Agent or Principal: What Counts as Your Turnover for VAT

If you act as an agent, your turnover is your commission. If you act as a principal, your turnover is the whole amount the customer pays you, even though most of it may go straight back out to a supplier the same week. That distinction decides whether you cross the £90,000 VAT registration threshold at all, and it decides what VAT you charge on what. Contracts help, but what actually happens between you, your customer and the supplier is what governs.

This is the highest-consequence question on this site that almost nobody writes about in public. It is also the quiet cause of a large share of accidental VAT registrations: a business measures its turnover on the money that passes through its bank account, discovers late that HMRC measures it the same way, and finds it has been over the threshold for months.

The second half of the question wears different clothes. Once you know whether you are an agent or a principal, you still have to decide, line by line, whether a payment you made to somebody else is a disbursement that sits outside your supply, or a recharge that is part of it. HMRC publishes eight conditions for that, and all eight must be met.

Why This Question Is Worth More Than It Looks

Start with the number. A booking business handles £400,000 of customer money a year and keeps 12% of it.

• As an agent: taxable turnover is the commission, £48,000. That is comfortably below the £90,000 registration threshold. No VAT registration, no VAT on the commission, no MTD for VAT obligations, no quarterly returns.
• As a principal: taxable turnover is £400,000. Registration is compulsory, VAT is due on the full price the customer pays, and the business recovers input tax on what it buys in.

Same trade. Same bank account. Same cash. Two completely different businesses in the eyes of VATA 1994 Schedule 1, which sets the registration test at taxable turnover above £90,000 in any rolling 12 months or expected in the next 30 days. The GOV.UK registration guidance states the same test, and our companion page on the VAT threshold for 2026/27 works through the rolling 12-month mechanics in detail. This page is about what goes into the number that test is applied to.

The consequences of getting it wrong run in both directions, and they are not symmetrical.

If you thought you were an agent and you were not, you have been trading over the threshold without registering. HMRC backdates your registration to the date you should have registered and assesses the VAT you should have charged from that point. You cannot usually go back and collect it from customers who have already paid, so it comes out of your own margin. On a business turning over £400,000 with a 12% margin, output tax on the backdated period can exceed the entire gross profit for that period. A late-notification penalty under Finance Act 2008 Schedule 41 sits on top, calculated on the potential lost revenue.

If you thought you were a principal and you were not, you have been charging VAT on money that was never your consideration and you may have registered years earlier than you needed to. That is less dangerous, because HMRC generally has the tax, but it is real money: you have been making your services 20% more expensive to every non-registered customer for no reason at all.

And the question does not go away once you are registered. A VAT-registered business still needs to know whether it accounts for output tax on £400,000 or on £48,000, and whether an amount on an invoice carries VAT or not.

The Test: Whose Supply Is It?

There is no tidy statutory checklist for agency in the way there is for disbursements. The statutory hook is VATA 1994 s.47, which deals with the treatment of agents, including the different treatment of agents who act in their own name. We name it as the hook rather than quoting it; you can read the live text on legislation.gov.uk. Around it sits a large body of HMRC practice in the VAT Taxable Person Manual.

What the practice comes down to is one question asked from the customer's side of the counter: who is supplying the thing the customer is paying for?

An agent brings two parties together and is paid for the bringing together. The supply of the underlying goods or services runs directly from the supplier to the customer. The agent's own supply is the service of arranging, introducing, collecting or administering, and that arranging service is what the agent's VAT position is built on.

A principal buys in and sells out. There are two supplies, not one: the supplier supplies the principal, and the principal supplies the customer. The principal's turnover is what the customer pays, and the principal's input tax is the VAT on what it bought.

The factors that actually decide it, in rough order of how much weight they carry:

• Whose name is on the contract with the end customer. If the customer's contract is with the supplier and you facilitated it, that points hard to agency. If the customer's contract is with you, that points hard to principal.
• Who sets the price. An agent passes on the supplier's price and is paid a commission on it. A business that sets its own price to the customer, independently of what it pays the supplier, is behaving like a principal.
• Who takes the margin, and does it vary. A fixed commission percentage on a disclosed price is agency behaviour. Keeping whatever is left between a price you set and a cost you negotiate is principal behaviour.
• Who carries the risk. If the customer does not pay, who is out of pocket? If the supplier fails to deliver, who does the customer sue? Risk follows the supply.
• What the customer thinks. If the customer believes they are buying from you and has never heard of the supplier, it is very hard to argue you were only arranging something.
• How the money is handled. Money held for a client in a designated account, accounted for to the client, and paid over less an agreed commission, looks like client money. Money banked as your own and spent as your own looks like your income.

