Judgment summary
ITS Plant-Tech Limited ("ITS P-T") appealed against VAT assessments issued by HMRC under s73 VATA, which denied input tax claimed on invoices from MP Screeding Ltd and later ITS Payroll Ltd (1, 3). Following review, the assessments stood at £32,226 for period 06/19 and £536,949 for periods 09/19 to 03/22, totalling £569,175 (4).
The sole issue was whether HMRC correctly denied the input tax claimed in respect of VAT charged by the payroll companies, turning on whether those companies had supplied staff or labour to ITS P-T, or had merely provided payroll administration services (5, 8).
The Tribunal, applying the two-step approach in Secret Hotels2 Ltd and principles from Clark v Harney Westwood & Reigels on identifying an employer, found that ITS P-T remained the employer of the relevant individuals throughout and that no supply of labour was made to it by MP Screeding Ltd or ITS Payroll Ltd (15, 16, 56). The appeal was dismissed (58).
Background
ITS P-T carries on a business providing inspection, testing, training and maintenance services in the wind technology and related sectors (1). Prior to 2019 it operated its payroll function in-house, but in early 2019, following difficulties including the absence of the staff member who had performed payroll duties, it entered into arrangements with MP Screeding Ltd and later ITS Payroll Ltd (the "payroll companies") (2, 19).
No written contract between ITS P-T and either payroll company was produced in evidence (20). The arrangements were described by ITS P-T, and by its director Mr McManus, as "TUPE" transfers, but it was accepted in the hearing that this was informal shorthand and that there was no transfer of any undertaking and no TUPE-compliant transfer of employees either to or from ITS P-T (21, 22).
On 19 July 2023 HMRC issued assessments under s73 VATA denying part of the input tax claimed, on the basis that the relevant amounts were not payment for a taxable supply (3). Following a review on 25 October 2023, the assessments were confirmed at a total of £569,175 (4). ITS P-T appealed to the Tribunal; there was no dispute as to the validity or timeliness of the assessments (5).
Core dispute
The principal issue was the true nature of the supplies made by MP Screeding Ltd and ITS Payroll Ltd to ITS P-T during the periods in dispute (7). The Tribunal had to determine whether ITS P-T's employees ceased to be its employees and became employees of the payroll companies, and if so whether those companies supplied staff or labour to ITS P-T such that the wages and employers' national insurance elements of the invoices formed consideration for a taxable supply (8(1)-(2)).
Alternatively, HMRC's position was that the economic and commercial reality was that ITS P-T remained the employer throughout and received only payroll administration services, with wages and employers' NIC representing ITS P-T's own employment costs rather than consideration for a taxable supply (8(3)). Consequently, the question was whether the VAT charged on the wage and employers' NIC elements constituted input tax within section 24 VATA capable of deduction (8(4)).
A subsidiary issue was whether HMRC's earlier (later withdrawn) assessment of ITS Payroll Ltd for output tax on substantially the same invoices supported ITS P-T's case that a taxable supply of staff had been made (9). The burden of proof rested on ITS P-T to establish entitlement to the input tax deduction (6, 38).
Court findings
The Tribunal found that throughout the relevant period ITS P-T selected and controlled its workforce, directed workers as to sites and tasks, provided specialist training, and continued in practice to deal with workforce matters, including grievances, with Mr McManus accepting that there was "minimal disruption" and that little changed day to day (26, 27).
There was no contemporaneous documentation evidencing any transfer of employment contracts from ITS P-T to MP Screeding Ltd, or from MP Screeding Ltd to ITS Payroll Ltd, and no transfer agreement, employee schedule, notification, contract variation or replacement contracts were produced (42). Mr McManus accepted he did not know what steps, if any, had actually been taken to transfer employment, and that no steps were taken to transfer contracts of employment when the arrangements were terminated in 2022 (32, 42).
The invoices themselves separately identified gross wages, employers' NIC and a processing fee (of 1.5% of gross wages plus employers' NIC), which the Tribunal found consistent with a supply of payroll processing rather than a supply of labour (30, 44). Payslips issued in the name of ITS Payroll Ltd, bearing its PAYE reference, were found not sufficient to demonstrate that employment contracts had been transferred or that a supply of labour was being made (29, 46). ITS P-T's annual accounts continued to record employees throughout, though the Tribunal treated this evidence as neutral (28, 47).
As it was accepted there was no TUPE transfer, there could be no automatic transfer of employment, and there was no evidence that employees had agreed to new contracts with the payroll companies or, later, with ITS P-T (48). The Tribunal did not accept that HMRC's earlier, subsequently withdrawn, output tax assessments on ITS Payroll Ltd assisted ITS P-T's claim, since ITS P-T's entitlement to deduct input tax depended on the statutory requirements being satisfied by ITS P-T itself (49, 50). An alternative argument that unspecified "rights" had been transferred and supplied back for consideration was rejected for lack of any evidential or legal basis (51-53).
Overall, the Tribunal found on the balance of probabilities that the relevant individuals continued to be employed by ITS P-T throughout, and that the arrangements with the payroll companies were for payroll administration services only, with no supply of labour made to ITS P-T (54-56).
Outcome
The Tribunal held that ITS P-T had not established, on the balance of probabilities, that MP Screeding Ltd or ITS Payroll Ltd supplied labour to it, and that the VAT charged on the wages and employers' National Insurance contributions elements of the invoices was not VAT on taxable supplies made to ITS P-T (54, 57).
Accordingly, ITS P-T failed to establish that those amounts constituted deductible input tax, and the appeal against the VAT assessments totalling £569,175 was dismissed (57, 58).
Major issues / areas of contention
- Whether ITS P-T's employees ceased to be its employees and became employees of MP Screeding Ltd and/or ITS Payroll Ltd during the relevant periods (8(1)).
- Whether the payroll companies supplied staff or labour to ITS P-T such that wages and employers' NIC formed consideration for a taxable supply (8(2)).
- Whether the economic and commercial reality was that ITS P-T remained the employer throughout, receiving only payroll administration services (8(3)).
- Whether the VAT charged on the wage and employers' NIC elements of the invoices constituted deductible input tax within section 24 VATA (8(4)).
- Whether any significance attached to HMRC's earlier (later withdrawn) output tax assessments on ITS Payroll Ltd in respect of the same invoices (9).
- Whether an alleged 'transfer of rights' between the parties, absent a transfer of employment, could give rise to a taxable supply of services (51-53).