The distinction between a disclosed agent and an undisclosed agent is an important concept in VAT law. While the commercial arrangements may appear similar, the VAT consequences can be dramatically different.
Many businesses operate as intermediaries between suppliers and customers. Examples include letting agents, travel agents, online marketplaces, property sourcing businesses, management companies and commission-based sales businesses. Whether that intermediary acts as a disclosed agent or an undisclosed agent will determine whose supply is being made, who accounts for VAT and on what amount VAT is charged.
HMRC devotes significant attention to agency arrangements because businesses frequently misunderstand the rules. In many cases, businesses describe themselves as agents but for VAT purposes are actually acting as principals.
The distinction can affect VAT registration thresholds, output tax liabilities, input tax recovery and contractual obligations.
What is an Agent?
An agent is a person or business that acts on behalf of another person, known as the principal.
In a genuine agency arrangement, the agent facilitates a transaction between the principal and a third party.
The key question is whether the customer knows that the agent is acting on behalf of someone else.
This determines whether the agent is disclosed or undisclosed.
HMRC guidance can be found in the VAT Notice 700.
Disclosed Agents
A disclosed agent acts in the name of and on behalf of the principal.
The customer is aware that the agent is acting for another party.
The contractual relationship exists directly between the principal and the customer.
The agent merely facilitates the transaction.
Example
A landlord appoints a letting agent to find a tenant.
The tenancy agreement is entered into between the landlord and the tenant.
The tenant knows the landlord owns the property.
The letting agent acts on the landlord's behalf.
The agent may collect rent and arrange maintenance but is not itself making the supply of the property.
VAT Consequences
Under Section 47(2A) Value Added Tax Act 1994, where an agent acts in the name of and on behalf of another person, the supply is treated as being made by the principal.
The consequences are:
The principal makes the supply to the customer.
The principal accounts for any VAT due.
The agent accounts for VAT only on its commission or management fee.
The consideration received by the agent on behalf of the principal does not form part of the agent's turnover.
For example, assume:
Monthly rent collected: £2,000
Letting agent fee: £200 plus VAT
The landlord receives £2,000 rental income.
The letting agent makes a supply of agency services worth £200.
If VAT registered, the agent charges VAT only on the £200 fee.
The £2,000 rent is not part of the agent's taxable turnover.
Typical Characteristics of a Disclosed Agent
HMRC will consider factors such as:
Contracts identify the principal.
Customers know who the principal is.
The agent earns a commission or management fee.
The agent does not take ownership of goods.
The agent does not assume primary contractual responsibility.
The agent acts under authority granted by the principal.
No single factor is decisive.
HMRC will consider the overall commercial reality.
Undisclosed Agents
An undisclosed agent acts in its own name even though it may ultimately be acting for another party, and the customer believes they are dealing directly with the intermediary and the identity of the principal is hidden or irrelevant to the customer.
For VAT purposes, the intermediary is generally treated as both receiving and making the supply.
VAT Legislation
Section 47(1) Value Added Tax Act 1994 provides that where an agent acts in its own name in relation to a supply of goods or services, the agent is treated as both receiving and making that supply.
This creates what is often referred to as the "deemed supply" rule.
The result is that there are effectively two supplies:
Principal to agent.
Agent to customer.
Example
A business advertises accommodation in its own name.
Customers contract solely with that business.
The property owner remains behind the scenes.
The business determines pricing and collects income.
The customer may have no knowledge of the owner.
For VAT purposes:
• The owner supplies accommodation to the intermediary.
• The intermediary supplies accommodation to the customer.
The intermediary is making the taxable supply.
VAT may therefore be due on the entire amount charged to the customer (assume this is holiday let) rather than merely on any margin or commission.
Why the Difference Matters
The financial implications can be significant.
Disclosed Agent Example
Customer pays £1,000.
Agent earns commission of £100.
VAT registered agent accounts for VAT on £100 only.
Taxable turnover is £100.
Undisclosed Agent Example
Customer pays £1,000.
Intermediary retains £100.
Owner receives £900.
