Mr Justice Lewison:
- A1 Lofts Ltd, as its name suggests, is in the loft conversion business. The issue before the VAT Tribunal (Chairman Miss JC Gort) was whether it supplied a complete package to a homeowner, consisting of a finished loft conversion; or merely project management services with the individual tradesmen (fitters, plumbers, electricians etc.) making separate supplies to the homeowner. The Tribunal decided ([2008] UKVAT V20888) that A1 Lofts supplied the whole package. A1 Lofts, represented by Mr Guy Tritton, now appeal. The appeal is confined to a point of law only.
- The Tribunal found the following relevant facts. A1 Lofts was one of a number of companies associated with Mr Stephen Mills (whom the Tribunal found to be honest and reliable) and his family. The others were A1 Designs Ltd which carried out design services for A1 Lofts; MM Administration Ltd, which dealt with pre-build work (e.g. party wall awards, scaffolding and skip hire) and MM Logistics Ltd which ordered materials. A1 Lofts and the homeowner entered into a written agreement upon which much of the argument in this appeal turned. In paragraph 9 of its decision the Tribunal described what happened before the agreement was signed:
"A1 Lofts advertises in the Yellow Pages and also on its own website. Upon being contacted by a customer, Mr Mills arranges a visit to get details of the work/project required. This visit is almost invariably carried out by Mr Mills himself, on behalf of A1 Designs, and includes inspection of the proposed conversion, preparation of an indicative design and preparation of a quote to the customer for the total price of the job, including labour and materials. That quote is presented to the customer on A1 Lofts' headed notepaper. It is calculated by Mr Mills on the basis of his experience, and the customer is given no breakdown of the details of how that quote is made up and is unaware of the existence of A1 Designs. There is no negotiation with the customer over the price of the job. For each job there is an order form detailing all the works necessary, a payment schedule and a client agreement ("the A1 Agreement"). Prior to the signing of an agreement with the customer A1 Lofts provides a document which sets out what A1 says it does. In particular at Clause 1.2 which is headed "What does a full A1 Loft Conversion include?" It sets out the various matters, such as the technical survey, the design, the submission to authorities or approve inspectors, scaffolding and skip hire and then the work which is required to effect a loft conversion. Under Clause 1.3 headed "About us and what we do" it states as follows:
"A1 Lofts are the loft conversion specialist in your area. We are specialist and therefore have a wealth of knowledge on all related issues such as design, planning, building regulations and of course the construction. …
"We concentrate on specific areas within London and the Home Counties where we know we have access to a reliable and experienced workforce …
"Building a loft conversion is complex and requires careful planning. A1 are unique in that we will manage the whole project for you by using tried and trusted professionals and experienced personnel, from plans through to completion.
…
"We will not just build your loft conversion we will manage the whole project on your behalf by appointing specialised teams to look after every single stage of the process. You will have access to a pre-survey design team, pre-build client services, drawing build client services, heaters, electricians and plumbers.""
- The Tribunal quoted part of the website later in their decision (§ 46):
"Q. Are A1 Lofts Ltd experienced specialist in loft conversions?
A. Yes. We have many years experience in designing and building loft conversions and we use only skilled professional tradesmen."
- At the conclusion of (or following) Mr Mills' visit A1 Lofts and the homeowner sign what the Tribunal called the A1 Agreement. This provides:
"The Client … hereby appoints A1 Lofts Ltd as Project Management and Agent for the Client in respect of the construction and installation of:
………….
…………
("the Works")
at the property
………….
("the Property")
for the price of ……….
Subject to the Terms of Business (receipt of which the Client acknowledges) and any special conditions detailed overleaf."
