Disclosed agent & non-limited cost business - transfer of ownership of goods (SoGA)

[The_Doctor]

Hello,

I’m hoping someone can help me with an issue relating to VAT liability, but which is underpinned by ownership of goods.

Essentially, I am seeking to establish my VAT liability as a sole trader operating an online retail business in a disclosed agent capacity - it would commonly be described as a dropshipping model:

A purchases from me (B) on an online marketplace for an unascertained product based on the product description published by B
B does not own this product, but subsequently purchases it from another online marketplace (C)
In completing the billing address and shipping address details, B instructs C to ship the product directly to A

My question is, assuming the only details in the contracts between A and B, and B and C are that the contact between B and C forms at the point of dispatch, if and when does B take ownership of the goods and if and when does this ownership transfer to A?

This relates to VAT liability as it is hoped that B’s position can be both one of a disclosed agent but also a non-limited cost business, such that under the Flat Rate Scheme, the liability is that of w “retail business not elsewhere classified” (6.5%) rather than a “limited cost business” (16.5%). For the latter to be true, B must take transitory ownership of the relevant goods.

Bit of a complicated one and speaks to the lack of case law covering this area and the draft Bill put forwards by the Law Commission in relation to this grey area, but any advice would be greatly appreciated.

Many thanks!

 

[eteb3]

My question is, assuming the only details in the contracts between A and B, and B and C are that the contact between B and C forms at the point of dispatch, if and when does B take ownership of the goods and if and when does this ownership transfer to A?

I don't quite follow what you mean by 'the only details' - presumably the contract is more than one line! But pressing on anyway, and on ownership of goods only and not the VAT aspect:

It's not enough to know when the contract forms: you'll need to ascertain when under that contract ownership transfers. That may well be explicitly stated. If not, you can probably infer it by who instructs the courier, because ownership will be assumed to follow possession.

If the courier's contract is with B, then then courier is almost certainly B's agent and (if the contract is otherwise silent), B would be assumed to take ownership when he takes possession by that agent. Vice versa if the courier answers to C, goods are in C's constructive possession by his agent the courier until possession passes to B, and B takes ownership at that point.

For the purposes of the contract B-C, A is probably B's agent for the purpose of accepting the goods: ie, ownership passes from C to B when A accepts delivery on B's behalf. Then you'd have to look at the contract A-B and see when ownership transfers from B to A. It may well be at the same moment: what that does for VAT I have no idea, but I would imagine B's constructive ownership for the infinitesimal period required to pass the goods from A-as-B's-agent-for-accepting-delivery to A-as-principal-in-the-contract-A-B would be enough to attract a liability.

But of course the contracts may say all sorts of crazy thing. Strangest I ever saw was a requirement by a company that goods purchased but not yet paid for were to be kept unused and segregated from other stock, with the purchaser as the seller's trustee, and ownership passing only on payment. These were their standard credit terms: obvious why they'd would want to do that, but complete fiction until the bankruptcy court, I imagine - and maybe even then.

But tbh, if you've read the Law Commission report on this, you probably know more than anyone on this forum And please note I am not a lawyer.

 

[kulture]

I am not convinced that this is at all complicated. The customer buys the goods from B. This implies that at some point B owns the goods.

In normal VAT situations, the customer pays 20% VAT on the full retail price. The seller B claims the VAT that the wholesaler C charges for the item and service. The seller B pays the difference to HMRC.

Now what type of business you are and how much the Flat rate is, should be based on this.

Why not consider a simple case? The customer places an order for an item. B accepts the order and instructs C to deliver it. It is delivered. C invoices B for the goods. B pays C. The customer then issues a chargeback and the money is taken from B. Do you seriously think that C will refund B?

 

[eteb3]

The customer buys the goods from B. This implies that at some point B owns the goods.

Not necessarily: if B is C's disclosed agent, the contract is generally between A and C.

In which case, it would still be as simple as you say: B never has ownership of the goods, because he is C's (or possibly A's) agent throughout.

 

[kulture]

Not necessarily: if B is C's disclosed agent, the contract is generally between A and C.

In which case, it would still be as simple as you say: B never has ownership of the goods, because he is C's (or possibly A's) agent throughout.

