Judgment summary
This is an appeal by Tapi Carpets Limited against VAT assessments raised by HMRC totalling £13,555,315, covering quarterly VAT accounting periods from 06/19 to 12/23 (1).
Tapi is a retailer of floor coverings operating 220 UK stores. Where customers purchased flooring and wanted it fitted, they could either arrange their own fitting or pay Tapi a fitting arrangement fee, whereby Tapi introduced an independent fitter from a vetted pool who attended the customer's premises and was paid the fitting fee directly by the customer (2)-(3).
Tapi accounted for VAT on the arrangement fee only, treating itself as the customer's disclosed agent and the fitter as principal supplying the fitting service. HMRC assessed Tapi on the basis that, in substance, the fitters supplied fitting services to Tapi under an implied sub-contract, and Tapi in turn supplied the fitting service to customers, so VAT should have been accounted for on the fitting fees (3), (89).
The Tribunal heard evidence from Mr Johnson and Mr Karir for Tapi, and Mrs Crosby for HMRC. The Tribunal found Tapi's witnesses honest, credible and consistent (7).
The Tribunal concluded that, on a proper construction of the contractual documentation and having regard to economic and commercial reality, Tapi supplied the fitting arrangement service (and delivery and care package) to customers as principal, while the fitters supplied the fitting service itself to customers as principal, under a contract concluded on the day of fitting (89), (99). The appeal was allowed.
Background
Tapi is a flooring retailer with 220 UK stores, offering carpets, vinyl, laminate and engineered wood, with a UK market share of approximately 19.4% (11)-(12). Around 60% of customers who purchase flooring also purchase the fitting arrangement service and related delivery and care package (14).
Where the fitting arrangement service was purchased, Tapi introduced the customer to an independent fitter from a pool of around 1,200 vetted fitters, and the customer paid the fitter directly for the fitting service on the day of installation (2), (17). Tapi charged a separate arrangement fee (of £1.00 per square metre inclusive of VAT from December 2023) and a delivery and care package fee (of £39 inclusive of VAT at the relevant time), both subject to VAT at the standard rate (14).
In a small minority of cases (approximately 1.2% of orders), described as 'invoiced fitting', customers asked Tapi to collect the fitting fee directly; Tapi treated this as its own supply and charged VAT accordingly. This treatment was not in dispute in the appeal (4).
Many fitters were not VAT registered and did not charge VAT on the fitting fees they received. HMRC's assessments were based on estimated figures for total square metres fitted and industry-standard fitting rates, since Tapi did not keep records of the actual fitting fees paid by customers to fitters (53).
Core dispute
The central issue was whether, for VAT purposes, Tapi supplied the fitting services to customers as principal (as HMRC contended, treating the fitters as sub-contractors to Tapi), or whether Tapi merely supplied a fitting arrangement service as disclosed agent for the customer, with the fitters supplying the fitting services as principal directly to customers (3), (89).
HMRC argued that the contractual terms did not, in substance, establish a genuine agency relationship, and that, in any event, economic and commercial reality showed Tapi was the true supplier of fitting services, discharging its obligation to customers by buying in fitters' services under an implied sub-contract, with customers' direct payment to fitters representing non-monetary consideration flowing to Tapi (80)-(85).
Tapi argued that the written terms and conditions clearly established that Tapi acted only as agent in arranging fitting, that a separate contract for the fitting service arose between the fitter and customer on the day of fitting, and that this reflected the genuine economic and commercial reality of the arrangements (80)-(81), (87).
The parties disputed the relevance and weight of several prior decisions, including Adecco (UK) Ltd v HMRC, Secret Hotels2 Ltd v HMRC, WHA Ltd v HMRC, A1 Lofts Ltd v HMRC, JM Ledger and CE Ledger (T/A Lewis Carpets), and United Carpets (Franchisor) Ltd v HMRC (60)-(78).
Court findings
The Tribunal approached construction of the contract between Tapi and customers applying the principles in Wood v Capita Insurance Services Ltd, seeking the objective meaning of the parties' language (89(1)).
The Tribunal found that, in return for the arrangement fee, Tapi agreed to arrange, on the customer's behalf, for a suitable fitter to fit the flooring at an estimated price, subject to negotiation, and that the fitter provided the fitting service to the customer under a contract concluded on the day of fitting for a fee agreed between them (89(1), 89(3)).
The standardised customer communications using terms such as 'we' and 'us' were found not to detract from this conclusion; a reasonable reader would interpret them as Tapi acting in conjunction with its 'fitting partners' as organised by Tapi (89(2)).
The Tribunal held that many of the factors HMRC relied upon as inconsistent with agency (such as Tapi setting an estimated price, matching customers with fitters without offering a choice, monitoring fitting standards, assisting with complaints, and providing a guarantee) were properly explained as part of the fitting arrangement service and Tapi's interest in protecting its brand and goodwill, rather than indicating that Tapi was itself supplying the fitting service (89(5), 93-96).
The Tribunal found no basis for an implied contract between Tapi and the fitters for the fitters to supply fitting services to Tapi, and no evidence supporting HMRC's characterisation of the fitting fee as a 'wholesale' price and the arrangement fee as a 'retail' margin (90), (93(4)).
The Tribunal considered HMRC's analysis to be commercially and legally unrealistic, noting the difficulty of treating a single payment as consideration for two distinct supplies between different parties, and finding no legal relationship of reciprocal performance of the kind HMRC's case required (97).
The Tribunal considered the prior authorities relied on by both parties (including Adecco, Secret Hotels, WHA, A1 Lofts, Lewis Carpets and United Carpets) but found comparisons with those cases of limited value, as they illustrate the application of established principles to different facts rather than establishing new principles (98).
Outcome
The Tribunal concluded that, for VAT purposes, Tapi supplied the fitting arrangement service to customers for the arrangement fee (on which Tapi correctly charged VAT), and the fitters supplied the fitting service to customers as principal in return for the fitting fee, on which VAT would be due only if the fitter was registered for VAT (89(7)).
Tapi was therefore not liable to account for VAT on the fitting fees received by the fitters (6), (99). The appellant's appeal was allowed (99).
Major issues / areas of contention
- Whether Tapi supplied fitting services to customers as principal or acted only as the customer's disclosed agent in arranging fitting by independent fitters.
- Whether the written contractual terms between Tapi and customers reflected a genuine agency arrangement or were displaced by economic and commercial reality.
- Whether there was an implied sub-contract between Tapi and the fitters under which the fitters supplied fitting services to Tapi.
- The relevance of Tapi setting an estimated 'quote' or price for fitting, using market rate information, to the question of agency.
- The significance of Tapi not offering customers a choice of fitter and matching a fitter to the job at its own discretion.
- Whether contractual terms imposed by Tapi (such as fitters acting with reasonable skill and care, monitoring of standards, limitation of liability and complaints handling) were inconsistent with an agency relationship.
- The relevance of the 10-year fitting guarantee provided by Tapi in certain circumstances to the characterisation of the supply.
- Whether HMRC's analysis, that customer payment to fitters constituted non-monetary consideration to Tapi discharging an obligation to pay the fitters, reflected a legally and commercially realistic 'reciprocal performance'.
- The weight to be given to prior decisions including Adecco, Secret Hotels2, WHA, A1 Lofts, Lewis Carpets and United Carpets in analogous fitting-service arrangements.
- Whether an adverse inference should be drawn from Tapi's failure to call store manager Mr Brian James as a witness.