UK: Taxpayer acting as principal and not agent for VAT purposes (First-tier Tribunal decision)

The First-tier Tribunal on 23 August 2023 dismissed an appeal by a platform company facilitating the sale of academic papers (essays, coursework, etc.), finding that the company was acting as principal as opposed to an agent for value added tax (VAT) purposes.

The case is:  All Answers Ltd. v. HM Revenue & Customs, [2023] UKFTT 737 (TC).

Customers using the taxpayer’s platform could order academic work written by third parties who were not employed by the taxpayer. The taxpayer retained approximately two-thirds of the fee paid for the work, and the writer received the remaining third. The taxpayer took the position that it merely acted as the writers' agent, and that the sale of academic work was made by the writer to the customer. HMRC disagreed and argued that the company was acting as principal in relation to the supply of the academic work and must account for VAT on the total fees paid by the customer. It also contended that the company paid the writers consideration for a separate sale of services.

In a July 2020 decision, the Upper Tribunal held in favor of HMRC that the taxpayer was liable for VAT on its total fees charged because the writers who produced the work were not the party selling to the customers. It reached this conclusion by interpreting the contractual terms between the parties to determine whether the obligation to provide the academic work was imposed on the taxpayer or the writer. The tribunal observed that a customer purchased the work from the taxpayer's website, paid the taxpayer directly for the work, and could only address its concerns about quality and timeliness to the taxpayer. It also highlighted the fact that when writers submit work to the taxpayer's portal, they effectively transferred all of their copyright in the works to the taxpayer, and only the taxpayer could provide the customer with intellectual property rights. Further, the tribunal said it was irrelevant that the writer, and not the taxpayer itself, was directly liable under a "no-plagiarism guarantee" in the contract to pay the customer if plagiarism was discovered.

Following this decision, the taxpayer updated the terms of its contracts with its customers and writers to be consistent with its position that it held an agency relationship with both the writer and the customer. The taxpayer then filed an appeal against an HMRC assessment for the relevant period arguing that such revisions altered its VAT obligation. The First-tier Tribunal dismissed this appeal, relying on the July 2020 decision of the Upper Tribunal. It held that the circumstances of the transactions and overall business operations were the same before and after the updates to the contracts. Notwithstanding the updates, the “core” obligations were still imposed on the taxpayer, and not on the writer, and were therefore consistent with the commercial and economic reality that the taxpayer delivered the academic work.

Digital platforms facilitating the sale of goods and services for underlying sellers who use their platforms, may yet be subject to VAT for the entire transaction in spite of contractual terms that are drafted to expressly avoid this position. This applies, especially where the “commercial and economic reality” of said transaction implies the platform is the principal for VAT purposes. Digital platforms thus need to carefully review their arrangements in which they act as an agent, to avoid the risk of potentially material assessments and penalties for under-accounting for VAT.
 

For more information, contact a KPMG tax professional:

Philippe Stephanny | philippestephanny@kpmg.com

Chinedu Nwachukwu | chinedunwachukwu@kpmg.com

Clarissa Vogelaar-Kelly | clarissa.vogelaar-kelly@kpmg.co.uk

Tim Jones | tim.jones2@kpmg.co.uk