- The Terms of Business are contained on a printed form. Among the drafting deficiencies is the fact that almost every cross-reference within the contract is wrong. I have corrected the errors in quoting it. They begin with a number of definitions which include:
"the Contractors" - the Architect, Service Providers, tradesmen and other persons engaged by the Project Manager on behalf of and as independent contractors to the Client to fulfil in whole or in part the obligations herein"
" the Project Manager" – shall be A1 Lofts Limited which shall throughout the existence of the agreement act as the agent of the Client"
- The Service Providers are not defined or identified, but are in fact MM Administration Ltd and MM Logistics Ltd. Clause 2 provides:
"The Project Manager, as agent for the Client shall:
(a) Prepare and agree with the Client an initial scheme of design for the construction of the Works and generally oversee and co-ordinate the conduct of the Works at the Property until completion;
(b) Upon receiving the deposit (which shall be non-returnable) and stage payments from the Client pursuant to the terms herein utilise the same for the purposes of making payments to the suppliers, the Service Providers, Contractors and all other persons properly entitled to the same, including the Project Manager either for his own account or on behalf of the Contractors;
(c) Upon satisfactory completion of the Works, and the Client having fully complied with the proficiency of the agreement and made payment of all moneys due, issued to the Client the Guarantee."
- Clause 3 requires the Architect "as agent for the Client" to produce plans, and to submit them for approval. He is given authority on behalf of the Client to make certain alterations to the plans. Clause 3 (e) provides that the copyright in all plans and specifications will belong to the Project Manager. Clause 4 sets out the obligations of the Service Providers "as independent contractors to the client". Clause 5 provides:
"The Contractors, as independent contractors to the Client, shall:
(a) Complete the Works in accordance with good building practice and within a reasonable time. In respect of the commencement, carrying out and completion of the Works time shall not be of the essence.
(b) In the event that the Contractors shall unreasonably delay the completion of the Works the Client, having complied fully with the provisions of Clause [6], shall have the right to give the Project Manager formal notice in writing requiring the Project Manager to remedy such default as may be specified in the notice with a reasonable time being not less than 30 days from the date of delivery of such notice by registered or recorded delivery post."
- The Contractors are not identified in the agreement either, and are not directly parties to it. Clause 6 sets out the obligations of the Client himself. These include giving access to the Architect; ensuring that clear access can be gained to the property by the Contractors throughout the works; providing necessary services such as electricity, water and drainage; protecting personal property from damage; removing carpeting. They also include paying the Price to the Project Manager in accordance with the provisions of clause 7, time being of the essence. Clause 7 deals with financial matters. In particular clause 7 (b) says that payment of the Price shall be made to the Project Manager and "credited to his general client account from which he is hereby authorised as agent for the Client to make payment to any supplier of materials the Architect and Contractors pursuant to clauses 2 (b) and 7 (c)". Clause 7 (c) says that all invoices issued by the Architect, the Project Manager and the Contractors must be "addressed to the Client" and will be discharged out of moneys in the client account. The invoices will be collated and retained by the Project Manager "as agent for the Client" and on completion of the works the Project Manager will provide to the Client "a financial statement showing details of all the moneys received from the Client pursuant to the provisions of this agreement". The financial statement is apparently not required to show disbursements out of the client account. Clause 8 deals with default on payment or other breach by the Client. In that event the Project Manager has the right to suspend the works and to withdraw all contractors from site; by himself or his agents to remove from the property all tools equipment and materials; and to add to the price the sum of £100 for each day's suspension "being a genuine pre-estimate of loss arising out of the Client's breach". Clause 9 provides that on completion of the works and payment of the Price the Project Manager will deliver the Guarantee to the Client. Clause 10(a) contains an entire agreement clause which says:
"It is hereby acknowledged that the provisions herein constitute the entire agreement and that no reliance is placed on any prior oral or written representations."
- Clause 11 provides:
"During the currency of this agreement the Project Manager, the Architect and the Contractors shall be deemed independent contractors working independently of each other and contracting severally with the Client as detailed herein."
