Our client has a gift shop with a gallery selling artworks on behalf of local artists, some of whom are registered for VAT. They charge commission on sales; on what values do they declare VAT?
How VAT is declared on the artwork sales depends on how our client is acting:
• as a disclosed
• or undisclosed agent.
As a disclosed agent the principal in the sale will be the artist, and if an invoice is issued it will be in the name of the artist who will account for any VAT due on the sale. Our client would only account for VAT on any commission charged.
An undisclosed agent makes the sale, and issues any invoice, in their own name and, for VAT purposes only, they are treated as making the supply of the goods. They account for VAT on the sale as well as VAT on the supply of their services.
Unless it is made clear in the shop that these goods are being sold on behalf of an identified third party, our client will be an undisclosed agent. VAT has to be accounted for on the sale and on any commission charged regardless of whether the artist is VAT registered or not.
Where the sale is on behalf of a VAT registered artist the shop accounts for VAT on the full selling price. The artist should issue an invoice for the same value to the shop. This has the effect of netting off the sale VAT within the shop’s VAT account. The shop issues a commission invoice to the artist and accounts for output tax on this.
Alternatively, they have the option of adopting the commissionaires’ rules, where the amount invoiced by the principal is reduced so that the agent in effect gets his ‘commission’ by marking up to the selling price. Output tax will be accounted for on the full selling price, and input tax recovered on the sum invoiced by the principal.
Sales of artworks by unregistered artists can be accounted for under the margin scheme. Using a Margin Scheme allows a trader to account for VAT on the difference between the price paid for an item and the price it sold for. VAT is due on 1/6th of the margin achieved. (1)
[1] Reproduced with permission of Croner Taxwise