What do the billback rules do?
Remember here that, if a travel business acts as principal, TOMS is likely to apply. Under TOMS, input VAT is not recoverable by either the travel business or its customers, so the use of TOMS makes the travel services 20% more expensive for a corporate customer. If however a business acts as disclosed agent, the TOMS rules do not apply because the business is not itself "supplying" the services but instead acting as an intermediary in arranging for the supplier and the customer to contract with each other. As such, for many businesses, avoiding TOMS is key to their profit margins and customer retention.
I have talked in earlier articles about how to be an agent for VAT purposes . Importantly here, a business acting as disclosed agent should not receive or issue invoices in its own name for the services it intends to act as agent for, because it is not itself "supplying" or "receiving" the service. Instead, for disclosed agents:
- The supplier should invoice the customer directly for the full amount due from the customer (because the supplier is making a sale directly to the customer)
- If the supplier is paying commission to the agent, the agent should invoice the supplier for the commission/fee amount only; and
- If the customer is paying the commission to the agent, the agent should invoice the customer for this commission/fee only.
This however creates a bit of a dilemma - the corporate customer needs to be named on the supplier's invoice, but the agent needs to receive the invoice because how else would it be able to take and process payments between the supplier and customer? The agent also wants to handle all the administration on behalf of its corporate customer to facilitate the process. The corporate customer need to know how much to pay the agent, for both these travel services and the agent's own fee (if applicable), but the agent can't invoice for the travel services otherwise its agent status may be at risk.
So how do we deal with this?? Answer: Billback!