- As I have said, the Contractors are not identified in the Terms of Business. The Tribunal considered how the contractor was appointed. Sometimes the contractor is chosen by the homeowner. The Tribunal found (§ 11) that this would be allowed in circumstances where that contractor had satisfactory references and these would invariably be checked by Mr Mills before such a contractor was employed. In circumstances where a client was not asking for his own contractor, the client would not know who the contractors or the labourers were until the work started. The contractors all had written agreements with A1 Lofts in a standard form. The relevant terms of it were:
"(1) The Contractor hereby agrees for the Agent to undertake such Works for Owners as the Agent may from time to time allocate to the Contractor at a Price to be agreed in each case.
(2) The Works shall be carried out in accordance with the provisions of the Principal Agreement between the respective Owner and the Agent, a copy of which including any Special Conditions, shall be made available to the Contractor upon request."
- However, this agreement did not identify any particular property at which works were to be carried out; nor any particular works. It was no more than an umbrella agreement which did not require A1 Lofts to offer work to the contractor, nor did it require a contractor to undertake work if offered. The agreement was accompanied by a letter from Mr Mills to the contractor which stated:
"From time to time, we will be acting as the Agent for Clients who may wish to instruct you to undertake work at their premises. Please note that when we ask you to undertake such work we will be acting as Agents for the Clients. Accordingly, your invoices should be addressed to them, but delivered to us for payment.
For the avoidance of doubt, we wish to make it clear that at no time we will be acting in the capacity as a contracting party ourselves. On all such occasions, we will be merely acting as agents for the clients."
- The Tribunal found (§ 12) that the contractors will have agreed previously with A1 Lofts a total fee for the job. A1 Lofts does not enter any negotiation with the contractors as to the price per job. The contractor is able to accept the price or reject it. The amount each contractor makes depends on how efficiently he has done the job; he does not get paid any extra if he overruns the budgets. However he is able to negotiate directly with the client if the client requires any items over and above those agreed in the initial contract. In those circumstances there is a separate contract between the contractor and the client with which A1 Lofts is not associated, and from which it takes no cut. The client is at no stage aware of the actual amounts paid to individual contractors, but it is permitted to see the entries on its own Client Account.
- There were no written contracts between the client and the contractors. Although A1 Lofts' Terms of Business required all invoices to be addressed to the client, the Tribunal found (§ 13) that this was not always adhered to. On completion of the works the client would sign a completion notice stating that the works "have been completed by A1 Loft Conversions". This document is contained within a Client Information Pack. Once the job is finished, A1 Lofts do not immediately take all the money out of the Client Account. They leave a significant amount of money there in the event of any claim under a ten year guarantee which they offer to the clients. However, this guarantee is very limited. It is limited to a repetition of manufacturers' guarantees (such as Velux windows) and to failures in materials. It does not cover defective workmanship.
- The Tribunal also heard evidence from Mr Ashley-Hacker, who was put forward by A1 Lofts as a typical client. The Tribunal made the following relevant findings in relation to his evidence:
i) It was Mr Ashley-Hacker's understanding that A1 Lofts would act as his agent in finding the various contractors needed to get the conversion done. He found the document which he received from A1 Lofts not inconsistent with what he had been told at the initial meeting. Mr Ashley-Hacker had confidence in Mr Mills, and considered that this was more important than the nature of the documentation (§ 25).
ii) Mr Ashley-Hacker regarded the advantage of using A1 Lofts as being that they would have the necessary leverage to get the work done should the people on site fail (§ 26).
iii) Snagging items were fixed on site by the builder with whom he was dealing; but he did not know what would happen if the builder on site did not do the work and A1 Lofts had been unable to persuade him to. He did not know what his rights were and would have consulted a solicitor. (§ 26).
iv) It would be overstating matters to say that he had a separate contract with the electrician and with the plumber, he had contracted with A1 Lofts for a certain number of electrical points and for various plumbing matters, and had signed a global contract with them and had no extra contracts. In re-examination he was adamant that the only contract he had signed was with A1 Lofts, he had no other contracts, and by saying he had no other contracts, he included verbal as well as written contracts (§ 26).
