In Its Plant-Tech Limited v HMRC [2026] UKFTT 1299 (TC), the First-tier Tribunal dismissed an appeal against VAT assessments of £569,175. The holding is operationally sharp: outsourcing payroll administration does not turn wages and employer NIC into consideration for a taxable supply of labour. If the economic reality is that you still employ the workers, VAT on the wage and NIC lines is not your input tax — full stop. HMRC allowed recovery on the processing fee only. Everything else stayed disallowed.
If you run group payroll through third-party processors, umbrella-style wrappers, “TUPE” staff-supply pitches, or PE portfolio companies that still treat payroll invoices as routine reclaimable overhead, treat this as a process control note — not a niche SME curiosity. The same substance test bites facilities management, engineering contractors, field-service businesses and any structure where a third party invoices gross pay plus NIC plus a fee and stamps VAT across the lot. Read the judgment on Find Case Law alongside VATA 1994 s24 (input tax), HMRC’s VAT Input Tax manual, the Secret Hotels2 economic-reality approach, and HMRC’s staff-supply and employment guidance.
What actually happened
ITS Plant-Tech provides inspection, testing, training and maintenance services in the wind-technology sector. Until early 2019 it ran payroll in-house. After the payroll administrator left, management outsourced the function — first to MP Screeding Ltd, later to ITS Payroll Ltd. There was no written contract with either provider in evidence.
Invoices charged VAT on amounts that included wages, employer NIC and a 1.5% processing fee. ITS Plant-Tech paid net wages (and training costs) directly from its own bank account; those amounts appeared as credits on the provider invoices, so the cash paid to the payroll companies was the balance. The company claimed the full VAT shown as input tax.
HMRC assessed under VATA 1994 s73. After review the figures stood at £32,226 (period 06/19) and £536,949 (periods 09/19 to 03/22) — £569,175 in total. Validity and timing of the assessments were not in dispute. The only issue was entitlement to the disputed input tax.
The company argued the payroll entities had become the legal employers and supplied labour back. It relied on payslips headed ITS Payroll, a PAYE reference belonging to that company, informal “TUPE” language used internally, and the fact that HMRC had previously assessed ITS Payroll for output tax on similar invoices before withdrawing those assessments. HMRC’s case was simpler: ITS Plant-Tech remained the employer throughout; the only taxable supply was payroll processing; wages and employer NIC were the appellant’s own employment costs.
The test: contracts first, then economic reality
The Tribunal applied the two-step approach from the Supreme Court in Secret Hotels2 Ltd [2014] UKSC 16: characterise the relationship from the contractual documentation, then test whether that characterisation matches economic reality. See also the employer-identity principles drawn from Clark v Harney Westwood & Reigels [2021] IRLR 528 — written agreements as the starting point, caution over documents the other side never saw, and consistent day-to-day conduct as evidence of what was actually agreed.
On the facts, the documentation cupboard was bare:
- No transfer agreement, employee schedule, notification, novation or replacement contracts.
- No TUPE transfer in law — both sides accepted there was no relevant transfer of an undertaking or service provision change.
- Employment contracts in evidence still named ITS Plant-Tech as employer.
- Contemporaneous cost-benefit analysis and early HMRC meeting notes described payroll outsourcing for administrative efficiency, not a labour-supply model.
- Day-to-day control never moved: recruitment, site direction, specialist training, grievances and dismissals stayed with ITS Plant-Tech. The director accepted there was “minimal disruption” and little change in practice.
- The company kept Peninsula for employment-law support throughout.
- Annual accounts continued to show employees.
Payslips and a third-party PAYE scheme were not enough. At most they showed that payroll functions ran through ITS Payroll. They did not prove employment had transferred or that labour was being supplied back for consideration. A separate processing fee on the invoices pointed the other way — toward a payroll service, not a single labour charge.
HMRC’s earlier (withdrawn) output-tax assessments on ITS Payroll carried little weight. Input-tax entitlement is a statutory question for the claimant. Another taxpayer’s historic assessment does not discharge your burden of proof.
