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Where Taxpayers and Advisers Meet

Shipping services paid for on behalf of artists, disbursement?

1nkling
Posts:6
Joined:Thu Mar 10, 2022 2:44 pm
Shipping services paid for on behalf of artists, disbursement?

Postby 1nkling » Thu Mar 10, 2022 3:05 pm

I've been trying to get to the bottom of this issue. My accountants feel that shipping services can't be treated as disbursements because of examples given on the HMRC website. The examples seem to apply to incidental business costs and not those specifically on behalf of a customer. I found this forum while googling for answers and saw this thread which I think is a very similar situation to the one I find myself in. It very much gives me the impression that the costs I pass on could be a disbursement. - https://www.taxationweb.co.uk/forum/viewtopic.php?f=13&t=51546&p=189768

One part of my business is shipping on behalf of artists. The sales are all through their own online stores with the order details being fowarded to my shipping software. The prints are shipped in bulk to me but are at no time my property. After packing the prints for an order I ship them via UPS / DHL / Royal Mail. When I bill the customer I bill them for the exact shipping costs that I am passing on to them. I then add packaging cost and a fee for my services. These are all detailed separately on my invoices. The majority of shipping costs are zero rated as they're overseas so I can't claim any input VAT. All of the artists are not VAT registered so they won't be able to claim any VAT back on my invoices. If I have to charge VAT on the shipping costs its going to be a lose/lose situation all round.

I understand that I need to charge VAT on the packaging costs and my fees. Where the shipping charges come in though I feel like they should be treated as a disbursement. They tick all the boxes for being a disbursement as the original sale is the artists responsibility not my own. All contact between artist and the customer is between them. Ownership of the product passes between the artist and the customer.

Main points from HMRC re: Disbursements and my thoughts below.
-
  • You paid the supplier on your customer’s behalf and acted as the agent of your customer
    your customer received, used or had the benefit of the goods or services you paid for on their behalf.
    Yes, although the shipping accounts are in my name. All labelling on packages make it appear to come from the individual artist and the return address is c/o myself. All shipping emails, etc are between artists store and customer direct.
    -
  • It was your customer’s responsibility to pay for the goods or services, not yours.
    Yes, the artist received the funds for shipping the order and needs to pay the costs to ship it to the customer.
    -
  • You had permission from your customer to make the payment
    Yes, all artists expect me to arrange shipping once orders are packed.
    -
  • Your customer knew that the goods or services were from another supplier, not from you
    Yes, artists know I will be using DHL / UPS / Royal Mail for shipping services.
    -
  • You show the costs separately on your invoice. / You pass on the exact amount of each cost to your customer when you invoice them.
    Yes, the shipping costs are individually broken down on the invoices.
    -
  • The goods and services you paid for are in addition to the cost of your own services.
    Yes, I charge a separate 'per item' packing fee for my services.

Any advice and clarification on this will be very appreciated. I don't think Lavender2306 who commented on the other thread I saw has been active lately but if they are around I'd appreciate input.

Thanks!

1nkling
Posts:6
Joined:Thu Mar 10, 2022 2:44 pm

Re: Shipping services paid for on behalf of artists, disbursement?

Postby 1nkling » Sun Mar 13, 2022 4:51 pm

I guess maybe there aren't any VAT specialists on the forum then? If anyone could point me in the direction of something that would clarify this better, it'd be very appreciated.

Trevor S
Posts:108
Joined:Tue Jan 01, 2019 12:37 am

Re: Shipping services paid for on behalf of artists, disbursement?

Postby Trevor S » Mon Mar 14, 2022 12:08 am

I wouldn't consider these to be disbursements. There may also be other VAT issues to consider.

A simplistic view of a disbursement is that you've settled your customer's "debt" with a third party, and then recharge the cost to your customer. This can only happen if your customer is also a customer of the third party, there is some supply made directly by the third party to the customer, and there is some form of "contact" (whether a formal document, verbal or merely implied) which demonstrates this.

