completely as a sell and that's not quite correct.

So in the example I've just quoted where a piece of art is sold for a thousand pounds, well that's its value and the agent earns a 20 percent commission. The 20 percent commission is the sale for the agent. The money that's been collected is collected on behalf of the principal and that should be ideally recorded as some form of liability, a creditor.

And it's recorded as a payment on account. Do not mix that up with your own sales. Recognise that money that you owe to that principal. You can certainly take your commission out of that and remit the balance. But it requires keeping a record of the amount you're collecting on behalf of your principal.

separate from the main cells in your organisation. Failing to do so can cause lots of headaches and problems when it comes to recording your financial statements, producing your financial statements, what your level of profitability is, and also, VAT officers would not be very happy with that as well. I want to round up with the responsibilities of the principal in this relationship.

So whether you're an artist, a performer, the landlord, renting out commercial property, it's essential to keep an eye on the value of the supplies being made. As I've said, just in case it triggers a VAT registration. Paperwork and documentation is really important in this situation and paperwork and documentation, in my opinion, is always good in any business relationship because it clarifies the responsibilities, clarifies what happens if things go wrong.

And if you have a situation where you're doing work on behalf of somebody else, you've got an agency principal relationship and have a contract which reinforces wshat the responsibilities are, what the nature of that relationship actually is, make sure that's demonstrated to people you're selling those items to,

so they clearly know that you're acting as that intermediary. Now folks, I hope you found this episode of use and of value. If you are an agent or principal, you're a creative organisation, you're an artist, you're somebod\y who effectively acts on behalf of somebody else and you're still scratching your head then obviously drop us a line, contact me and see where we can help you.

Remember the tax webinar coming up on the 6th December There's a link in the show notes for the registration and it's completely free It's aimed at effectively the 2 million people who are finding their return quite close to the wire and also for the 660 000 people who are late. Well we don't want that.

We don't want you to unnecessarily give your money to HMRC. Keep that in your pocket. I hope you can join me on the webinar. And until next week, happy agency. We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.