In an era where businesses are increasingly using third-party providers to transact with suppliers and/or buyers, businesses need to keep a close eye on whether or not they’re using disclosed or undisclosed agents. Why? Well, it may have an overall effect on your VAT treatment.
In order to run a successful business and meet all VAT obligations, we need to understand the difference between the two types of agents and how each one impacts the VAT process. If you would like guidance on how this applies to your business, you can contact us.
An agent is a person who is legally permitted to act on behalf of another entity (a principal). The agreement between a principal and an agent can either be disclosed or undisclosed to a third party. The core difference between the two comes into effect when dealing with the specific VAT treatment of each. However, before we dive into it, let’s establish their core objectives.
| Disclosed agents | Undisclosed agents |
| A disclosed agent is an agent who acts on behalf of the principal. However, the end customer or third party is aware of the fact that they are doing business with an agent of the principal. The principal can recover VAT on the purchases the disclosed agent makes on their behalf. | An undisclosed agent ‘acts’ as the principal. The supplier of the goods and services does not generally deal with the principal whatsoever. Even though the agent acts on behalf of the principal, the principal remains unnamed. The supplier will deal solely with the undisclosed agent. The undisclosed agent can recover VAT on their purchases, which reduces the administrative burden on the principal. |
When using a disclosed agent, the principal remains the entity that receives the goods and services from the supplier. The disclosed agent simply acts as a middleman between the two. However, although the disclosed agent liaises with the principal’s supplier, the principal is still liable for the VAT on the supplies. Therefore,the principal will be able to recover the VAT (incurred on the invoice from the supplier) in their VAT return.
The disclosed agent will only be entitled to charge VAT on their services supplied to the principal. The disclosed agent must issue a VAT invoice to the principal. The gist? The principal will be liable for the VAT (charged by the supplier) for the supply of goods and services and the VAT charged by the agent for their commission.
The VAT treatment process gets slightly trickier when using undisclosed agents. However, in the grander scheme, it’s more time-efficient and mitigates the need for constant back-and-forth via a middleman.
An undisclosed agent will carry out all the VAT procedures in their own name (not the principal’s). Keep in mind that this does not remove the principal from the process but simply streamlines it.
This means that we’re working with a simultaneous process.
The agent will therefore be liable for the VAT on the supply between them and the supplier. Unlike disclosed agents, the undisclosed agent’s commission is included in the price of goods and services charged to the principal. The VAT rate applicable to that commission is the same VAT rate for the goods or services supplied.
The purpose of the provision is to ensure that the ultimate buyer obtains an invoice on which he can receive an input tax credit.
Irrespective if you are using a disclosed or undisclosed agent, there will always be VAT due and payable. However, the varying VAT treatments between the two types of agents can easily cause confusion.
Ultimately, the place of supply rules are complex and challenging to navigate. Don’t add additional difficulty to the process by misunderstanding the compliance obligations of the principal and agent. Contact an expert in this field to ensure that you are using an agent who is right for your specific business.
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