No single factor settles it, and a business can be an agent for one revenue stream and a principal for another in the same week. What settles it is the overall economic reality. A contract that labels you an agent while you set the price, keep the spread, carry the bad-debt risk and never mention the supplier to the customer will not survive contact with HMRC.

Disclosed and Undisclosed Agency

Agency splits again, and the split matters more for VAT than most people expect.

A disclosed agent acts openly on behalf of a named principal. The customer knows who they are really dealing with. The agent's own supply is the arranging service, its VAT is charged on its commission, and the underlying supply is made by the principal directly to the customer.

An undisclosed agent acts in its own name. The customer does not know there is anyone behind the transaction, and as far as the customer can tell they are buying from the business in front of them. For VAT purposes an undisclosed agent is generally treated as having received and made the supply itself, which means accounting for VAT on the full price rather than on a commission. In other words, acting in your own name can make you a principal for VAT even where the commercial arrangement behind the scenes is an agency one.

This is the trap that catches intermediaries who have been told by their supplier that they are an agent. Being called an agent in a supplier agreement does not help if the customer only ever sees your name, your invoice, your price and your terms. If you want the agency treatment, the agency has to be visible in the transaction.

There are two adjacent regimes that can override the general position and are outside the scope of this page. Businesses buying in and reselling travel services in their own name may fall within the Tour Operators Margin Scheme, and online marketplaces and their overseas sellers are subject to separate deemed-supplier rules. Both change who is treated as making the supply. If either could apply to you, check the current position on GOV.UK for your exact arrangement rather than reasoning it out from the general test.

Where the Line Falls, Trade by Trade

The table below puts the same trade on both sides of the line wherever it can be on both sides, because that is the point: the trade does not decide it, the arrangement does.

Agent, turnover is the commission	Principal, turnover is the whole amount
A letting agent collecting rent for a landlord and keeping 10%. The tenancy is between landlord and tenant, the agent never supplies accommodation to anyone, and only the 10% is taxable turnover.	A letting agent who takes a property on a guaranteed-rent basis and sublets it. The agent has taken on the property and is supplying the accommodation, so the whole rent received is its turnover.
A travel agent booking a hotel where the contract is between the hotel and the traveller, the hotel's price is passed on unchanged and the agent is paid a booking commission.	A tour operator selling its own package at its own price, having bought the hotel rooms in its own name. It is supplying a holiday, not arranging one, and the package price is its turnover.
A driving instructor franchisee's fee collected by the franchisor on the instructor's behalf and disclosed to the pupil as such. The lesson is supplied by the instructor.	A driving school that contracts with the pupil, sets the lesson price and pays the instructor out of it. The school supplies the lesson and the full lesson price is its turnover.
A garage arranging an MOT at an approved test centre in the customer's name, itemised on the invoice at exactly the fee the test centre charged, with nothing added.	The same garage buying the MOT in its own name and billing it on, particularly with a margin. That is a recharge, standard-rated along with the rest of the job.
A salon booking platform charging the stylist a fee for each booking taken. The haircut is supplied by the stylist to the client, and the platform's turnover is the fees.	A salon selling the stylist's time to the client at the salon's price, on the salon's terms and in the salon's name. The salon supplies the haircut and the full price is its turnover.
A recruitment agency introducing a candidate to an employer for an introduction fee, where the worker is then engaged and paid by the employer directly.	A recruitment business that engages the contractor itself, pays them, and invoices the client for the contractor's time plus its own margin. The whole invoice is turnover.

Two things fall out of this table. The first is that the right-hand column is bigger business by turnover and smaller business by margin, which is exactly why the threshold question bites so hard. The second is that the salon row has a sibling question of its own: rent a chair arrangements raise the separate issue of what the salon supplies to the stylist, which is a standard-rated supply of facilities, and that income counts toward the salon's own threshold.

Disbursement or Recharge: The Eight Conditions

Now to the line-by-line question. You paid somebody else something and you want to pass it on. Is it outside the value of your supply, or part of it?

HMRC's VAT Taxable Person Manual at VTAXPER39000 sets out eight conditions, and every one must be met for the payment to be treated as a disbursement. Fail one and the whole amount is consideration for your own supply, taxable at your own rate. Not the failed part. The whole amount.

Verbatim, the eight conditions are:

1. "the person acted as an agent of his client when he paid the third party"
2. "the client and not the agent used the goods and services supplied by the third party"
3. "the client was responsible for paying the third party"
4. "the agent was authorised by his client to pay the third party on his behalf"
5. "the client knew that the goods or services were to be provided to him by a third party"
6. "the agent's outlay is separately itemised when he invoices the client"
7. "the amount recovered from the client is exactly the same amount as paid to the third party"
8. "the goods or services paid for by the agent are clearly additional to the agent's own supplies"

Most competitor write-ups give four or five of these from memory, and the ones they drop are usually the ones that decide real cases. Work them one at a time against the garage MOT, because it is the classic failure and it makes each condition concrete.

