TC09596 - [2025] UKFTT 00895 (TC)

The CJEU has observed that the contractual position normally reflects the commercial and economic reality of the transactions: Newey (CJEU), at [43].

Miss McArdle submits that:

In respect of Miss McArdle’s submission that a customer seeks to purchase a ‘fitted carpet’ when they purchase the goods from the Appellant’s store, we have found that the customer has freedom of choice in relation to the fitting service and we are satisfied, on consideration of the contractual arrangements, that it is made clear to the customer by the Appellant (both under the pre- and post-August 2020 arrangements) that the Appellant does not provide fitting and, further, that a significant proportion of customers buy flooring from the Appellant without asking for a fitter to be referred to them.

In respect of Miss McArdle’s submission that the fitting fee is agreed by the Appellant and the customer without recurse to the fitter, we are satisfied that it is only an ‘estimated’ fitting fee that is entered on the Invoice. The estimate is based on the ‘going rate’ that is discussed between the Appellant and the fitters. Indeed, HMRC were unable to provide any evidence of the arrangements that are considered to be in place in the industry as a whole (or any trade practice) and wrongly interpreted the question from the panel as the trade practice known to HMRC to be a requirement for HMRC to disclose the tax affairs of a specific taxpayer in the same industry as the Appellant. The unchallenged evidence given on behalf of the Appellant is that the estimate given in the Invoice is based on rates that the fitters and the Appellant have discussed in advance; thus informing the estimated cost. As already considered, the charge might be different from the estimated cost (depending on the actual job) as agreed between the fitter and the customer. Such an arrangement is entirely consistent with there being a separate supply of fitting by the fitter to the customer.

Furthermore, we accept that the fact that the identity of the fitter is not provided to the customer until the fitter makes contact on the day of the fitting is of no probative value to HMRC’s case. This is because the service provided by the fitter is not a personal one in the sense that the identity of the fitter is material from the customer’s perspective.

HMRC’s overarching contention appears to be that the fitters are acting as ‘subcontractors’ for the Appellant. We find that HMRC’s view that a subcontractor relationship exists in the circumstances of this appeal is misconceived. This is because the economic/commercial model of a contractor/subcontractor relationship ordinarily arises where the contractor is responsible for some task (e.g., the provision of goods or services to the recipient of those goods or services) and contracts with someone else (i.e., the subcontractor) to undertake all, or part, of that task. We are satisfied that the Appellant did not assume any responsibility for the fitting of flooring in this appeal and did not contract with the fitter to undertake such a task. The fitters were under no obligation to provide their services and were not under a ‘cab-rank’ rule, so to speak.

Furthermore, we are in agreement with Mr Jones that in a contractor/subcontractor relationship, the customer (client) pays the contractor for completion of the task, pursuant to their agreement. The contractor then pays its subcontractors for their work; which is ordinarily a margin on the difference between what it receives from the client and what it has had to pay its subcontractors. There is no evidence before us to support a finding that the customer paid the Appellant for the fitting service and, indeed, such an arrangement is not reflected in the contracts/agreements analysed above. Furthermore, the Invoices show that the total sum paid by the customer at the point of sale does not include the ‘fitting estimate’. There is no evidence before us that the Appellant ever received the fitting payment.

As described by Mr Jones in his skeleton argument, the Appellant (the putative contractor in HMRC’s analysis) is not entitled to receive (and does not in fact receive) any economic benefit from the price paid for the fitting services. The payment is made by the customer to the fitter, directly, and the fitter retains the entire amount. In many circumstances, the Appellant will not know what the final fitting charge is if surcharges have been applied, or if the job is not as described by the customer. We accept, and agree with, Mr Jones’ submission that the outcome of HMRC’s case is that the Appellant has to pay a greater amount of VAT in respect of the transaction where the customer opts for the fitter referral than it must pay in respect of the transaction where such a choice is not made by the customer. This is despite the fact that, in economic terms, the Appellant is receiving exactly the same, or less (when the customer qualifies for a discount), in the first transaction. In this respect, around 25% of customers purchase carpets without asking to be introduced to a fitter by the Appellant. In the case of ‘other types of flooring’, this figure is around 55%.

