HMRC gets the rug pulled out from under it: Tapi succeeds in £13.5 million VAT dispute

The First-tier Tribunal’s decision in Tapi Carpets Limited v HMRC [2026] UKFTT 1128 (TC) provides a useful reminder that, when determining who makes a supply for VAT purposes, contractual arrangements remain the starting point. Operational involvement, commercial control and customer-facing communications may all be relevant, but they do not automatically turn an agent into a principal.

The case concerned VAT assessments totalling approximately £13.56 million for periods between June 2019 and December 2023. HMRC argued that Tapi supplied flooring fitting services to its customers as principal. Tapi maintained that independent fitters supplied those services directly to customers, with Tapi acting only as the customer’s disclosed agent in arranging the fitting. The Tribunal agreed with Tapi and allowed its appeal. 

Customers purchasing flooring from Tapi could arrange installation themselves or pay Tapi a separate fee to arrange an independent fitter from its vetted pool. Where Tapi provided this arrangement service, the customer generally paid the fitting fee directly to the fitter when the work was carried out.

Tapi accounted for VAT on the arrangement fee it received. However, it did not account for VAT on the fitting fee because it considered that the fitter supplied the installation service directly to the customer. Many of the independent fitters were not VAT registered and therefore did not charge VAT on their services. In a small minority of “invoiced fitting” cases, representing approximately 1.2% of orders, Tapi received the fitting payment itself, treated the fitting as its own supply and accounted for VAT accordingly. 

The distinction was significant because, if Tapi supplied the fitting service as principal, VAT would have been due on the full fitting charge regardless of whether the individual fitter was VAT registered.

HMRC considered that the independent fitters were effectively subcontractors supplying fitting services to Tapi. On that analysis, Tapi purchased the fitting services and made an onward taxable supply to its customers.

In support of its position, HMRC pointed to the degree of control exercised by Tapi. Among other things, Tapi selected and vetted fitters, provided customers with an estimated fitting price, established service standards, offered a fitting guarantee, assisted with complaints and sometimes used language such as “our fitting costs”. HMRC argued that these features gave customers the impression that Tapi was providing a single, seamless flooring and installation service. 

HMRC also argued that direct payment from the customer to the fitter was merely an administrative arrangement. In its view, Tapi benefited from the fitter accepting the payment directly and bearing the risk of non-payment. The separate arrangement fee was said to represent, in substance, Tapi’s retail margin on its supply of fitting services.

The Tribunal approached the issue by first identifying the contractual relationships between Tapi, the customer and the fitter, before considering whether those relationships reflected the economic and commercial reality. This was consistent with the principles developed in cases including Secret Hotels2 and Newey. Contractual terms are not necessarily conclusive, particularly where they are artificial or inconsistent with the parties’ conduct, but they remain the most useful starting point. 

The Tribunal found that customers engaged Tapi to act on their behalf to source a suitable fitter and establish the framework within which the customer and fitter could contract. The customer was not obliged to accept the fitter, and the fitter was not obliged to accept the work. The fitter could also amend the quoted amount where additional or more complex work was required.

Crucially, the fitters performed the installation, were responsible for their work and received the fitting fee directly from the customer. Tapi neither paid the fitters nor accepted responsibility for collecting unpaid fitting fees. The Tribunal found no implied subcontracting agreement under which the fitters supplied their services to Tapi. 

The Tribunal also rejected the suggestion that Tapi’s involvement in pricing, fitter selection, quality standards and complaints was incompatible with agency. These activities were, in the Tribunal’s view, part of the arrangement service for which customers paid Tapi. Agency is not narrowly defined, and there is no universal checklist that determines whether a party is acting as an agent. The nature of the relationship must instead be established from the agreements, surrounding circumstances and conduct of the parties. 

Accordingly, Tapi supplied a taxable arrangement service to the customer, while the independent fitter supplied the fitting service as principal. VAT was chargeable on the fitting fee only where the individual fitter was VAT registered or otherwise required to account for VAT on that supply.

The judgment is relevant beyond the flooring industry. Retailers, online platforms and businesses that arrange services through independent contractors should consider whether they are acting as an agent or purchasing and resupplying the underlying service.

However, the decision should not be interpreted as meaning that direct payment to a third-party contractor automatically establishes an agency relationship. The Tribunal stressed that each case depends on its own contractual and commercial facts. Contracts, websites, quotations, invoices, payment flows and customer communications should therefore tell a consistent story.
Businesses relying on agency treatment should be able to demonstrate who is contractually responsible for performing the service, who bears the risk of non-payment, who is liable if the service is defective and in whose name the intermediary acts. As a First-tier Tribunal decision, Tapi is not binding authority and may be appealed. Nevertheless, it provides a helpful illustration of the importance of carefully documenting the respective roles of all parties involved in a supply chain. 

For further information on the above, please get in touch with your usual Crowe UK contact.