Agent or principal? It can make a big difference to your VAT position
High net worth individuals often purchase goods and services through a family office entity for reasons of convenience or anonymity. It is important not to overlook the VAT implications of such arrangements, as getting it wrong can be costly.
The first point to consider is whether the entity (let’s call it ServiceCo) is a business for VAT purposes, as the requirement to register and account for VAT can only apply to an entity that is in business. This can be quite a complex question to answer but, generally, the fact that ServiceCo’s activities may be carried on for a private purpose and may not be profit making is irrelevant. Our previous article comments further on this point.
Assuming that ServiceCo is a business, the simplest arrangement from a VAT perspective is for it to act as a ‘disclosed agent’ on behalf of the principal (i.e. the individual). That is to say, when it buys goods and services, it acts in the principal’s name. Provided that certain conditions are satisfied for treating the costs as ‘disbursements’, it does not normally need to account for VAT on the reimbursements that it receives, but it cannot reclaim any VAT incurred on the goods or services purchased on the individual’s behalf. The only VAT implication for ServiceCo is likely to be that any income it receives for its agency services may be subject to VAT.
Things become more complex from a VAT point of view if ServiceCo buys goods and services in its own name. Whether it is acting as an undisclosed agent or as principal, the VAT position is likely to be broadly the same. Normally, ServiceCo would need to register and account for VAT on the income that it receives, but would be entitled to reclaim VAT incurred on the goods or services that it has purchased, subject to the normal VAT recovery rules.
This can raise a variety of VAT issues. Some of the costs incurred by ServiceCo may not be subject to VAT, but it may be required to charge VAT when passing the cost on to the individual. For example, ServiceCo may incur salary costs for employees (which are not subject to VAT), but have to add 20% VAT when passing the cost on to the individual, i.e. the ServiceCo arrangement creates a 20% VAT cost.
Another point to be aware of is that, although the individual may live overseas or the funds may be paid from an overseas bank account, it does not mean that ServiceCo’s income is automatically VAT free. Other factors, such as the nature of the supply, must also be considered. We will cover this issue in more detail in a future article.
It is important to understand the VAT position, in order to minimise the risk of unexpected VAT costs and penalties. Setting up a VAT efficient structure can help to reduce unnecessary VAT costs.
If you would like to discuss the above VAT issues and find out more about how our family offices team can help, please contact Lisa Burnside.