A principal accounts for VAT on the full value of what it sells, while a true agent accounts for VAT only on its own fee or commission, because the underlying supply passes directly between its principal and the third party. Undisclosed agents who act in their own name are different: under section 47 of the VAT Act 1994 they are treated as buying and selling the goods (and, for services, may be treated the same way), so they account for VAT on the whole amount.

Why does the agent or principal question change the VAT bill so much?

Agents are always involved in two supplies at once: the supply between their principal and the third party, and their own supply of agency services to the principal (VAT Notice 700 paragraph 22.3; HMRC’s VAT Taxable Person manual VTAXPER35500). If a business is genuinely an agent, it only accounts for VAT on its commission. If it is a principal, it accounts for VAT on the full price the customer pays.

HMRC explains the revenue risk at VTAXPER36000. Treating a principal as an agent can mean output tax is declared on a much smaller value. Examples include salons and driving schools that recast staff as independent operators with the business acting as their agent, and employment businesses that restructure so they charge VAT only on commission rather than on the full cost of temporary workers. The opposite risk also exists: a selling agent for zero rated produce might claim to be a principal so that its margin is zero rated too.

HMRC accepts that arranging a business through a genuine agency is legitimate, provided both parties have clearly consented to the relationship and the day to day facts are consistent with it.

How does HMRC decide whether someone is an agent?

VAT law says how agents account but does not define an agent (VTAXPER36580). HMRC relies on two cases: Johnson, where the court held agency requires two consenting parties, one agreeing that the other will act for it; and Garnac Grain, which says the relationship arises from consent, express or implied, even if the parties do not recognise or even disclaim it.

Labels do not decide the question. Notice 700 paragraph 22.2 points out that distributors, sole concessionaires and motor dealers who call themselves agents usually trade as principals, while solicitors and architects, who normally act as principals, sometimes arrange supplies as agents. In P and R Potter the Court of Appeal looked past the words agency and commission and weighed the facts for and against.

VTAXPER36820 lists six factors normally present in a genuine agency:

  1. Title. For goods, ownership stays with the principal throughout.
  2. Identity. The goods or services bought or sold for the principal are clearly identifiable.
  3. Value. The principal knows the exact price and receives any discounts the agent obtains.
  4. Separation. The agent’s fee is separately identifiable, even if calculated as a percentage. In PBK Catering, discounts the agent kept were held to be extra consideration for its services.
  5. No change. The agent does not alter the direction of the main supply.
  6. Nature and value. The agent does not alter the nature or value of the supply it arranges.

VTAXPER36900 then requires a consistency check: does the parties’ conduct match the agreement? In Trafalgar Tours and Allied Medicare Nursing Services, new agency agreements failed because working practices had not changed. In Reed Personnel Services the High Court accepted that the tribunal could look beyond the contracts at the whole operation.

How does a disclosed agent account for VAT?

Where the agent acts in the name of the principal and invoicing runs between the principal and the customer, the agent’s only supply for VAT is its service to the principal (Notice 700 paragraph 22.5). That holds even if the agent holds stock, delivers goods or handles payments.

The liability of the agent’s own service can differ from the supply it arranges. Under paragraphs 22.4.1 and 22.4.2, arranging a taxable supply is a standard rated service, but arranging an exempt supply may itself be exempt, depending on the relevant exemption. Paragraph 22.4.3 allows zero rating in some cases, such as arranging exports of goods.

Under paragraph 23.1.1, if the principal is VAT registered the principal issues the VAT invoice to the customer. If the principal is not registered, no VAT is due on the arranged supply, but the agent must charge VAT on its commission and hold evidence, such as a signed declaration from the principal, that it was selling on the principal’s behalf.

What is an undisclosed agent and how is it treated?

An undisclosed agent, or commissionaire, contracts with the third party in its own name, often so that the principal can stay anonymous (Notice 700 paragraph 22.6). Section 47 of the VAT Act 1994 then applies:

  • Goods: section 47(2A). Where goods are supplied through an agent acting in its own name, the supply is treated as both a supply to and a supply by the agent. This is mandatory.
  • Services: section 47(3). Where services are supplied through an agent acting in its own name, HMRC may treat the supply in the same way. VTAXPER37900 explains that in practice HMRC lets agents choose, provided the principal and agent are both VAT registered and the supplies are taxable at a positive rate.
  • Electronic and telecommunication services: section 47(4). Supplies through an agent acting in its own name are always treated as supplies to and by the agent.

Under section 47(2A) or 47(3) the agent accounts for output tax on the onward supply and may reclaim the VAT charged to it, as well as charging VAT on its own commission. VTAXPER37900 adds that the input tax claimed must equal the output tax declared, and both must go on the same return, with the tax point fixed by the underlying supply, as the High Court confirmed in Metropolitan Borough of Wirral.

Does the commission still carry VAT separately?

For domestic supplies, normally yes. The example in Notice 700 paragraph 23.1.2 has a seller supplying goods for £100 plus £20 VAT through an agent acting in its own name, with a 10% commission:

Invoice Net VAT at 20%
Seller to agent £100.00 £20.00
Agent to buyer £100.00 £20.00
Agent to seller for commission £10.00 £2.00

Only £108 may actually pass from agent to seller, but the full invoicing must still be followed.

Cross border cases are different. VTAXPER37950 explains that since 2000 UK undisclosed agents involved in international supplies are treated solely as principals, in line with the commissionaire model used in civil law countries. The agent makes no separate supply of agency services and its commission is subsumed in the value of its onward supply. Notice 700 section 24 says this is compulsory for international supplies and optional for wholly domestic ones. It is a VAT treatment only and does not change the agent’s legal status or its treatment for other taxes.

Does acting as agent affect VAT registration?

Yes. Notice 700 paragraph 22.7 says an agent’s taxable turnover includes both its own supplies to principals and any taxable supplies it makes in its own name. An undisclosed agent can therefore pass the VAT registration threshold far sooner than its commission alone would suggest.

What mistakes should I avoid?

  • Relying on a contract alone. If invoices, accounts and stock records treat sales as your own, HMRC will argue you are a principal. VTAXPER36900 notes that accounts showing commission as sales undermine an agency claim.
  • Keeping undisclosed margins. A true agent cannot make a secret profit; retained discounts become extra consideration.
  • Claiming input tax without declaring output tax under section 47(3). HMRC’s remedy is to disallow the input tax.
  • Confusing the accounting and VAT tests. Whether revenue is shown gross or net in the accounts is decided under the accounting standards, not VAT law; see principal or agent for revenue. The VAT answer can differ.
  • Treating your own costs as paid for the client. Costs passed on only escape VAT if they meet the strict conditions in disbursements vs recharges.

Second hand goods sold through an agent acting in its own name may also be within the VAT margin scheme, as Notice 700 paragraph 22.6 notes. Agency status is often tested in a HMRC VAT compliance check.

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Sources

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.