£13.5 Million VAT Dispute: Tribunal Rules in Favour of Tapi Carpets Over Flooring Installation

Introduction

A recurring VAT issue in many commercial arrangements is determining who is making a supply for VAT purposes. Where a business facilitates or arranges a service provided by a third party, the key question is whether the business is acting as a principal, supplying the service in its own right, or as an agent, merely arranging for the supply to be made between the service provider and the customer. The distinction is significant because a principal must generally account for VAT on the full value of the underlying supply, whereas an agent is typically required to account for VAT only on its commission or arrangement fee. In resolving such disputes, tribunals and courts examine the contractual arrangements, payment flows, legal obligations, and the overall commercial reality of the transaction to determine the true supplier for VAT purposes. Against this background, the First-tier Tribunal considered whether Tapi Carpets was supplying floor-fitting services to its customers or simply acting as an intermediary arranging for independent fitters to provide those services directly.

Background

The case concerned Tapi Carpets, a UK established company, and whether itwas liable to account for VAT on floor-fitting services arranged through independent carpet fitters between June 2019 and December 2023.

When customers purchased flooring from Tapi Carpets, they had the options to either arrange installation themselves or ask Tapi to arrange installation, through one of its independent carpet fitters.

Under the second option, Tapi charged a separate arrangement fee for finding and coordinating a fitter. The customer then paid the fitter directly for the installation work when it was carried out.

Tapi treated itself as an agent facilitating the arrangement between the customer and the fitter. It accounted for VAT on its arrangement fee but not on the fitting charge itself.

 HMRC’s position

HMRC argued that the independent fitters were effectively subcontractors working for Tapi. On this basis, HMRC contended that Tapi was supplying the fitting service to customers and should have charged and accounted for VAT on the full fitting fees received by the fitters.

This led to VAT assessments being issued totalling approximately £13.5 million for the period in question. Tapi contested this decision, and the case was escalated.

Tribunal Decision

The First-tier Tribunal found in favour of Tapi Carpets, concluding that the contractual arrangements accurately reflected the underlying commercial reality of the transactions. In reaching its decision, the Tribunal placed significant weight on the fact that the independent fitters were responsible for carrying out the installation work, were engaged directly by customers, and received payment directly from those customers. The Tribunal determined that Tapi’s role was limited to introducing and arranging a fitter through its approved network in return for a separate arrangement fee. As a result, the Tribunal held that the supply of floor-fitting services was made by the independent fitters directly to the customers, rather than by Tapi Carpets. Consequently, Tapi was not liable to account for VAT on the fitting charges, and HMRC’s £13.5 million VAT assessment was overturned.

Key VAT principle

The decision highlights the importance of determining who is actually making a supply for VAT purposes. In agency arrangements, it is not enough to look at who introduced the parties to each other, or who coordinated the service. The courts will examine the contractual terms, payment arrangements, and overall commercial reality to decide whether a business is acting as a principal supplier or merely as an agent.

Practical lessons for businesses

The ruling highlights that businesses should ensure that contracts clearly reflect the intended agency relationship, with payment transactions being consistent the contracted arrangements. It is important the commercial reality matches the documentation held by all parties. Businesses using independent contractors should regularly review their VAT treatment to ensure it aligns with how services are actually provided.

This is a significant decision for retailers, marketplaces, and businesses that arrange services through networks of independent contractors, as it reinforces that a genuine agency model, can be respected for VAT purposes, where the facts support it.