Condition 1: acting as agent when the payment was made

This is the agency test from the first half of this page, applied to a single payment. When the garage rang the approved test centre, was it acting on the customer's behalf, or buying something for its own business? A garage that books tests in bulk for its own workshop throughput, on its own account, is buying for itself.

Condition 2: the client, not you, used the goods or services

The test is on the customer's vehicle and the certificate is the customer's. That points the right way. Contrast a diagnostic scan the garage runs to work out what is wrong: the garage used that, in the course of doing its own work, even though the customer benefits from the answer. A cost you consumed in producing your own supply is never a disbursement.

Condition 3: the client was responsible for paying the third party

This is the condition most recharges fail and the one most often skipped in summaries. Who owed the test centre the money? If the test centre would have chased the garage for an unpaid fee, the liability was the garage's and the payment was the garage's own cost. If the account and the liability sit with the customer, the garage was paying somebody else's bill.

Condition 4: you were authorised to pay on the client's behalf

Authority does not have to be a signed mandate, but it has to be real and it has to be evidenced. A line in your terms of business authorising you to incur and pay specified third-party costs on the customer's behalf, agreed before the work, is the ordinary way to satisfy this. Silence and assumption are not authority.

Condition 5: the client knew a third party would provide it

The customer has to know the service is coming from someone else. If the customer thinks the garage does MOTs in-house and never learns that a separate test centre was involved, this condition fails, and it fails for the same underlying reason that undisclosed agency makes you a principal. Disbursement treatment depends on the arrangement being visible.

Condition 6: separately itemised on your invoice

The amount must appear as its own line, identified for what it is. Rolling it into "parts and labour" or into a single job price destroys it. This is the easiest condition to satisfy and one of the most commonly failed, because invoicing habits are set by software defaults rather than by VAT analysis.

Condition 7: exactly the same amount, no more

Exactly. Not approximately, not plus a handling fee, not rounded up to the nearest five pounds, not with a percentage for administration. If the test centre charged £54.85 and the invoice says £60, the payment is not a disbursement, and the consequence is not that the £5.15 becomes taxable. The consequence is that the whole £60 becomes consideration for the garage's own standard-rated supply.

If you genuinely need to be paid for the work of arranging and administering third-party costs, charge for it as a separate, clearly described arranging fee on its own line, and charge VAT on that fee. What you cannot do is bury it inside the disbursement.

Condition 8: clearly additional to your own supplies

The third-party supply has to be something extra, not an ingredient of what you sell. A solicitor's court fee is additional to the legal advice. A solicitor's own courier, printing and travel costs are ingredients of delivering the advice, however separately the practice management system lists them. Trades run into this constantly: a designer buying a stock photo licence used inside the artwork it is selling has bought an ingredient, and it is a recharge, while a freight forwarder paying import duty that is the importer's own liability is paying somebody else's bill entirely.

The Separate-Records Requirement

There is a ninth requirement, which is not in the list of eight and is quietly the one that gets tested during a VAT inspection.

VTAXPER39000 also states that the agent "must also be able to prove that he did not claim input tax on that payment. This will involve keeping separate records for disbursements."

The logic is simple. If the supply was made to your client, the input tax on it is your client's, not yours. You cannot claim it. But bookkeeping systems do not know the difference: a supplier invoice arrives, VAT is coded, and it lands in Box 4 along with everything else. The only way to prove you did not claim it is to have kept it somewhere it could not have been claimed from.

In practice that means:

• Disbursements posted to a balance sheet control account, never to a profit and loss expense code with a VAT rate on it.
• The third-party invoice retained and addressed to, or clearly identified as being for, the client.
• The client's authority to incur the cost on file, dated before the payment.
• The sales invoice line matching the third-party invoice to the penny.

Where firms lose this argument, it is almost never because the analysis was wrong. It is because nothing in the records distinguishes a disbursement from any other purchase, so there is no way to demonstrate that the input tax was left alone.

The Turnover Consequence, Worked

Example one: the booking business and the threshold

A booking business takes £400,000 a year from customers and keeps 12%.

Run as a disclosed agent. Customers contract with the venues. The business collects on the venues' behalf, holds the money as client money, remits £352,000 to venues and retains £48,000 in commission. Taxable turnover for registration purposes is £48,000. That is below £90,000, so no registration requirement arises and no VAT is charged on anything.