In your case, you are the parcel carrier's customer. You are the account holder, and invoices would be issued to you. Although you put the artists' names on the labelling, there is no contractual relationship or obligations between the parcel carrier and the artists. You receive a supply of services from the parcel carrier, and use that in providing your services to the artists.

I've added my thoughts to your comments on HMRC's criteria below:

• You paid the supplier on your customer’s behalf and acted as the agent of your customer
your customer received, used or had the benefit of the goods or services you paid for on their behalf.
Yes, although the shipping accounts are in my name. All labelling on packages make it appear to come from the individual artist and the return address is c/o myself. All shipping emails, etc are between artists store and customer direct.
You aren't paying the supplier (the parcel carrier) "on your customers' (the artists') behalf", because the artists don't owe anything to the parcel carrier. They aren't contracting with eachother - the parcel carrier may not even be aware of the artists? The labelling you put on the packages and the shipping emails from the artists to their customers are irrelevant to the transaction with the parcel carrier.

• It was your customer’s responsibility to pay for the goods or services, not yours.
Yes, the artist received the funds for shipping the order and needs to pay the costs to ship it to the customer.
On this point, HMRC are meaning the direct transaction with the parcel carrier. As above, from the parcel carrier's perspective, it's neither the artists', nor the artists customers', responsibility to pay them. The responsibility lies with you.

• You had permission from your customer to make the payment
Yes, all artists expect me to arrange shipping once orders are packed.
This is again based on the assumption that there is a direct contractual relationship between the artists and the parcel carriers. There isn't - so you do not need "permission" from the artists to pay the parcel carriers. The artists' expectation for you to arrange the shipping is no different to their expectation that you would provide any other part of the services that they pay you for.

• Your customer knew that the goods or services were from another supplier, not from you
Yes, artists know I will be using DHL / UPS / Royal Mail for shipping services.
Again, consider the contractual arrangements. The artists may be aware that you use parcel carriers, rather than delivering them personally - but that doesn't mean that they have received a service from the parcel carrier. They have received a service from you, which you in turn have received from the parcel carrier.

• You show the costs separately on your invoice. / You pass on the exact amount of each cost to your customer when you invoice them.
Yes, the shipping costs are individually broken down on the invoices.
This criteria only works "one way". You can't have a disbursement if the costs aren't itemised and charged exactly. But showing charges in this way is not enough on its own to make it a disbursement - it can simply mean that you're being transparent about your costs.

• The goods and services you paid for are in addition to the cost of your own services.
Yes, I charge a separate 'per item' packing fee for my services.
Not enough in isolation to constitute a disbursement - when the other criteria demonstrate that it is not a disbursement. In any event, I'd consider the shipping to be a part of your service to the artist (rather than an additional service supplied by someone other than you) due to the lack of contractual relationship between the artists and parcel carriers.

Having determined that it can't be treated as a disbursement, you need to establish whether you are making a single or multiple supplies of services to your customers. Although there appear to be a number of elements to the service provided (e.g. packaging, shipping, handling returns, etc.), it would in reality appear to be a single package of services, liable to VAT.

I'm not clear on why the parcel carriers aren't charging VAT. HMRC guidance in notice 744B implies that where such services are supplied B2B, unless the entire journey is within a foreign country, the "place of supply" is where their customer (i.e. you) is located. So I would have expected UK VAT to be charged - which would be recoverable by you as input tax.

--------

I have also read the other thread that you've linked to and do not consider those transactions to be disbursements either. I would instead agree with the analysis provided by "les35" and the second post by "section 44". I wasn't aware of this forum back in 2017. But if I had been, I would have certainly posted at the point that Les' opinion was queried.

In that thread, the position was only slightly less clear there because the original poster was buying stamps from a post office. Therefore when the stamps were sold, there was no document that would have specified whether the post office's "true" customer was the original poster themselves, or the original poster's customer. Of course, logic would say that the original poster was the customer. They were physically present when the stamps were sold - it's unlikely that the post office would have been aware of the other parties involved, yet alone entered into a "contact" with them. The response by "section 44" pointed this out. Hence my view that those arrangements also do not constitute a disbursement.