The holding
Standing back, the Tribunal found ITS Plant-Tech had not established, on the balance of probabilities, that either payroll company supplied labour. Sincere belief that staff had “transferred” cannot substitute for evidence. Where you would reasonably expect transfer documents if a real employment change had occurred, their absence matters.
Economic reality: the individuals remained employed by ITS Plant-Tech throughout. Wages and employer NIC were not consideration for a taxable supply by the payroll companies. VAT on those lines was not deductible input tax under s24 VATA. The appeal was dismissed. Judgment date: 10 September 2026. Heard 27 August 2026 before Judge Fairpo and Member Corrigan.
Why CFOs should care beyond the wind sector
This is not an exotic avoidance case. It is a documentation and substance failure on a common commercial pitch: “we’ll take your payroll / put staff on our books / you reclaim the VAT on the full invoice.” Variants appear in:
- Outsourced payroll and “employer of record” wrappers that never actually novate contracts
- Intra-group recharge models where one entity runs payroll for the operating company without a clear labour-supply agreement
- Facilities and engineering contractors who pay net wages themselves while a processor invoices gross-plus-NIC-plus-fee with VAT on the lot
- PE portfolio cutovers where the first 90 days after acquisition leave payroll half-migrated and half-documented
HMRC’s published position on supply of staff has always turned on who is the employer and what is actually being supplied. Plant-Tech is a clean reminder that labels, payslip headers and informal “TUPE” talk do not rewrite the VATA analysis. For the statutory frame on supplies and consideration, see also VATA 1994 s5 and HMRC’s VAT Supply and Consideration manual.
Related process risks sit next door: IR35 / off-payroll working status maps, agency workers, and the employment-tax side of any structure that claims someone else is the employer while you keep operational control. If your VAT reclaim assumes a labour supply that employment law and day-to-day control do not support, you have a dual-exposure problem — VAT and PAYE/NIC — not a single line-item debate.
The CFO lock-list
Run this as a control pack, not a one-off counsel note:
1. Map every third-party payroll or staff invoice that carries VAT on wages or employer NIC. Split fee vs wage/NIC lines. If the wage/NIC block is material and you are reclaiming full VAT, escalate.
2. Demand the contract pack. Written service agreement, statement of what is supplied (payroll admin vs labour), fee schedule, and — if labour supply is claimed — novations, employee consents, and a clear employer-of-record trail. No contract, no comfort.
3. Kill “TUPE” as marketing language. Either there is a real TUPE transfer with legal effect, or there is not. Informal shorthand in emails will be read against you when HMRC asks for the transfer file and you produce nothing.
4. Reconcile operational control. Who recruits, directs, trains, disciplines and dismisses? Who pays net wages from whose bank account? Who appears as employer in statutory accounts and on employment contracts? Inconsistency is the case for the other side.
5. Align the VAT return with the employment reality. If you remain the employer, reclaim VAT on the processing fee only. Do not invent a labour-supply input-tax position to “optimise” a cash-flow line.
6. Watch the provider’s own VAT treatment. A processor charging VAT on wage pass-through is a red flag for your reclaim analysis even if their compliance story is someone else’s problem.
7. Board and audit-committee note. For material arrangements, minute the economic-reality conclusion and the residual risk if HMRC opens a s73 enquiry years later — Plant-Tech’s assessments covered periods from 2019 into 2022 and crystallised in 2023.
Bottom line
Plant-Tech is not about clever law. It is about failing the basic substance test on a high-value reclaim. Payroll outsourcing is real and often sensible. Labour supply is also real — when contracts, control and economic reality actually move. What does not work is treating a 1.5% processing arrangement, payslip headers and a sincere belief in a “transfer” as enough to pull half a million pounds of input tax on wage and NIC lines.
Lock the contracts. Lock the employer map. Lock the reclaim to the fee that is actually a supply. Everything else is a future assessment waiting for a quiet s73 letter.
Sources: Find Case Law judgment · VATA 1994 s24 · VATA 1994 s73 · Secret Hotels2 UKSC · HMRC VAT input tax manual · HMRC staff supply guidance · Off-payroll working · VAT Notice 700 · FTT Tax decisions · Legislation.gov.uk VATA