VAT and agents can create a real head scratch.

You may collect money for somebody else, deduct a commission and pass the balance across. But whose sale is it? Who accounts for VAT? Does the whole amount belong in your turnover, or just your fee?

The answer depends on the agency relationship.

For VAT purposes, one of the most important distinctions is whether we are acting in the name of our principal or acting in our own name.

In other words, are we clearly the intermediary, or do we appear to the customer to be the person making the supply?

About this episode

VAT, or Very Awkward Tax as we sometimes call it, becomes even more awkward when agents and principals are involved.

An agency relationship simply means one person or organisation acts on behalf of somebody else.

That could be:

• an accountant dealing with HMRC for a client
• a gallery selling artwork for an artist
• a theatre selling tickets for performers
• a music manager organising work for an artist
• an employment business bringing parties together

Not the James Bond type of agent. No tuxedo or Aston Martin required.

What matters for VAT is the commercial reality: who is making the supply, who the customer believes they are dealing with, whose name appears on the invoice and what the contracts actually say.

What is an agent for VAT purposes?

HMRC broadly treats you as an agent where you act for, or represent, another person called the principal when arranging supplies of goods or services.

The relationship needs to be genuine.

It can be written, verbal or established through the way the parties conduct themselves, but you should be able to show HMRC that you are genuinely arranging transactions for somebody else rather than trading on your own account.

A proper agent will not normally own the goods being sold or alter the nature or value of the principal's supply.

This distinction matters because VAT follows the actual supply chain, not simply the label you put on your business.

Calling yourself an "agent" does not automatically make you one for VAT purposes.

There are usually two supplies

When an agent is involved, there will often be at least two separate supplies:

1. the underlying supply between the principal and the customer, and
2. the agent's own service to the principal, usually in return for a fee or commission.

Keeping those two supplies separate is one of the keys to getting the VAT right.

For a wider VAT foundation, see our guide to VAT in the UK and how it works.

Disclosed agents: acting in the principal's name

A disclosed agency relationship is the easier one to picture.

The customer knows that the agent is acting for somebody else.

Imagine an art gallery selling a painting for an artist.

The buyer knows who the artist is and understands that the gallery is arranging the sale rather than selling its own painting.

In that situation, the underlying supply is between the artist, the principal, and the buyer.

The gallery has a separate supply of agency services to the artist.

If the agency service is taxable and the gallery is VAT registered, the gallery accounts for VAT on its commission or fee.

The artist deals with the VAT on the underlying artwork sale according to their own VAT status and the VAT liability of that supply.

A simple disclosed agency example

Suppose an artwork sells for £1,000.

The gallery earns a commission of 20%, so its fee is £200.

The £1,000 does not automatically become the gallery's sales income simply because the money passes through its bank account.

The gallery has collected the sale proceeds on behalf of the artist.

Its own income is the £200 commission.

If the gallery's agency service is standard-rated and it is VAT registered, VAT applies to that £200 fee.

The artist separately considers whether VAT is due on the £1,000 artwork supply.

Undisclosed agents: acting in your own name

An undisclosed agency relationship works differently.

Here, the agent acts in their own name and the customer may not know who the underlying principal is.

This is the more secret-agent version of the arrangement.

For VAT purposes, HMRC can treat an agent acting in their own name as taking a much fuller part in the supply chain.

For goods, where the agent issues an invoice in their own name, the transaction can be treated as though the goods were supplied to the agent and then supplied onwards by the agent.

That means the underlying transaction may appear in the agent's VAT accounting as both an incoming and an outgoing supply.

The agent may also have to account separately for their agency service or commission, depending on the particular arrangement.

The exact treatment can become more technical for services, international transactions and margin-scheme goods, so this is an area where the contract and invoicing arrangements matter enormously.

Disclosed vs undisclosed agency at a glance

Disclosed agencyUndisclosed agency

Customer knows the agent acts for a principal

Agent acts in their own name

Underlying supply normally remains between principal and customer

Agent may be treated as receiving and making the underlying supply for VAT

Agent normally accounts for its own agency fee

Underlying transaction may also run through the agent's VAT records

Principal deals with VAT on the underlying supply

Agent may account for output VAT on the onward supply

Do not confuse money collected with your own sales

This is one of the most common practical mistakes.

An agent may receive £1,000 from a customer, deduct £200 commission and send £800 to the principal.

That does not necessarily mean the agent made £1,000 of sales.

If we are genuinely acting in the principal's name, the money collected for the principal is money we owe to them.

It should normally be recorded separately from our own income.

Think of it as money passing through our hands rather than money belonging to us.

Mix the two together and suddenly turnover, profit and VAT reporting can all become distorted.

Invoices need to match the agency relationship

The paperwork should tell the same story as the commercial arrangement.

Where we act in the principal's name and the principal is VAT registered, the VAT invoice for the underlying supply should normally be issued by the principal to the customer, either directly or through us.

We then invoice the principal for our own agency services.

Where we act in our own name, different invoicing rules can apply because we may be treated as part of the supply chain for VAT purposes.

So do not decide the VAT treatment after the invoices have already gone out.

Set up the relationship correctly first.

For the wider invoice rules, see our guide to VAT invoice requirements.

Your contract matters

A written agreement is not the only way an agency relationship can exist, but it is extremely useful evidence.

