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VAT when Selling Goods

POSTED BY: Scott Sartin

18 July 19

At Charlton Baker, we work with many different client types and industries. We receive hundreds of queries a year from our clients wanting to understand tax issues relating to their business.

Most recently, we were contacted by a client (an Artist) who had been told by his art gallery selling agent, not to charge VAT on the sale of some original artwork. Our client being a newly VAT registered business and a vigilant business owner, contacted us before listening to the so-called ‘accurate’ VAT advice of his customer. It transpired the art gallery had been given this advice by its own accountant.

Working off limited information, we soon deduced this query related to the Principal versus Agent VAT rules. In other words, determining who is really selling the goods, in this case a work-of-art, to the general public. It transpired that the accountant of the art gallery mixed up a couple of VAT rules and had given the wrong advice.

What’s the Difference Between Principal and Agent?

Essentially, the Principal is the business selling the goods to the end consumer, and an Agent is a business selling the goods on behalf of somebody else.

In terms of VAT:

  • If you are the Principal in a supply chain, you should charge VAT on the full selling price to the end consumer, whether you use a selling agent or not. If you didn’t manufacture the goods, the business you bought them from should charge you their amount of agreed profit share, or the agreed cost of the goods, plus VAT;
  • If you are the Agent, you will sell the goods to the end consumer for the same price (on behalf of the Principal) and with the same amount of VAT. So, you are essentially charging and collecting Output VAT on the Principal’s behalf. You should then charge your Agents’ Commission to the Principal plus VAT.

In the real life instance we dealt with, our client was the Principal, and the correct VAT treatment between him and the gallery came down to the Terms of Business.

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