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Bathroom subcontractors flushed out in VAT case

The first tier tribunal (FTT) found that self-employed contractors were working for a bathroom company and not its final customer, so the VAT assessment was correct.

A number of years ago, I purchased a carpet from a retail outlet – let’s say for £500 plus VAT. The shop gave me a sheet of paper with a list of six self-employed carpet fitters, confirming they would all charge a fee of £250 to fit my carpet. None of them were VAT registered.

It was up to me to select a fitter and arrange a date and time for the work to be done, paying the fitter when the work had been completed. In this situation, I paid for two separate supplies from two different businesses; one for goods and one for services. There is no VAT problem and a welcome £50 tax saving on the labour charge.

Bathroom installation

Compare the above arrangement to that adopted by Marshalls Bathroom Studio Ltd (TC07753).

The company installs bathrooms for private households and in its advertising material, it claims to offer a “complete service from initial discussion… to the work being completed.” The company employs an in-house fitting team and also uses independent contractors to do some work. The company directors decide which fitters to send out after an order is received.

Invoicing procedure

When an invoice was raised at the completion of a job, the customer was asked to make direct payments to any contractors who had provided their services. The contractors’ bank details were usually shown on the invoice.

The invoice was silent about VAT, only quoting only the VAT inclusive figure of the job and not any split of ‘net and VAT’. Marshalls accounted for output tax on the payments it received and excluded any of the payments made directly to the contractors. The contractors were not registered for VAT.


HMRC raised a VAT assessment for £22,615 for periods from February 2012 to November 2015 on the basis that there had been no supplies made by the contractors to the final customer. The whole contract was supplied by Marshalls to the customer and the contractors worked for Marshalls.

The company appealed to the FTT against this VAT assessment.

HMRC’s approach

There were many factors that indicated Marshalls was making the entire supply, as HMRC highlighted at the hearing:

• The customers only ever dealt with Marshalls and not the contractors
• Marshalls chose the fitters and not the customer
• Any complaints about the job would be raised by the customer with Marshalls and not the contractor, although the contractor would be responsible for doing any corrective work, as required by his contract with Marshalls.

HMRC victory

The commercial and contractual reality was that Marshalls supplied a fully installed bathroom suite to the customer and the contractors provided their services to Marshalls. The company’s appeal was dismissed, although there was a partial success because assessments for periods February to August 2012 were out of time, reducing it from £22,615 to £17,646.

Learning points

I suspect there are a lot of situations going on that mirror the flawed strategy that was adopted by Marshalls.

The directors took the view that the only relevant issue was how the payments were made. They felt that as long as the customer paid the contractors directly, there would be no output tax liability for Marshalls.

This is wrong: payment arrangements are rarely the most important issue when it comes to working out the VAT position of a deal. It all comes down to the basic question: who is supplying what and to whom?

It would be a good idea to check if your builder clients are adopting correct VAT accounting with their contractor arrangements, hopefully like my carpet shop.