Earning a commission, surely that’s not subject to VAT?

The VAT liability of earning a commission is a subject we regularly get asked questions about on the VAT helplines. As per usual these days the answer is never as straightforward as you think it should be.

Commission income (also referred to as an agency fee, intermediary service, or a broker’s fee) occurs when a person is acting as a go between and facilitates or helps in arranging supplies between two other parties.

The general rule for earning commission is that it is a taxable supply at standard rate (SR) 20% in the UK, except in certain specific situations where the underlying transaction relates to a supply made abroad, or within the Finance or Insurance industry where we could potentially treat it as an Exempt supply.

When billing Business to Business (B2B), in most cases the general Place of Supply of Services rule (POSS) apply Place of supply of services (VAT Notice 741A) – GOV.UK (www.gov.uk) but if an individual (Business to Consumer – B2C) is billed then this changes e.g. a UK art gallery earns a commission on the sale of a customer’s painting which is in France when it is sold. If the UK agent is billing B2B the VAT liability is “where the supplier belongs” so SR when billed B2B in UK and Outside the Scope of UK VAT (OSS) when billed abroad.

However, if billing B2C we would need to look at where the underlying supply takes place. If the artwork is in the UK when sold, the commission charged would be subject to UK SR VAT. But if the artwork is in France when sold, the VAT liability on the invoice raised is that French VAT (not UK VAT) is to be charged to the B2C customer. This creates a requirement for the agent to be VAT registered in France. The best advice I can give here would be for your client to speak to an accountant in that country for more information on the local VAT rules.

An exception to the general rule would be if commission income is earned by a UK estate agent in relation to a property being sold in Spain, then the Land related POSS rules (LRS) kick in for both B2B and any B2C supplies. s 7.1 “If you supply services that directly relate to land, the place of supply of those services is where the land itself is located, irrespective of where you or your customer belongs or whether they’re in business or not.” Any B2B intermediary services other than LRS fall under the general POSS rules s 6.3.

Let’s now look at a situation where we have a client who is a sales agent and has an agreement with their supplier that they can earn a commission based on how much of the supplier’s products they sell. Normal VAT rules apply to this B2B transaction, this Commission income is SR when billed to a supplier in the UK. If this was billed to a supplier based abroad, the supply would follow the general rule under the Place of Supply of Services rules (POSS)s 6.3 and the place of supply would be where the supplier belongs so OSS.

The same rule applies for anyone who earns commission from merely passing on contact details. Let’s look at an estate agent who recommends a potential house buyer to an Independent Financial advisor for mortgage advice. This may well be related to an underlying financial transaction (and many transactions in the Finance industry can be EX supplies) but just passing on a referral is not seen by HMRC as negotiating terms of lending money, in fact HMRC goes as far as to say in their guidance VAT Notice 701/49: finance – GOV.UK (www.gov.uk) the completing of an application form would not be seen as an EX supply  s 9.3 Exempt supplies “would not include work done of a general nature such as administrative or clerical formalities”, so this commission income is SR.

If however, if a mortgage broker were to negotiate terms for a customer with a mortgage lender in an intermediary capacity, then this commission income would be an EX supply as they are actively engaging with and representing with both parties.

If the client is earning commission as an intermediary in the Insurance industry, e.g. as a broker, as long as the agent is somewhere in the chain of supply of a contract of insurance then the commission income is an EX supply Insurance (VAT Notice 701/36) – GOV.UK (www.gov.uk), other insurance related services remain SR.

Other points to consider.

If your client is making both taxable and exempt supplies then Partial exemption rules will apply, see N 706 Partial exemption (VAT Notice 706) – GOV.UK (www.gov.uk)

Also, advising on foreign VAT registration requirements is best left to an accountant in that country, they are the experts.

It has been introduced to resolve a VAT issue for businesses trading in second-hand motor vehicles in Northern Ireland that have been sourced from Great Britain and Isle of Man. Under the Northern Ireland Protocol, businesses in Northern Ireland cannot use the existing VAT margin schemes for motor vehicles which they have bought from Great Britain or Isle of Man. This meant that businesses had to account for VAT on the full selling price of those vehicles which in turn potentially increases the prices which are charged to end consumers or increase the costs to the business. The purpose of the new scheme is to allow businesses in Northern Ireland to remain in a similar financial position to those businesses that can apply margin schemes elsewhere in the UK. The new scheme is also available to EU VAT registered business that purchase eligible, second-hand motor vehicles in Great Britain and export them to the EU for resale.

