The Upper Tribunal has upheld a decision that left the director of a recruitment agency facing personal tax liabilities exceeding £900,000 after HMRC successfully challenged VAT claims connected to outsourced payroll providers.
In Opus Labour Services Ltd v HMRC, the Tribunal dismissed the company's appeal and confirmed earlier findings that the agency should have known its transactions were connected with VAT fraud. The case provides an important example of how HMRC applies the Kittel principle within labour supply chains.
Background
Opus Labour Services operated as a recruitment agency supplying workers into the construction industry.
Rather than operating its own payroll, the company outsourced payroll administration to a series of specialist payroll providers. Those providers paid the workers, invoiced Opus for their services, charged VAT, and Opus reclaimed that VAT as input tax in the normal way.
HMRC later identified that the payroll providers had failed to account for VAT due to HMRC.
HMRC's case
HMRC argued that the transactions formed part of supply chains connected with fraudulent VAT evasion.
Although Opus had paid the VAT charged on the invoices, HMRC denied the company's entitlement to recover that VAT under the Kittel principle. This allows input tax recovery to be refused where a business knew, or should have known, that its transactions were connected with VAT fraud.
HMRC also imposed penalties on the company before issuing Personal Liability Notices against the sole director, Mr Jason Giller, making him personally liable for those penalties.
The Tribunal's findings
The First-tier Tribunal accepted that the relevant supply chains were connected with fraudulent VAT evasion.
However, the principal issue was whether Opus, through its director, knew or should have known of that connection.
The Tribunal found that Mr Giller did not have actual knowledge of the fraud. It also concluded that HMRC had not established "blind eye" knowledge, namely that he had deliberately avoided confirming facts he suspected.
Nevertheless, the Tribunal concluded that he should have known the transactions were connected with VAT fraud.
In reaching that conclusion, it considered a number of factors, including:
- Previous HMRC correspondence concerning labour supply fraud.
- Limited commercial due diligence before engaging payroll providers.
- A repeated pattern of supplier failures over a relatively short period.
The Tribunal concluded that the factors, viewed collectively, meant that a reasonable business person should have recognised the connection with VAT fraud.
Appeal dismissed
Opus and Mr Giller appealed to the Upper Tribunal.
The appeal argued that the First-tier Tribunal had applied the wrong legal test, failed to provide adequate reasons, and made a number of factual findings that were not supported by the evidence.
The Upper Tribunal rejected all three grounds of appeal.
It confirmed that the First-tier Tribunal had correctly applied the Kittel test and was entitled to conclude that, although there was no actual knowledge of fraud, the company should have known that the transactions were connected with fraudulent VAT evasion.
The Tribunal also upheld the Personal Liability Notices issued against Mr Giller.
Wider implications for recruitment agencies
The judgment comes as some payroll providers continue to offer recruitment agencies extended unsecured credit terms as part of their commercial proposition.
While there are legitimate ways of funding credit, recent insolvency records indicate cases where businesses within labour supply chains may have funded working capital by retaining VAT that should have been paid to the Exchequer.
From April 2026, the Government introduced new legislation aimed at tackling tax avoidance within labour supply chains by making agencies potentially liable where PAYE and National Insurance Contributions are not properly accounted for by umbrella companies. Although those provisions do not extend to VAT, the Opus decision demonstrates that VAT failures elsewhere in a supply chain can also create significant financial exposure. In light of both developments, recruitment agencies may wish to extend their due diligence beyond PAYE and NIC compliance to include verifying that payroll providers are accounting for VAT correctly and paying it to HMRC on time.
Where that VAT is not ultimately paid, HMRC may seek to recover the tax from other businesses within the supply chain if it concludes they knew, or should have known, that their transactions were connected with VAT fraud.