- The Tribunal also heard evidence from three of the contractors. Two were fitters and one was an electrician. The Tribunal found (§ 27) that the two fitters regarded themselves as working direct to the client, and would agree the precise starting date of the works with the client once the job had been inspected. So far as the electrician was concerned the Tribunal noted that he gave self-contradictory evidence about who he would look to if his invoice was not paid (§ 29). They did not make a finding which resolved the contradiction.
- The Tribunal then set out the parties' respective cases. The essence of the case advanced by Mr Tritton on behalf of A1 Lofts (and repeated before me) was that in a case where there is a written contract governing the relationship between all potential suppliers and the person(s) to whom supplies are being made, the identity of the supplier and the nature of the supply are to be determined as a matter of construction of the contract, unless the contract is a sham or the parties have departed from the terms of the contract. He relied on a number of cases in support of this proposition. The cases had held that where A physically supplies a service to B, and A is in a contractual relationship with C who facilitates the supply, it is a question of construction of the contract whether the supplier for the purposes of VAT is A or C, except in the circumstances mentioned. Applying that approach, A1 Lofts' Terms of Business made it clear that A1 Lofts was acting as agent for the client in the appointment of contractors who would physically carry out the work. The latter were the suppliers of the building works. A1 Lofts only supplied project management services.
- The essence of the case for HMRC, represented by Mr Richard Smith (who also appeared before me) was that although one must look at the contract, it was not determinative. He, too, relied on authority in support of that proposition. He relied also on features of the pre-contractual arrangements and the post-contractual certification which he said were inconsistent with the contractual position. Those features, he said, showed that A1 Lofts supplied a full loft conversion service and that is what the client contracted for. He also drew attention to a number of features of the Terms of Business themselves that were inconsistent with the mere agency for which A1 Lofts contended. These included in particular:
i) Clause 5 (b) which entitled the Client to call on A1 Lofts to make good certain defaults by the contractor;
ii) Clause 6 (c) which required the client to give access to the contractor. If the client had a separate contract with the contractor this clause would be redundant;
iii) Clause 8 which gave A1 Lofts the right to withdraw the contractors. The payment of £100 per day of suspension to A1 Lofts (if, as it claimed to be, it was a genuine pre-estimate of loss) was inconsistent with mere agency, especially since it was not suggested that A1 Lofts held the money for the contractors.
- He also referred to the perception of a client such as Mr Ashley-Hacker.
- The Tribunal set out their reasons for decision in paragraphs 56 to 58 of their decision. I will return to their reasons when I have looked at the law. The upshot was that the Tribunal decided that A1 Lofts were accountable for VAT on all the building services included in the loft conversion and not merely for project management services.
- Section 4 (1) of the Value Added Tax Act 1994 (VATA) provides:
"VAT shall be charged on any supply of goods or services made in the United Kingdom, where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him."
- Section 1 (2) provides that:
"VAT on any supply of goods or services is a liability of the person making the supply and (subject to provisions about accounting and payment) becomes due at the time of supply."
- So it is important to identify the supplier, for it is his liability to account for VAT. Of course if he is not a taxable person (e.g. because his turnover is below the statutory limit) then there will be no VAT for him to account for. That is the economic crux of the present appeal, because some 60 per cent of the contractors are not required to be registered for VAT. If they are making direct supplies to the client, then the client will not have to pay VAT on their supplies. So the ultimate price of a loft conversion will be cheaper than would be the case if the whole package is supplied by A1 (which is registered for VAT).
- In the present case there is no doubt that the contractors supply services. But to whom do they supply them? Do they supply them to the client or to A1 Lofts? Equally, there is no doubt that A1 Lofts supplies services to the client. But what services do they supply? Are they supplying project management services only, or the whole package? Mr Tritton submits that since the Tribunal have made no finding that the contractual documents are a sham, or that the parties have departed from their contractual arrangements, the answers to these questions are to be found in the contractual documents alone. I shall begin by looking at the line of cases on which Mr Tritton relied in support of his proposition.