Run as a principal. The business contracts with customers in its own name, sets its own prices and pays venues out of what it receives. Taxable turnover is £400,000. Registration is compulsory. If the £400,000 was collected VAT-inclusive at the standard rate of 20%, the output tax inside it is £400,000 × 1/6, or £66,666, leaving net turnover of £333,334. If the prices were set without VAT in mind, the business now has to add 20% to its prices or absorb £66,666 out of a £48,000 gross margin, which is not survivable.

That is the whole argument for getting this right before the money moves rather than after.

Example two: the garage and the MOT

A garage carries out a service costing £240 plus VAT and arranges an MOT that the approved test centre charges at £54.85.

Version A, a genuine disbursement. The test is arranged in the customer's name, the customer authorised it in the garage's terms, the customer knows the test centre is doing it, and the invoice shows £240 service plus £48 VAT, then a separate line: "MOT test fee paid on your behalf, £54.85, no VAT". The customer pays £342.85. The garage accounts for £48 of output tax and claims no input tax on the test fee.

Version B, a recharge. The garage buys the test in its own name and bills it at £65. Conditions 3 and 7 both fail, so the £65 is part of the garage's own standard-rated supply. The garage's taxable supply is £240 + £65 = £305, output tax £61, and the customer pays £366. The VAT difference on one invoice is £13, and the garage's taxable turnover for threshold purposes is £65 higher rather than nothing.

Thirteen pounds is not the story. The story is that a garage doing 800 MOTs a year has moved roughly £52,000 of third-party fees from outside its turnover to inside it, and if it was sitting near the threshold, it has just crossed it without noticing.

What People Get Wrong

Treating the contract as the answer. A document headed "agency agreement" is evidence, not a conclusion. If you set the price, keep the spread, carry the risk and never name the supplier to the customer, you are a principal whatever the heading says.

Assuming a disbursement carries over the original VAT treatment. It does not work that way for a recharge. A recharge takes the rate of your supply. Pass on a train fare, a Companies House filing fee or an insurance premium as part of your own service and it carries VAT at your rate, even though the original cost carried none. That surprises people every time.

Rounding the amount. Condition 7 says exactly. Rounding a £54.85 fee to £55 on the invoice fails it, and the failure infects the whole line, not the 15p.

Adding an administration percentage to the same line. Same problem, larger. Split the arranging fee out and charge VAT on it.

Claiming the input tax and treating it as a disbursement anyway. The two positions are contradictory. If it was your client's supply, the input tax was never yours. Claiming it is the clearest possible evidence that you treated the supply as made to you.

Applying one answer to the whole invoice. Most invoices carry both. A solicitor's bill routinely contains a genuine court fee disbursement and a set of recharged internal costs on the same page, and each line is tested on its own facts.

Treating "I am an agent" as a structuring technique. This one is worth stating plainly. Discovering that you genuinely act as an agent, and that your turnover is therefore smaller than you thought, is a finding about how your business actually works. Reorganising a single business into artificially separate parts so that each stays below £90,000 is a different thing entirely. That is disaggregation, and HMRC can direct that the separate parties be treated as a single taxable person under VATA 1994 Sch 1 paras 1A and 2. Separate businesses with genuinely separate customers, prices, staff, premises and money are separate. A business split on paper while operating as one is not.

Ignoring it because you are already registered. Registration removes the threshold question, not the question. A registered principal owes output tax on the whole price; a registered agent owes it on the commission. The difference is the same money either way.

What to Do About It

Take one revenue stream at a time and answer three questions in order. Whose contract is the customer's contract? Who sets the price and keeps the difference? Who does the customer think they are buying from? If those three point the same way, you have your answer and the job is to make the paperwork, the invoicing and the money flow match it.

If they point in different directions, you have a real problem rather than a documentation one, and it is worth resolving deliberately before turnover gets anywhere near the threshold. Changing how you contract is straightforward while the business is small and expensive once there are hundreds of live arrangements written the other way.

For the disbursement side, run the eight conditions as an actual checklist on the categories of third-party cost you pass on, not on individual invoices. Most businesses have three or four recurring types, and each one gets the same answer every time. Decide once, set the invoice template and the nominal codes to match, and keep the separate records the manual asks for.

Related Reading

• VAT threshold 2026/27: the £90,000 registration rule, which covers the rolling 12-month test this page feeds into.
• Accounting for ecommerce sellers, where the agent or principal question decides whether marketplace gross sales or net payouts are your turnover.
• Rent a chair salon tax, the same "whose supply is it" question in one sector.
• HMRC's own statement of the eight conditions at VTAXPER39000.