In relation to an agency relationship (which was how HMRC also interpreted the Appellant’s case to be), in Maritime Stores Ltd v HP Marshall & Co Ltd [1963] 1 Lloyd’s Rep 602, at 608, the following summary of the law set out in Bowstead & Reynolds on Agency was approved:

“The question whether an agent who has made a contract on behalf of his principal is to be deemed to have contracted personally, and, if so the extent of his liability, depends on the intention of the parties, to be deduced from the nature and terms of the particular contract and the surrounding circumstances, including any binding custom.”

It is, therefore, clear that the parties to the contract have to be identified.

Overall, we are in agreement with Mr Jones’ submission that none of the factors identified and relied on by HMRC undermine the position set out in the contractual arrangements in relation to the appeal before us. We further find force in his submission that HMRC appear to be “asserting obligations and bending the focus”, which undue focus on agency “misses the wood for the trees”. We are satisfied that the economic and commercial reality in this appeal is that the fitters are independent and it is they who undertake fitting work for the customers. They do not work for the Appellant and the Appellant is not obligated to remunerate them for any fitting services. The absence of adopted written terms between the Appellant and the fitters is not fatal to the overall picture but serves to reinforce the independence of the fitters.

We accept, and agree, that the fitting terms are uncomplicated. Essentially, one job is the same as another. The customers pay the fitters directly upon completion of the job. The fitter has no obligation to take on work. The discount available to customers is not tied to the fitting. The core obligation to provide the fitting service lay firmly with the fitters and the obligation to pay for that service lay with the customer. We have further considered the fact that online sales comprise of only 1% of the sales.

In respect of the small minority of circumstances where the Appellant assists a customer with problems in the fitting service provided, this is not to be translated into a finding that the Appellant is the one making the supply. This is because the assistance given by the Appellant is explicable by reference to its need to maintain its brand and reputation with customers. The fact that the stakes may be high for the Appellant does not translate into a finding that there is a supply of fitting being made by the Appellant, and does not result in a legal obligation on the Appellant (in relation to fitting). In relation to maintaining its brand and goodwill, in Secret Hotels, at [46], Lord Neuberger said this:

“46.

There is nothing in factor (1)(a): until a customer selected a particular hotel on the website, Med had to deal with the customer in its own name, but that does nothing to undermine the point that, once a hotel was selected, Med acted as the hotelier’s agent. As to factor 1(b), it is true that Med appointed its own local agents to look after holiday-makers, but that was not inconsistent with its status as an agent of the hotelier, and is easily explicable by reference to Med’s need to maintain goodwill in the holidaymaking market…”

We are satisfied that the Appellant had no obligation to act as intermediary in the circumstances of the appeal before us, unlike Med in Secret Hotels. In the appeal before us, where the referred fitter carries out additional fitting work, or fitting work that is not as described at the point of sale of the goods, HMRC’s case appears to be that for VAT purposes, the difference between the estimated fitting price on the Invoice and the price actually paid is consideration for a distinct supply; that supply being made to the fitter by the customer.

We are in agreement with Mr Jones’ position that it does not follow from the fact that a customer wants their flooring to be fitted that the Appellant is the one who is providing the fitting service. We further find that there is considerable force in Mr Jones’ submission that HMRC must establish that supplies of fitting are made by the Appellant. HMRC have not done so. For there to be a single, composite supply of a fitted flooring, it must be established that the flooring and fitting service are supplied by the same person. A supplier of flooring cannot become a supplier of fitting by virtue of the fact that fitting is necessary in order for a customer to enjoy the flooring. We are satisfied that it is artificial to treat that single service as being supplied in parts by different people; one part by the Appellant and the remainder by the fitter, to the extent that the price differs from the fitting estimate shown in the Invoice. It is settled that for VAT purposes, the taxable amount is the consideration “actually received” by the supplier.