The principle of participatory principals

4 August 2014

Once a trader has been able to ascertain whether or not a supply of digital services is being made, it’s necessary to consider to whom the service is being provided.

Let’s look at the example of an App. An App developer could sell via an on-line App Store, which is registered for VAT, or could sell Apps directly on its own website.

In the former case, the App Store could be acting as a principal by buying the App from the developer and selling it to the end-user, or it could be acting as an agent by arranging the sale by the developer to the end-user. Of course, in the second of these two possibilities, the developer may have comparatively few details about the end-user, so it may be quite difficult for the developer to make a decision about the end-user’s status and location. This was recognised as being a problem when the rules were being drafted and any VAT registered business in a supply chain is deemed to be acting as a principal with regard to the supply of digital services. These businesses are referred to as participators. So, in this case, the App developer would be supplying a participator and would not have to worry about the end-user’s circumstances.

As ever, within a supply chain there are many types of relationship and not all will be as clear-cut as my simple example. In analysing who may be a participator, it’s necessary to look at the economic substance of any transactions and participation may not be at issue if the deemed participator does not, for instance, authorise the charge to the customer, authorise delivery, or set the terms & conditions of the transaction. Non-participators can include payment-handling services and mobile networks that just handle data.

Selling direct to an end-user from the developer’s own website means that the developer has to be concerned about the type of customer it’s supplying and the location of that customer. This aspect will be covered in the next article.

If you require any advice on deciding the type of supply being made, please contact one of our tax advisers at your nearest location, or complete the contact form.