VAT registered intermediary may need to account for VAT on the full £1,000 supply.
Taxable turnover becomes £1,000.
The VAT exposure is substantially greater.
This distinction often determines whether a business exceeds the VAT registration threshold.
Property Industry Examples
Letting Agents
Most traditional letting agents operate as disclosed agents.
The landlord is clearly identified.
Tenancy agreements are entered into by the landlord.
The agent earns management fees.
The agent therefore accounts for VAT on management charges only.
Rent-to-Rent Operators
A rent-to-rent business typically leases property from a landlord and then grants occupation rights to occupiers.
Unlike a letting agent, the rent-to-rent operator usually contracts in its own name.
The occupiers have no direct contractual relationship with the property owner.
The operator generally assumes commercial risk and retains any profit.
In these circumstances the operator is usually acting as principal rather than agent.
The operator is making supplies to occupiers in its own right.
Consequently, VAT treatment differs fundamentally from that of a traditional letting agent.
Serviced Accommodation Operators
Many serviced accommodation businesses incorrectly assume they are acting as agents.
Where bookings are accepted in the operator's own name and guests contract directly with the operator, HMRC will frequently regard the operator as principal.
The operator may therefore be responsible for VAT on the entire accommodation charge.
HMRC's Approach
HMRC places considerable weight on commercial reality rather than contractual labels.
Calling a business an "agent" does not automatically make it one.
HMRC will examine:
Who sets prices.
Who bears commercial risk.
Who contracts with customers.
Who issues invoices.
Who is liable if things go wrong.
Who controls the terms of supply.
Who receives payment.
This approach derives from numerous UK and European court decisions.
The courts consistently emphasise substance over form.
Relevant Case Law
Secret Hotels2 Ltd v HMRC [2014] UKSC 16
This important Supreme Court case considered whether an online hotel booking business acted as principal or agent.
The court concluded that the business acted as a disclosed agent.
As a result, VAT was due only on its commission rather than on the entire hotel charge.
The case demonstrates that contractual arrangements and commercial reality must be examined carefully.
Airtours Holidays Transport Ltd v HMRC
This case reinforced the principle that the true legal and commercial relationships determine VAT treatment rather than merely the labels used by the parties.
Reed Personnel Services Ltd v Customs and Excise Commissioners
The courts again considered whether supplies were made as principal or agent, emphasising the need to analyse the entire transaction.
Common Errors
Businesses frequently make several mistakes.
Error 1 – Assuming Agency Exists
A contract may describe a business as an agent but commercial reality may indicate principal status.
HMRC will not accept contractual wording alone.
Error 2 – Accounting for VAT Only on Commission
An undisclosed agent may incorrectly account for VAT solely on its retained margin.
HMRC may later assess VAT on the full supply value.
Error 3 – Ignoring VAT Registration Thresholds
Disclosed agents consider only commission income for threshold purposes.
Undisclosed agents may need to include the full value of customer receipts.
This can trigger unexpected VAT registration obligations.
Error 4 – Failing to Review Existing Structures
Business models evolve.
An arrangement that began as agency may gradually become principal trading.
Periodic reviews are essential.
Practical Steps for Businesses
Businesses operating intermediary models should review:
Contracts with suppliers.
Contracts with customers.
Marketing materials.
Booking procedures.
Invoicing arrangements.
Payment flows.
Allocation of commercial risk.
The review should focus on substance rather than terminology.
Where uncertainty exists, obtaining professional VAT advice is often essential because historic errors can result in significant VAT assessments together with penalties and interest.
Conclusion
The VAT distinction between disclosed and undisclosed agents is fundamental. A disclosed agent acts in the name of and on behalf of a principal and generally accounts for VAT only on its commission. An undisclosed agent acts in its own name and is usually treated as both receiving and making the underlying supply.
The difference can affect VAT registration, taxable turnover and the amount of VAT payable by many thousands of pounds each year.
Businesses in the property sector, hospitality industry, online marketplace sector and commission-based industries should regularly review their arrangements to ensure that the VAT treatment adopted reflects the true legal and commercial position.
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