VAT can often get very complicated when there are three parties involved in a transaction. To clarify who must account for what VAT, it is essential to identify who is the principal, who is the agent and who is the customer.

Identifying the customer is normally the easy part, as that is the person who receives the goods or services. However, that can be confused when an agent, perhaps a bank, orders services to be provided on behalf of its customer, which the customer pays for.

When identifying the principal, ask: who does the customer think he is dealing with? A clue is to determine who the customer would complain to if he had a problem with the goods or services he had purchased. Also look at what the written trading conditions and terms of engagement say, if they exist at all.

If there is a contradiction between the commercial reality of a transaction and what the contracts say, HMRC’s approach is that the commercial realit must take priority. It is always important to consider VAT issues at the planning stage of a big deal, rather than when the money is paid.