VAT, agency and economic reality

The FTT has held that changes made to the contractual terms between an agency and customers for academic works were insufficient to change the correct analysis of the supplies made by the agency: All Answers Ltd v HMRC [2023] UKFTT 737. Supplies of academic works made via a website where there was no contact between the writer and customer were made by the website operator as principal, not as agent for the writer.

This remained the case even after changes were introduced to the contracts to, for example, state (in the contract between operator and writer) that the writer contracted directly with the customer.

Background

All Answers (AA) operated as an internet provider of academic works such as essays, dissertations and coursework. Customers placed orders via its website and AA would then source that work from a pool of approved third parties. The writers were lecturers, teachers or PhD students. There were two contracts. One between AA and the customer and one between AA and the writer. AA accounted for VAT only on the net amount received by it, contending that it acted as agent for the actual writers when providing the work to customers and the supply of the academic work as actually made from the writers to customers.

HMRC contended that in those circumstances, and based on the contractual terms, the whole of the supply to the customer was made by AA. The matter was referred to the FTT and then the Upper Tribunal which both held in favour of HMRC. Although the Writer contract gave AA the authority to enter into the contracts as its agent, in the Customer contract it was clear that the core obligations to deliver the academic work were obligations binding on AA only.

Subsequent to that decision, AA introduced changes to its contracts which it contended altered the effect of those arrangements such that from 2020, it only acted as agent on behalf of the writers and should only account for VAT on the net amount received by it. There were two particular changes to the contractual arrangements:

• Changes to the intellectual property (IP) arrangements. The original contracts involved the transfer of the IP from the writers to AA and then AA granted a limited use licence to customers. Under the revised contracts, the IP was to remain with the writer.
• An explicit contractual term in the Writer contract stating that "when you do bid for a project and we allocate it to you, this is a binding contract for services between yourself and the Customer."  

FTT decision

The FTT has held that the contractual changes made did not change the nature of the supplies in this case.

The FTT noted that the factual arrangements essentially remained unchanged from that in place at the time of the earlier UT decision. In particular, everything went via AA's website. The order, the tender of the order to writers and posting of the work by the writer onto the website. It was noted that AA took great care to ensure that a customer remained unaware of the identify of the writer and vice versa. This was so that the writers remained anonymous (their employers would not want to discover they were "moonlighting") and so that customers could not simply bypass AA and go directly to a writer for future orders.

The FTT rejected AA's argument that the changes to the contractual terms had any impact on the core obligation on AA to deliver the service. Whilst the copyright remained with the writer under the new arrangements (and the UT had considered the fact that the IP had been transferred to AA supported its conclusion), that did not change the fact that the core obligation to deliver the licence to use the work remained with AA. The FTT noted that the terms indicated that only AA might be liable to the customer for late delivery or failure to use reasonable care and skill in the service. Those had not changed and it remained the case that AA had the "core" obligations to deliver the service to a customer.

In addition, the FTT held that the clause in the Writers contract that there was a "binding contract for services between you and the Customer" was ineffective. No explanation had been offered as to how the additional words in a contract (not involving a customer) might bring into existence a separate contract between writer and customer. There was no explanation as to how the offer and acceptance might work or what the terms of the contract might be.

Even if the FTT were wrong in its conclusions and the contractual changes did mean that the contracts imposed the "core" obligations on the writer, then the FTT indicated that they would have found that contractual position to be inconsistent with the commercial and economic reality considering the facts and circumstances of the case.

Comment

The decision is a reminder that it will often take more than contractual tweaks to change the nature of the supplies made, especially in tripartite arrangements. The true effect of contractual clauses need to be considered and where they are inconsistent with the economic and commercial reality, they may be disregarded for VAT purposes. This is especially true in agency situations, where merely stating that a person is acting as agent will not necessarily cause an agency arrangement to arise - particularly where the customer and principal are entirely unknown to each other.