Yes, but the op said in his first post that the he customer is purchasing from Him(B). He then subsequently purchases the item from another marketplace. So I assumed that B did not highlight in the transaction that he was just an agent for the online marketplace (C). Otherwise the customer could just go direct to C.

So from what the op said, it is more likely that he will be seen as the retailer and not an agent.

 

[eteb3]

Do you seriously think that C will refund B?
So from what the op said, it is more likely that he will be seen as the retailer and not an agent.

Our edits of our own posts crossed. I'm with you here: what the OP describes doesn't sound like a disclosed agent situation, because A presumably has no relationship with C at all.

(I would still maintain that in principle, A purchasing from B doesn't rule out that he purchases from B as C's agent, with the contract forming between A and C. But totally agree that's unlikely.)

 

[The_Doctor]

Thanks both for your replies.

Keen to focus on the issue of goods ownership if possible, it’s already been established for the purposes of my query that B is acting as an agent to A (i.e. a buying agent) and this was disclosed in B’s terms and conditions of sale. The agency role has already been confirmed by HMRC, but whether B is limited cost or not is debatable.

Specifically, my question is whether B takes ownership of the goods, even instantaneously, and whether or not this is mutually exclusive to acting in a disclosed agent capacity. If B does take ownership, this would mean B’s business is not limited costs for the purposes of the VAT flat rate scheme. The way I see it, how could ownership ever transfer directly from C to A without going through B, if there is no A-C contract?

Thanks again!

 

[Scalloway]

To be a disclosed agent you have to have an agreement with the supplier and disclose the fact to the customer. At no time does the agent own the goods being sold.

 

[The_Doctor]

Thanks for clarifying. In this case though, it’s suggested that B is a buying not selling agent, so wouldn’t B need an agreement with A and disclose to C? In this case, it is stated in the agreement with A that a third party supplier is used, and C is clearly dealing with an agent if the billing and shipping addresses are for two distinct parties (but presumably B takes ownership briefly at some point during transit with the courier). In this case, wouldn’t B be both a disclosed agent and briefly taking ownership of the goods?

 

[eteb3]

wouldn’t B need an agreement with A and disclose to C?

Yes.

it is stated in [B's] agreement with A that a third party supplier is used

If my edit there is correct, that's fine, A & B each know where they stand.

But this

the billing and shipping addresses are for two distinct parties

is not enough (on its own) for disclosure of an agency by B to C. Eg, thanks to Brexit, if I want to send an English book to my brother in Denmark, I buy it from a Dublin bookshop and have them ship it. If it's damaged on receipt, I, not he, will have to take it up with them. Even if I ordered it on his behalf, from the bookshop's point of view the different addresses are no evidence that they're dealing with me as an agent, and if he sued them they'd tell him to buzz off.

wouldn’t B be both a disclosed agent and briefly taking ownership of the goods?

I can see almost no case where that can be true: the agency and the ownership are mutually exclusive. If C sells to B as disclosed agent for A, B never takes ownership; and if B in fact takes ownership, that is conclusive that C dealt with B as principal, not as agent.

The only possible exception I can see is if A B or C is outside the UK: traditionally an agent for an overseas principal is liable in their place, and possibly therefore such an agent does have ownership, mere agent though he is - but I don't think the ownership would necessarily follow the liability, and anyway in the internet age the courts are not applying the doctrine as often as they once did.

To me it seems you're making the shipping and billing addresses do too much work. C only deals with B as a disclosed agent if B discloses that B is acting as agent, and C accepts to deal with B on that basis - ie, accepts that he is really dealing with A. B would sign 'for and on behalf of A'. See here.

So the only question is whether C, when accepting the order, is accepting to be liable to A and not B. If so, B is A's disclosed agent and never has ownership. If not, B is principal on the contract and B must, one way or another, take ownership of the goods before passing them to A (and it seems to me kulture is right that it doesn't matter when or how).

If you put this question to C (say in a court of law when A sues them!), what would they say was going on?

 

[eteb3]

You know what, I think that might all be b0ll0ck$ - B has no ownership even if the agency is not disclosed to C, no? I'll have another think, and possibly read it up in Anson.

(Though from a quick Google, unless the agency is disclosed, it makes no difference to the VAT treatment?)