- In Customs and Excise Commissioners v Music and Video Exchange Ltd [1992] STC 220 the taxpayer traded from several shops, selling second hand musical equipment. Owners of equipment brought in goods which would be assessed at a price which they could be expected to fetch if sold in good repair. The original owner would then be given a valuation. If the original owner agreed to accept the valuation offered, a written agreement was completed. The written agreement provided that the goods were "accepted for sale on [the original owner's] behalf by the company acting as [his] agent in accordance with the terms and conditions of trading" and clause 1 of the terms and conditions of trading provided that the company "trades and acts at all material times as [the original owner's] agent". The fee would be the difference between the agreed valuation of the goods on receipt from the original owner and the price (including value added tax) for which the goods were sold if greater. The Tribunal held that VAT was payable only on the difference between the company's own fee and not on that part of the price paid to the original owner. On appeal McCullough J agreed. The Commissioners submitted that the Tribunal was wrong to regard the written agreement as determinative of the issue. The written agreement was only part of the entirety of the arrangements between the parties. The position of the ultimate purchaser had also to be considered. It was the substance and reality of the matter which counted. In any event, the terms of the written agreement did not clearly lead to the conclusion that the company acted as agent of the original owner in its dealings with the ultimate buyer. Therefore it was right and necessary to look at what happened in practice. When one looked at what happened in practice, it led to the conclusion that the company sold the goods as principal and not as agent. McCullough J began by construing the agreement. He said (p. 223):
"What has to be determined is the nature of the agreement made between A and B. Depending on its true interpretation value added tax will be payable by B on the one basis or the other, but the fact that the supply to C attracts value added tax cannot affect the construction of the contract. It makes plain why the parties contracted as they did, but it cannot alter the nature of their agreement. Its construction cannot differ depending on whether the issue comes before the court in the context of an appeal from a value added tax tribunal or in an action for damages for breach of contract."
- As a matter of construction of the agreement in question he concluded that it was a contract of agency rather than a contract of sale. There were a number of features of the contract which led him to that conclusion. It is unnecessary for me to go through them. However, his reasoning did not stop at that point. He said (p. 223):
"The chairman was, in my view, right when he concluded that the effect of the written terms was that A and B agreed that B would act as A's agent for the purpose of bringing him into a contractual relationship with a buyer.
He was also right in saying that the next step was to ask whether there was anything in the evidence wholly inconsistent with this conclusion."
- Having looked at the facts found by the Tribunal he decided that with one possible exception there was nothing inconsistent with the written contract, and that possible exception was not so strong as to displace the clear words of the written agreement.
- In Customs and Excise Commissioners v MacHenrys (Hairdressing) Ltd [1993] STC 170 Potts J followed the same approach. The case concerned the supply of hairdressing services. The issue was whether certain stylists supplied hairdressing services to the public as self-employed stylists, or whether they did so as employees of the salon. One of the arguments advanced by the Commissioners was that the tribunal should have considered how the public perceived the situation. Potts J rejected that submission. He said that the answer to the question depended on the relationship between the stylists and the salon and how the public or a customer perceived the situation was neither crucial nor determinative.
