Under the revised FRS 102 Section 23, which applies to accounting periods beginning on or after 1 January 2026, a business that controls a good or service before it passes to the customer is a principal and reports the full amount the customer pays as revenue. If its promise is only to arrange for someone else to provide the good or service, it is an agent and reports just its fee or commission. The test is control, assessed separately for each performance obligation, with three listed indicators to help.
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Why does the choice between gross and net make a difference?
Profit is the same either way: a principal shows the supplier’s cost as cost of sales, while an agent leaves both the customer receipt and the supplier payment out of revenue and costs. What changes is turnover, and turnover drives several other things:
- Company size. A company qualifies as small under section 382 of the Companies Act 2006 if it meets two of three limits, one of which is turnover of not more than £15 million, the figure substituted from 6 April 2025. Reporting gross can push a business over the limit, affecting audit exemption and filing options.
- Ratios and covenants. Gross margin percentages, lender covenants based on turnover and earn outs on a business sale all depend on the presentation.
- Comparability. Two businesses doing similar work can show very different turnover if one acts as principal and the other as agent.
Section 474 of the Companies Act 2006 defines turnover as amounts derived from providing goods and services, after deducting trade discounts, VAT and other taxes based on those amounts.
What does the revised Section 23 require?
The Periodic Review 2024 replaced the old Section 23 with a five step model based on IFRS 15, effective for accounting periods beginning on or after 1 January 2026 with early application permitted (paragraph 1.37). The principal or agent rules are in paragraphs 23.36 to 23.40.
When another party is involved in providing goods or services to a customer, the business must decide whether the nature of its promise is to provide the specified good or service itself, making it a principal, or to arrange for the other party to provide it, making it an agent (paragraph 23.36). A specified good or service is a distinct good or service, or a distinct bundle. The decision is made for each performance obligation, so one contract can contain both.
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How do you decide who has control?
Paragraph 23.37 says a business is a principal if it controls the specified good or service before it is transferred to the customer. It might obtain control of:
- a good or other asset from the other party, which it then transfers to the customer;
- a right to a service to be performed by the other party, giving it the ability to direct that party to provide the service to the customer on its behalf; or
- a good or service from the other party, which it combines with other goods or services to provide the specified good or service.
Paragraph 23.38 lists indicators that a business is a principal, while making clear the list is not exhaustive:
- it is primarily responsible for fulfilling the promise to provide the specified good or service;
- it has inventory risk before the good or service is transferred, or after transfer if the customer has a right of return;
- it has discretion in setting the price.
The indicators support the control assessment rather than replacing it. Credit risk is not among the listed indicators, so bearing the risk of a customer not paying does not on its own make a business a principal.
How does this work in practice?
Illustration only. A customer pays £100 for an item. The business pays the supplier £85 and keeps £15.
| Presentation | Revenue | Cost of sales | Gross profit |
|---|---|---|---|
| Principal (gross) | £100 | £85 | £15 |
| Agent (net) | £15 | £0 | £15 |
Consider two businesses using that pricing:
- An online marketplace lists goods for independent sellers, who set their own prices, hold the stock and ship directly. The marketplace takes payment and passes on the balance after its fee. It never controls the goods, has no inventory risk and no pricing discretion, so it is an agent and reports £15 (paragraph 23.40).
- A distributor buys stock in advance, holds it in its own warehouse, sets its own selling price and handles returns. It controls the goods before sale, so it is a principal and reports £100 (paragraph 23.39).
Harder cases sit in between, such as travel bookings, recruitment of temporary staff, subcontracted services and software resold with support. Each needs the contracts read and the control question answered for each distinct promise.
What about amounts collected for others?
Paragraph 23.41 defines the transaction price as the consideration the business expects to be entitled to, excluding amounts collected on behalf of third parties, such as some sales taxes. Recharges and disbursements made purely as a go between are therefore kept out of revenue, while costs the business incurs as principal and passes on are revenue.
Does the VAT treatment give the same answer?
Not necessarily, and the two questions should be answered separately. HMRC’s VAT guidance at VTAXPER36820 tests agency using six factors: title, identity, value, separation, no change in the direction of the main supply, and no change in its nature and value. Under section 47 of the VAT Act 1994, an undisclosed agent acting in its own name is treated as a principal for VAT in some cases, and HMRC states at VTAXPER37950 that this treatment applies for VAT purposes only and has no impact on other taxes. HMRC also notes at VTAXPER36000 that wrongly treating a principal as an agent can reduce output tax considerably, so it looks closely at these arrangements. A business can be an agent for VAT and a principal in its accounts, or the reverse. See the VAT registration threshold for how turnover is measured for registration.
What has to be disclosed?
Paragraph 23.131 asks for revenue to be disaggregated into categories showing how economic factors affect it, and lists revenue earned as an agent or as a principal as one possible category. Paragraph 23.135(c) requires a description of the goods or services promised, highlighting any promises to arrange for another party to provide them. Small entities applying Section 1A must give the performance obligation disclosures in paragraphs 23.135(a) to (c) under paragraph 1AC.32B.
On first applying the revised section, ICAEW notes that preparers can choose a cumulative catch up approach, adjusting opening retained earnings without restating comparatives, or full retrospective restatement. Because profit is unchanged, a principal or agent reassessment usually affects turnover and costs rather than equity. More on the wider changes is in FRS 102 changes from January 2026.
What mistakes come up?
- Deciding once for the whole contract instead of for each performance obligation.
- Treating legal title passing for a moment as proof of control.
- Relying on credit risk or on who invoices the customer as the deciding factor.
- Assuming the VAT treatment settles the accounting presentation.
- Changing from gross to net, or the reverse, without checking the effect on size thresholds, audit exemption and lending covenants.
- Leaving out the narrative disclosure of agency arrangements now required even for small entities.
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Related Accountapedia entries
- Turnover recognition under FRS 105
- The five step revenue model in FRS 102
- Consignment stock: whose balance sheet is it on
- Sale or return and customer rights of return
- Bookkeeping for marketplace and payment processor payouts
- Acting as agent or principal for VAT
Sources
- Financial Reporting Council: FRS 102 September 2024 tmKYWO6
- legislation.gov.uk: Act 2006 c. 46, section 382
- legislation.gov.uk: Act 2006 c. 46, section 474
- GOV.UK: www.gov.uk
- GOV.UK: www.gov.uk
- GOV.UK: www.gov.uk
- ICAEW: Frs 102 amendments revenue recognition
Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.