This month’s Chartered Accountants Tax Case digest looks at an Upper Tribunal (“UT”) VAT case that centred on whether a company involved was the provider of a service meaning output VAT should be charged to the customer on the full price paid or if it merely acted as an agent for other service providers resulting in output VAT only being chargeable on the element of the consideration retained by them.

Despite the company’s contract with its customers being formulated in such a way as to create an agency relationship, the UT found that the company was still acting as a principal when providing its service as a result of its legal relationship with its customers. That was because it assumed complete liability for the obligation to provide the academic work.

Background

All Answers Ltd, the Appellant in the case, is the operator of a number of websites in the UK, where students can order and buy essays, dissertations or pieces of coursework written on their behalf.

Once a student orders an essay, the relevant piece of work is advertised on a separate portal where writers (which can be a lecturer, teacher, or PhD student) can bid to take on the work. The essays are offered as model answers to help inspire the student when writing their own work. However, it is not outside the realm of possibility that students purchasing model pieces of work in this way might try to pass off this as their own.

At no point does the Appellant disclose the identity of the writer to the customer or vice versa. The Appellant and the writer of a particular piece of work share the fee paid by the customer between them with the Appellant generally retaining around two thirds of that fee and the writer receiving the remaining one third. Payment for the piece of work is made direct to the Appellant by the customer placing the order.

HMRC’s view was that the company sold the essay writing service as principal meaning it was, therefore, liable to account for output tax on the full fee charged to students. As a result, HMRC assessed the company for approximately £1 million in underpaid output VAT covering a three-year period.

HMRC contended that the Appellant makes a single standard-rated supply of the academic work to a customer and should account to HMRC for VAT on the full amount paid by them. The logic of HMRC’s case is that, when the Appellant pays the writer, it is paying the writer consideration for a separate supply made by the writer to the Appellant. However, since writers tended not to be registered for VAT purposes, the Appellant is not entitled to a credit for any input tax incurred in respect of this separate supply.

The Appellant argued that it is acting as a writer’s agent in relation to the supply of the academic work, matching customers with essay writers, and that this was supported by its contracts. Therefore, the supply of the academic work is made by the writer to the customer meaning the Appellant is not obliged to account for VAT in respect of that element of the supply. However, it acknowledged that it makes a supply in respect of its element of the consideration received and therefore accepted that it is obliged to account for VAT in relation to that element of the supply.

The difference between the parties was whether the Appellant is obliged to account to HMRC for VAT on the full amount received from the customer and not just on the element retained by it.

The First-tier Tribunal (the “FTT”) found in HMRC’s favour. Having examined the terms and conditions which were written with the aim of creating an agency relationship, the FTT decided to put the contracts aside and instead regarded the service as provided by the company as principal. This meant VAT was due on the full payment received from the student.

All Answers Ltd appealed the decision to the UT, on the basis that the FTT had erred in law when it discounted the contracts, arguing that those contracts made it clear they were acting in an agency capacity.

Decision

The UT ultimately reached the same conclusion as the FTT and dismissed the company’s appeal. However, it considered that the contracts should not be overlooked. The effect of the contracts and the question of commercial and economic reality were, therefore, both considered by the UT in reaching its judgement.

Even though the writer, not the Appellant, could be directly liable to a customer under the “no plagiarism guarantee” did not alter their conclusion. The effect of that guarantee was, in reality, only to provide assurance to the customer that the work provided was original. This did not alter the fact that it is the Appellant, and only the Appellant, who makes the supply of the academic work.

Despite the contracts referencing to an agency relationship, the legal relationship between the Appellant and its customers under which the company assumed complete liability for the obligation to provide a limited right to use the academic work of suitable quality within the stipulated timescale meant that the company was acting as a principal when providing its service.

The full judgment in this case is available from:- https://assets.publishing.service.gov.uk/media/5f2293f78fa8f57ad04290
50/All_Answers_v_HMRC.pdf