A First Tier Tribunal has just handed HMRC a pointed rebuke, and every small business owner who works with self-employed contractors should take note. In a VAT dispute, HMRC argued that Tapi Carpets — not its independent fitters — was really the one supplying the fitting service to customers. The tribunal disagreed, and didn’t hold back: HMRC’s case, as reported by tax specialists covering the ruling, was built on a view of how Tapi’s arrangements should have been organised, not how they actually were. That distinction matters more than it might sound, and it’s the reason this case deserves wider attention than one VAT bill.
Here’s why it lands: plenty of small businesses genuinely do structure work through self-employed subcontractors, franchise-style arrangements, or associate models — not as a tax dodge, but because that’s how the trade actually operates. A carpet retailer using independent fitters is a completely ordinary example. What this ruling suggests is that HMRC sometimes approaches these structures by imagining the “tidier” version it thinks a business ought to run, and then taxing the business as if that imagined version were real — rather than engaging with the arrangement the business actually has in place, paperwork and all. If that’s allowed to stand unchallenged, it quietly shifts the burden onto honest businesses to prove a negative: that they didn’t secretly mean to run things some other way.
The counterpoint is fair enough to name: HMRC’s job is partly to look past artificial structures set up purely to dodge tax, and some arrangements genuinely are dressed-up employment relationships. Nobody’s arguing HMRC should stop scrutinising this stuff. But there’s a real difference between testing whether a structure is genuine and simply asserting that a different structure would have been more convenient for tax purposes — and this ruling is a reminder that tribunals can and do see that difference, even when HMRC doesn’t.
If you run your business through genuinely self-employed contractors, sole traders you work with regularly, or any structure that isn’t the simplest possible employment relationship, don’t assume an HMRC challenge on “how you should have done it” is automatically right just because it’s HMRC making the argument. Your actual arrangements — contracts, invoicing, who controls the work — are the facts that matter, and this tribunal just confirmed that HMRC has to engage with those facts, not a hypothetical tidier version of them.
Has an HMRC enquiry ever tried to tell you how your business “really” works, rather than asking how it actually does?
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