This article does not provide detail on second-hand motor vehicles bought in Great Britain for export to the EU for resale. For more information regarding this I would recommend referring to HMRC’s guidance titled “Claim a VAT-related payment if you buy second-hand motor vehicles in Great Britain and export them to the EU for resale”

What has changed

Businesses that purchase vehicles from Great Britain & Isle of Man can no longer use the existing second-hand margin scheme when they move a vehicle to Northern Ireland to resell in Northern Ireland or the EU. The new scheme allows businesses to claim a VAT related payment instead, providing that:

• They buy and take possession of an eligible second-hand motor vehicle in Great Britain
• Move that vehicle to Northern Ireland with the intention of reselling it in Northern Ireland of within the EU
• The business has both a UK business establishment and a UK VAT registration. A business is established in the UK for the purpose of the scheme if it has a UK establishment with a permanent presence of both human and technical resources necessary to provide taxable supplies for which the business is required to account as a taxable person.

To use the scheme the eligible vehicle must be bought in Great Britain or Isle of Man and moved to Northern Ireland after 30 April 2023, with the intention of selling it. You cannot use the scheme if you intend the first use after moving it to Northern Ireland to be anything other than resale. This rules out using the scheme if you intend to use the vehicle in your business, for example as a pool car, or if you intend to use the vehicle privately, even if you intend to sell it afterward.

The vehicle can be moved to Northern Ireland on your behalf by a third party such as the seller or a haulage business. This does not prevent the scheme being used.

To use the scheme, details of the vehicle must be recorded in a stock-book. This must be a separate stock book that you might be using for any records which you keep for the second-hand margin scheme. The stock-book must contain specified information. The full list of information required in the stock-book can be found in HMRC’s published guidance titled “Check which records to keep for second-hand vehicles you move to Northern Ireland for resale”

You should also keep other evidence that you intend to sell the vehicle such as advertising it for sale.

HMRC’s guidance confirms that the scheme can also be used if repairs or other work needs to be carried out first. It also confirms providing the vehicle is held out for sale but is temporarily used for another purpose for a short period of time whilst trying to sell it, the scheme can be used. However, HMRC do not clarify what is meant by ‘a short period of time’. What one person considers short can be different to the next. The wording of the published guidance strongly suggests that providing that the vehicle continues to be advertised or held out for sale whilst it is being put to another purpose the scheme can be used to claim a VAT related payment.

How much can be claimed?

This is currently one-sixth of the value of the vehicle at the time it is moved to Northern Ireland. In most cases this will be the full purchase price of the vehicle. The recovery amount is based on the current VAT rate of 20% giving a VAT fraction of one-sixth. If the VAT rate changes in future, the payment claimed should be calculated accordingly based on the VAT rate in force at that time.

The payment should be claimed by treating it as if it is input tax and entering it into Box 4 of your VAT return.

Accounting for VAT when the vehicle is sold.

The precise treatment will depend on whether the vehicle is sold in the UK, sold to a VAT registered business in the EU or sold to a non-VAT registered customer in the EU.

Vehicles which are subsequently sold in the UK will be liable to VAT at the standard rate.

Vehicles sold to EU VAT registered businesses can be zero rated providing the customer has notified you of their EU VAT number, the goods are transported out of NI to a destination in an EU member state and an EC sales list is submitted accurately accounting for the supply. The customer will then account for acquisition tax in their own country.

Vehicles sold to non-VAT registered EU customers are subject to distance selling rules. Standard Rate UK VAT should be charged to the customer, unless you are over the distance selling threshold of £8818 (10,000 Euros) per calendar year. If you exceed the distance selling threshold you will be required to register and account for VAT in each EU member state where you make supplies or to register for the One Stop Shop (OSS). If you are below the distance selling threshold you also have the choice to voluntarily register in each EU member state or for the One Stop Shop. If you choose to do this, you must account for the VAT in the relevant member state or via the OSS.

Written by Nick Lovett, Tax Manager