In the final post of that thread, it is suggested that treatment as a disbursement would be allowed because the original poster was acting as the agent "on behalf of his clients with their knowledge and approval of his actions". However, simply being an agent is not enough. They would need to be a "disclosed" agent, which means that the supplier (in that case the post office) would need to be made aware of who the original poster was acting on behalf of. Without this, they were an "undisclosed" agent - and they would be treated as both receiving supplies from the supplier, and making supplies to their customer. See paragraph 22.6 of HMRC's notice 700.

1nkling
Posts:6
Joined:Thu Mar 10, 2022 2:44 pm

Re: Shipping services paid for on behalf of artists, disbursement?

Postby 1nkling » Mon Mar 14, 2022 12:10 pm

Thanks for the very informative answer Trevor. Its not the one I wanted but its very kind of you to explain it so clearly. :D

I feared that this would be the advice I received again. Its what I've been seeing pretty much everywhere apart from the other post I referred to which gave me a glimmer of hope. The various shipping suppliers are aware that I ship for other people but theres nothing written to show that and billing by them isn't broken down into individual customers.

I also found this which I wondered might give me potential to argue them disbursements if its at the agents discretion. - https://www.gov.uk/hmrc-internal-manuals/vat-taxable-person/vtaxper37900

The thing I'm struggling to wrap my head around is how nobody benefits from the way I'll need to apply VAT (apart from HMRC). As I understand it when I recharge the shipping costs I'm going to have to add 20% on top of everything, even though the bulk of my costs passed on are zero rated, because my services will be standard rated. Is that right? This means that all my artist customers who aren't VAT registered are going to take the brunt of the extra costs. This will put up their end shipping costs which they'll have to pass on to customers and will probably result in loss of business for them and therefore loss of business for me. I won't be able to claim any input VAT on the zero rated services back so can't absorb some of the extra costs myself. They can't claim it back because they're not registered. They'd probably be better off going back to shipping their stuff themselves. :cry:

1nkling
Posts:6
Joined:Thu Mar 10, 2022 2:44 pm

Re: Shipping services paid for on behalf of artists, disbursement?

Postby 1nkling » Mon Mar 14, 2022 12:12 pm

I did wonder if the products being shipped never being my property and the sales all being made via their own stores direct to them added anything to the equation? They'd be responsible for shipping them whether I was involved or not and have been paid by their customers to do so.

Trevor S
Posts:108
Joined:Tue Jan 01, 2019 12:37 am

Re: Shipping services paid for on behalf of artists, disbursement?

Postby Trevor S » Mon Mar 14, 2022 2:27 pm

I also found this which I wondered might give me potential to argue them disbursements if its at the agents discretion. - https://www.gov.uk/hmrc-internal-manuals/vat-taxable-person/vtaxper37900
These rules are aimed at cases where there is an agency arrangement in place, and a recharge might properly be a disbursement, but the parties involved don't want that treatment. This is likely to happen where the nature of the supply is taxable, the customer is VAT registered, but the supplier wishes to remain anonymous to the customer. The customer needs a VAT invoice to recover the VAT, but the supplier would lose their anonimity if they raised one to the customer. These rules allow the supply to be treated as made both to and by the agent - so the supplier invoices the agent (who would already know who the supplier is) and the agent invoices the customer (who would already know who the agent is).
Your situation is different, in that there is currently no agency arrangement involving the parcel carrier, but you'd like the invoicing treatment to be that which would apply if there was such an agency arrangement.
As I understand it when I recharge the shipping costs I'm going to have to add 20% on top of everything, even though the bulk of my costs passed on are zero rated, because my services will be standard rated. Is that right?
It's not a unique situation. When you go to a restaurant, you will be charged VAT on the total cost of your meals, even though the majority of the basic food ingredients used by the restaurant in preparing the meal would have been zero rated. VAT is determined based on the nature of what it being supplied at each point in the supply chain, not on the nature of the various costs incurred in making that supply. In your case, you are providing a much wider service than just the delivery of goods to the end customer.
I did wonder if the products being shipped never being my property and the sales all being made via their own stores direct to them added anything to the equation? They'd be responsible for shipping them whether I was involved or not and have been paid by their customers to do so.
It is quite useful from a VAT perspective that the products being shipped never become your property! If they did become your property then, regardless of what route physical payment took, you would be seen as:
  • receiving supplies of the products from the artists (no VAT if they're not registered), and
  • making supplies of goods to the end customer.
If the end customer was in the UK, you would have to declare VAT on the full amount that they pay for the products, because it's you (VAT registered) that would be making the onward supply to them. So the VAT costs would be much higher. No to mention any potential cashflow implications if the physical payments did then flow through you...