The contract should make clear:

• who the principal is
• who the agent is
• what the agent is authorised to do
• whether the agent can enter contracts in their own name
• who sets the selling price
• who owns the goods or provides the service
• who bears commercial risk
• how commission is calculated
• who issues invoices
• who receives customer money

Most importantly, the paperwork needs to reflect what actually happens.

A beautifully drafted contract will not rescue an arrangement where everyone behaves differently in practice.

VAT registration for agents and principals

Both parties need to monitor their own taxable turnover.

The current compulsory UK VAT registration threshold is £90,000 of taxable turnover.

For a disclosed agent, the agent's taxable turnover will usually include its taxable fees and commissions, rather than automatically including all money collected for principals.

The principal needs to monitor the value of their own taxable supplies.

If the agent makes supplies in their own name, those supplies can also be relevant to the agent's VAT registration position.

This is another reason why getting the agency classification right matters before the numbers start building up.

What if the principal is not VAT registered?

If the principal is not VAT registered, they do not simply add VAT to their underlying sale.

But if the agent is VAT registered and charges a taxable agency fee, the agent may still have VAT to account for on that fee.

So the VAT position of the principal and the VAT position of the agent need to be considered separately.

One party being outside VAT does not automatically take the other party outside VAT as well.

Common VAT and agency mistakes

• Calling yourself an agent without having a genuine agency relationship.
• Recording all money collected for a principal as your own turnover.
• Charging VAT on the entire transaction when you are only making an agency supply.
• Charging VAT only on commission when the arrangement actually makes you a principal for VAT purposes.
• Failing to keep contracts and evidence showing the nature of the relationship.
• Using invoices that contradict the stated agency arrangement.
• Ignoring the VAT registration threshold for either the principal or the agent.
• Assuming every employment, travel, ticketing or marketplace business follows the same agency VAT treatment.

VAT and agents: practical checklist

1. Identify the principal. Who actually owns the goods or makes the underlying supply?
2. Confirm whether you really are an agent. Do the agreement and working practices support that?
3. Decide whether you act in the principal's name or your own name.
4. Map the supplies. Separate the underlying transaction from the agency service.
5. Check each party's VAT status.
6. Make sure invoices match the commercial reality.
7. Separate client money from your own sales in the accounts.
8. Monitor taxable turnover for VAT registration.
9. Review unusual arrangements before invoicing. Especially international supplies, margin schemes and sectors with special VAT rules.

FAQs

What is an agent for VAT purposes?

An agent acts for or represents a principal when arranging supplies of goods or services. The relationship must genuinely exist and should be supported by the agreement and the way the parties actually operate.

Does an agent charge VAT on the full sale price?

Not necessarily. If the agent acts in the principal's name, the agent will normally account for VAT on its own taxable fee or commission, while the principal deals with the underlying sale. If the agent acts in its own name, different rules can apply.

What is a disclosed agent?

A disclosed agent is an intermediary whose role and principal are apparent to the customer. The underlying supply normally remains between the principal and the customer.

What is an undisclosed agent?

An undisclosed agent acts in their own name, so the third party may not know the identity or involvement of the principal. For VAT purposes, the agent may be treated as receiving and making the underlying supply.

Does money collected for a principal count as my turnover?

Not automatically. In a genuine disclosed agency arrangement, money collected on behalf of the principal is normally distinguished from the agent's own fee income. The exact VAT treatment depends on the contractual and invoicing arrangements.

What is the current VAT registration threshold?

The compulsory UK VAT registration threshold is currently £90,000 of taxable turnover. Businesses below the threshold can also choose to register voluntarily.

Episode Timecodes

• 00:00 - VAT and agency relationships
• 02:08 - What is an agent?
• 02:48 - Theatre, employment and creative-industry examples
• 03:18 - Galleries, artists and music management
• 04:26 - Disclosed and undisclosed agency
• 06:01 - VAT treatment of an undisclosed agent
• 06:50 - VAT treatment of a disclosed agent
• 07:13 - The £1,000 artwork and commission example
• 07:56 - Where accounting mistakes happen
• 08:54 - Responsibilities of the principal
• 09:39 - Contracts and documentation

Related episodes and guides

• VAT in the UK: How It Works and How to Stay Compliant
• What Are Your VAT Responsibilities?
• What Is VAT Reverse Charging?
• VAT Invoice Requirements

Key takeaway

With VAT and agents, the first question is not "how much VAT do we charge?"

The first question is: who is actually making the supply?

If we act transparently in our principal's name, the underlying supply normally remains between the principal and customer, while we account for our own agency service.

If we act in our own name, the VAT rules may pull us further into the transaction and treat us as receiving and making the underlying supply.

Get the relationship clear, make the contracts and invoices agree with it, keep principal money separate from your own income and monitor the VAT position of both parties.

Do that and Very Awkward Tax becomes considerably less awkward.

Further Support

If you act as an agent, use agents in your business or are unsure whether you are actually trading as principal, you can contact us for an initial chat.

You can also use our free online business calculators to support your wider business, VAT and cash-flow planning.

For more practical tax and finance guidance, visit the I Hate Numbers YouTube channel, or listen and follow on Apple Podcasts.

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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.

00:05:4

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.