VAT & Labour Supply
The First-tier Tribunal's decision in ITS Plant-Tech Ltd is a useful illustration of how payroll outsourcing arrangements are tested for VAT purposes.
ITS Plant-Tech, which operates in the wind technology sector, had experienced payroll administration difficulties and arranged for two companies in succession to handle its payroll. Those companies invoiced gross wages, employer's National Insurance contributions, a processing fee of 1.5 per cent, and added VAT on top calculated on the full amount. ITS Plant-Tech paid net wages directly to the workers and claimed input tax on the full invoiced amount, on the basis that the workers had become employees of the payroll companies, which then supplied labour back to it.
HMRC disagreed and raised assessments on the basis that this VAT was not recoverable as it was incorrectly charged. The Tribunal dismissed the company's appeal.
The Tribunal began with the contractual arrangements and then tested that characterisation against how the relationship actually operated in practice. TUPE did not apply, and there was no evidence of novation, new contracts of employment, or employee consent to any change of employer. ITS Plant-Tech continued to select and reject workers, direct their work, provide training, exercise day to day control, and manage disciplinary matters. Its own accounts continued to record the workers as employees, and contemporaneous documents described the arrangement as outsourced payroll administration rather than a transfer of the workforce.
On that basis, the payroll companies had not supplied labour to ITS Plant-Tech. The wages and employer's National Insurance remained its own employment costs, so the VAT charged on those elements was not deductible input tax, notwithstanding that valid VAT invoices had been issued. Only the VAT on the 1.5 per cent processing fee, which reflected a genuine administration service, was recoverable.
The decision is a helpful marker for any business using payroll bureaux or umbrella style arrangements. Holding a VAT invoice is not, on its own, enough. What matters is who genuinely employs the workers, who controls and directs them day to day, and whether employment has actually been transferred in substance as well as on paper.
