Acting as agent – commercial and economic reality

All Answers Ltd

The taxpayer is an internet based company that trades under various names such as ‘UK’. Clients, essentially students, who would like to have an essay, dissertation or piece of coursework done for them, can go to the taxpayer’s website. The client then provides the required information, selects from a number of options and is provided a price that will vary on the required standard and length. The taxpayer does not write the material itself but has about 400 independent writers. The taxpayer places the details of the required work on a portal where the writers can bid for the assignment. The selected writer then produces the material and provides this to the taxpayer, who in turn provides the work to the client. The writers receive a third of the gross fee. The FTT notes that many of the writers are from the education sector, and the student will be holding out the material as their own. Therefore, the taxpayer’s business model is based upon the students and writers’ identities not being known to each other.

The taxpayer essentially argues that according to the contracts they are acting as agent for the client and the writer. In its view, neither of the contracts can be characterised as a sham and therefore there is no need to go beyond the contracts. Therefore, it argues that VAT is only due on its commission. By contrast, HMRC argue that when the client orders a piece of work, the economic reality is that the taxpayer is charging a price for the product that it agrees to supply. They add that whilst the notion of agency is ‘so carefully woven into their two sets of terms and conditions’ they lack both factual and economic reality - the only service provider is the taxpayer who chooses to use a sub-contractor to provide it with the work which they will ultimately supply to the client.

The parties referred to a number of cases. The taxpayer sought to rely on Secret Hotels2 Ltd SC [2014], arguing that the tax treatment should be determined by the contractual arrangements unless the contracts were a sham. However, the FTT noted the SC’s earlier comments which also states that “when assessing the issue of who supplies what services to whom for VAT purposes, regard must be had to all the circumstances in which the transactions takes place. HMRC relied upon Adecco UK Ltd CoA [2018] in which the Court found the taxpayer was acting as principal and VAT was due on 100% of the consideration it received.

Having considered the evidence, the FTT stated that it was left in no doubt that both the commercial and the economic reality of the factual situation dictates that there is only one supply to the client and that supply is made by the taxpayer. The introduction of the notion of agency is wholly artificial and was/is intended to disguise the reality that the taxpayer engages a sub-contractor to produce the deliverable it has contracted to provide. The FTT acknowledged that each set of Terms and Conditions is deliberately written so as to present a different outcome. The FTT added that those Terms and Conditions are not, in the strict sense, shams, but they have been deliberately honed in a bid to achieve an outcome which is wholly artificial.

The FTT set out a number of factors supporting its decision. This includes the fact that when the client looks at the website they would believe they are contracting with the taxpayer. The FTT also noted that, whilst there are commercial reasons for keeping the identity of the client / writer confidential, such confidentiality is not indicative of an agency relationship. The taxpayers appeal was dismissed.

It was agreed that if the taxpayer loses on the agency point, the parties will look at the place of supply point to the extent that services were provided to non-EU clients. The taxpayer also has a Judicial Review challenge ongoing regarding legitimate expectation.



On the principal v agency point this is another case where Secret Hotels2 has been used to try and support the argument that in the absence of a sham, the taxing outcome should follow the contracts. The FTT has refused to adopt this approach in this case, presumably because in its view the contracts do not reflect reality. The students and writers are not known to one another – the reality is that the student asks the taxpayer for an essay and the taxpayer commissions the writer to produce one, which the taxpayer then sells to the student.