Is there any way you could change the structure so that it could be a disbursement? The only option I can see would to be to create separate accounts with the parcel carriers for each artist you deal with. Those accounts would be in the artists' names, but with you shown as their agent, so all correspondance, invoices etc. were sent c/o you. You would still make the arrangements as at present, but the parcel carriers would be aware that the artist was their true customer. The downsides are presumably:
  • extra administration for you in managing a much larger number of accounts with the carriers, and
  • potentially higher charges by the carriers if the volumes that you ship in total allow you to get better rates/terms than an individual artist would.

1nkling
Posts:6
Joined:Thu Mar 10, 2022 2:44 pm

Re: Shipping services paid for on behalf of artists, disbursement?

Postby 1nkling » Mon Mar 14, 2022 4:24 pm

Is there any way you could change the structure so that it could be a disbursement? The only option I can see would to be to create separate accounts with the parcel carriers for each artist you deal with. Those accounts would be in the artists' names, but with you shown as their agent, so all correspondance, invoices etc. were sent c/o you. You would still make the arrangements as at present, but the parcel carriers would be aware that the artist was their true customer. The downsides are presumably:
  • extra administration for you in managing a much larger number of accounts with the carriers, and
  • potentially higher charges by the carriers if the volumes that you ship in total allow you to get better rates/terms than an individual artist would.
I did talk to DHL about it. The problem would be that all the artists need to apply for their own accounts and they won't have the volume that I do. They have lower limits in some cases. Royal Mail I think you have to send a minimum of 1000 shipments a year which some of the artists don't.

Theres also the issue like you say of managing all those different accounts. I ship for 20 artists currently. I think that will get very confusing in the long term.

Trevor S
Posts:108
Joined:Tue Jan 01, 2019 12:37 am

Re: Shipping services paid for on behalf of artists, disbursement?

Postby Trevor S » Mon Mar 14, 2022 6:54 pm

There's the answer then! Your customers will hopefully still use your services even with the VAT cost, because you can access arrangements with the carriers that they couldn't on their own, you have greater experience of undertaking the work, and there's the convenience for them of not having to do it all themselves.

It's still a bit like my earlier restaurant analogy! You incur less VAT cooking your own meals. But a restaurant may use ingredients you wouldn't necessarily have at home, the chef is likely to be more skilled, and it saves you time and effort!

1nkling
Posts:6
Joined:Thu Mar 10, 2022 2:44 pm

Re: Shipping services paid for on behalf of artists, disbursement?

Postby 1nkling » Tue Mar 15, 2022 9:46 pm

There's the answer then! Your customers will hopefully still use your services even with the VAT cost, because you can access arrangements with the carriers that they couldn't on their own, you have greater experience of undertaking the work, and there's the convenience for them of not having to do it all themselves.

It's still a bit like my earlier restaurant analogy! You incur less VAT cooking your own meals. But a restaurant may use ingredients you wouldn't necessarily have at home, the chef is likely to be more skilled, and it saves you time and effort!
Hopefully so. I'm less worried about the artists who genuinely appreciate the service I'm offering and time/effort I'm saving them. My bigger worry is the end customer facing the higher prices. They have far less appreciation of what goes into getting the product from A to B safely.

The majority of purchasers for the type of prints I ship are generally in the US. We've had US customers complaining at paying £26 for an extremely well packaged express service so they'll be less than delighted when £26 becomes £31. I'm hoping maybe the artists will lose some of that cost in their product pricing to make it more palatable.

Its funny really as when I order something from the states it regularly costs me $70 to ship my way. :lol:


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