ITS Plant-Tech v HMRC: VAT Implications for Umbrella Payroll Arrangements

The case ITS Plant-Tech v HMRC [2026] UKFTT 1299 (TC) establishes precedent for the VAT treatment of defective umbrella payroll arrangements. It reinforces that economic reality—rather than paper labels—determines VAT recovery eligibility, particularly when written contracts are absent and operational control contradicts purported labour supply transfers.

Context

The judgment addresses a gap in case law regarding VAT treatment of umbrella payroll schemes where operational control and contractual arrangements diverge. These structures are common in UK contractor and agency labour supply chains, often used to simplify payroll administration for temporary workers.

The case arose from HMRC VAT assessments totalling £569,175 against ITS Plant-Tech Limited for two assessment periods. The assessments targeted VAT charged by ITS Payroll Limited—a payroll intermediary—for gross wages, employer National Insurance Contributions (NICs), and a 1.5% processing fee. HMRC disallowed VAT recovery on wages and NICs, arguing they did not represent consideration for a taxable supply of labour services.

What's Changing: Economic Reality Over Paper Labels

The tribunal's central finding was that ITS Payroll Limited had not genuinely engaged workers or supplied them to ITS Plant-Tech. Key factual findings included:

1. Payment flows and invoicing: ITS Plant-Tech paid workers' net salaries directly from its own bank account, while ITS Payroll invoiced for gross wages, employer NICs, and a 1.5% processing fee, charging VAT on the full total.
2. Contractual gaps: No written contracts existed between ITS Payroll and the workers, or between ITS Payroll and ITS Plant-Tech.
3. Non-existent benefits: Employee benefits claimed by ITS Payroll, including grievance procedures, were found to be non-existent in practice.
4. Operational control: ITS Plant-Tech retained day-to-day control of workers, selecting personnel, directing them to sites, providing specialist training, and handling workforce matters.
5. HMRC's selective acceptance: HMRC accepted VAT on the 1.5% processing fee as recoverable input tax but disallowed VAT on wages and NICs.

The tribunal upheld HMRC's stance, ruling that the VAT charged on gross wages and employer NICs did not represent consideration for a taxable supply of labour services. This decision reinforces the principle that contractual labelling alone cannot override economic reality in VAT determinations.

Implications for Contractors and Agencies

The judgment has immediate implications for contractors, agencies, and umbrella providers:

• Contractual evidence: Written contracts between all parties—umbrella provider, worker, and end-client—are essential to demonstrate genuine labour supply.
• Operational control: Agencies must ensure that operational control of workers is genuinely transferred to the intermediary. Retaining day-to-day management roles may disqualify VAT recovery.
• Invoice structuring: Billing practices must reflect actual supplies. VAT on processing fees may remain recoverable, but wages and NICs are scrutinised as non-supply components.
• Compliance audits: Recruitment agencies should review existing umbrella arrangements to ensure compliance with the tribunal's findings. Proactive documentation of labour supply transfers and operational control is critical.

Failure to meet these criteria risks HMRC disallowing input tax on umbrella invoices, potentially resulting in significant assessments.

Outlook: What to Watch

As of 2026-10-12, no appeal has been lodged in this case. ITS Plant-Tech has until early November 2026 to appeal, but the underlying VAT principles remain operative under current UK law. Key developments to monitor include:

• Appeal filings: Whether ITS Plant-Tech challenges the decision, which could extend legal clarity or introduce new arguments.
• HMRC enforcement: Increased scrutiny of umbrella payroll schemes in VAT compliance audits, particularly focusing on contractual gaps and operational control.
• Industry response: How recruitment agencies and umbrella providers adapt their structures to align with the tribunal's findings, including potential market consolidation or restructuring.