A UK firm has lost a £569,175 VAT appeal after a tribunal found that using an outside payroll firm did not change who employed its staff. The 10 September 2026 ruling warns UK employers that VAT on an invoice is not always tax they can claim back.
What Did the Tribunal Decide in the £569,175 Payroll VAT Case?
ITS Plant-Tech Limited works in the wind energy sector. In 2019, it stopped running payroll in-house and used MP Screeding Ltd, then ITS Payroll Ltd. It had 20 to 30 workers. The providers billed for wages, employer National Insurance, and a 1.5% processing fee. They also added VAT to the bills.
ITS Plant-Tech claimed VAT back. HMRC began checks in 2022. HMRC issued tax assessments on 19 July 2023. After a review on 25 October 2023, they totaled £569,175: £32,226 for June 2019 and £536,949 for September 2019 to March 2022. The First-tier Tribunal rejected the appeal.
Why Were the Payroll VAT Claims Rejected?
The firm said that its workers had moved to the payroll firms. It said those firms then supplied the staff back. But the facts did not support this. The tribunal looked at how staff were hired and managed.
ITS Plant-Tech still hired staff, gave them tasks, and paid for training. It also paid their net wages. No records proved that their job contracts had moved. Payslips in another firm’s name were not enough.
The tribunal found that the outside firms ran payroll but did not supply staff. VAT on the 1.5% service fee could be claimed. VAT on wages and employer National Insurance could not. This was not a new 20% VAT charge on all wages. The dispute concerned VAT the firm had already claimed.
Does Outsourcing Payroll Count as a TUPE Transfer?
Not on its own. TUPE is a UK law that protects staff when a business or service moves to a new employer. Some service changes do fall under TUPE, but not all. ACAS says this can include an organized group of staff who work on a service for one client.
In this case, both sides accepted that no TUPE transfer had taken place. The case dealt with VAT, not a claim for unpaid PAYE.
Do the April 2026 Umbrella Payroll Rules Matter?
These rules cover a different type of deal. Since 6 April 2026, HMRC can seek unpaid PAYE from the relevant agency in a chain that uses an umbrella company. If there is no agency, the end client may have to pay.
They do not apply to basic payroll work. They cover specific chains that supply workers through umbrella firms.
What Should UK Employers Do Now?
Check who employs each worker and who pays their wages. Read the contract and VAT bills. Check that both match daily work. Keep proof of pay and tax. Seek advice if the roles are not clear. A wrong VAT claim can lead to a tax bill, even if the provider charged that VAT.
How Can Lanop Help with Payroll and VAT Risks?
Outsourcing payroll can save time, but it can also create tax risks if the roles and costs are not clear. At Lanop Business & Tax Advisors, we help UK businesses review payroll contracts, check VAT claims, and understand their PAYE and National Insurance duties.
Our team can help you identify whether VAT has been claimed on the right services, review payroll records, and deal with HMRC queries. We also help businesses understand their tax duties when using outside payroll providers.
Contact LANOP today to review your payroll and VAT arrangements and reduce the risk of costly tax errors.