- Kieran Mullin Ltd v Customs and Excise Commissioners [2003] STC 274 was another hairdressing case. KML owned or operated eight hairdressing salons. Some of the stylists who worked in the salons were employed by KML and others were self-employed. All the self-employed stylists operated under identical written "Rent a Chair" contracts under which KML agreed to provide a chair in a salon to the stylist to rent and the stylist agreed to rent the chair. The contracts gave KML a significant measure of control over how the self-employed stylists were to carry on their business, in order to ensure that KML's salons were properly staffed at all times by competent and well equipped stylists, who would provide to customers the standards of service which KML required. Records were kept of all treatments of customers by self-employed stylists and of the amount paid by the customer. Receipts from customers were first paid into the tills in the salons but at frequent intervals the receipts attributable to the self-employed stylists and the amounts payable by them to KML by way of chair rentals and service charges were calculated. The balances of the receipts belonged to the stylists and they were paid to them. The question was whether the hairdressing services supplied to the public were supplied by the stylists or by KML. If the former, then little if any VAT would be payable (because the individual turnover of a stylist would be too low). If the latter, then KML would be liable to account for VAT. The Tribunal held that KML was liable to account, but Park J allowed KML's appeal. Park J pointed out that different VAT consequences could flow from different contractual structures and that "the different VAT consequences follow whether the customer knows the details of the structure or not" (§ 8). He amplified this point at several places in his judgment. I will quote one (§ 32):
"Who, for the purposes of s 1 of the 1994 Act, makes to the customer the supply of the service of hairdressing? Is it KML, acting by the stylist as its agent? Or is it the stylist, acting as principal? In my opinion the answer depends on the relationship between KML and the stylist. Further, the answer does not depend on what the customer knows about that relationship. Usually the customer will not know about it. This is a matter of common experience in all sorts of contexts, and is in no way special to hairdressing salons. If someone books a car from a local business to drive him somewhere a driver will turn up in a car and he will drive the customer to where he wants to go. The customer will pay the fare to the driver. He will have no idea whether the driver is an employee of the business, or a self-employed sub-contractor of the business, or whether he is a freelance driver who uses the services of the business to obtain customers for his own driving services. It is the same when a customer goes into a hairdressing salon and has his or her hair treated by one of the individuals who is in the salon and available to provide customers with the services which they require. The customer is most unlikely to know the nature of the contractual arrangement between the individual stylist and the proprietor of the salon, and it is in that contractual relationship that the answer to the question lies."
- Park J then went on to hold (§ 34):
"So the critical question is: what was the relationship between the self-employed stylists and KML? In my view the starting point, and sometimes the finishing point as well, in answering a question of that nature is to analyse the contractual terms which operate between the parties."
- He then analysed the provisions of the "Rent a Chair" contract and held that it was consistent with it being the stylists rather than KML who provided the hairdressing services to the public. He continued (§ 36):
"I accept that the matter is not automatically concluded just by considering the apparent contractual position. It is necessary to examine what the evidence shows, and to ask whether the evidence requires a departure from what would otherwise be the result of the apparent contractual position. The first question in this connection is whether the evidence shows that the parties contracted to do one thing, but in fact did something else, and did not act in accordance with the contracts."
- He also considered that the facts might show that it was not possible for the stylists (rather than KML) to be the persons who supplied hairdressing services to the public because of the tight control that KML exerted on the way in which they performed their services; but he held that the facts did not show that in the case before him. This, I think, is no more than an instance of a case in which the actual facts might contradict the written contract.
- Evans-Lombe J followed Kieran Mullen in Ringside Refreshments Ltd v Customs and Excise Commissioners [2004] STC 426. Ringside was a family partnership involved in the catering business. Operators made sales to the public of hotdogs and hamburgers from a fleet of vans and kiosks all owned by Ringside. Strict operating rules were imposed on the operators. The operators were required to enter into an agreement with Ringside called a purchasing contract. The contract required Ringside to lend free of charge a vehicle, receptacle or other means to prepare and sell the products to the public. On the part of the operators the agreement required them to: (1) buy the ingredients from Ringside, (2) sell to the public at prices determined by Ringside, (3) not to sell any products other than those produced by purchases from Ringside, and (4) to acknowledge that they were trading on their own account and that they were liable for any income tax or VAT liability arising from the sales. The Tribunal found that the entire operation was so closely, even autocratically, managed by Ringside that any sense the operators might have had that they were in control of their own affairs was illusory. The Tribunal then concluded that there was only one business, and that the sales to the public were in substance and reality made by Ringside through its agents, the operators. Evans-Lombe J allowed Ringside's appeal. In the course of his judgment he said (§ 25):
"In the present case the tribunal, while setting out the provisions of the contract entered into by the operators in full and saying that "its provisions are of some importance" thereafter does not purport to construe the effect of the contract or appear otherwise to give any weight to its terms in coming to their decision (see para 34 of the tribunal's reasons). On the other hand the tribunal does not find the contracts to be shams. Indeed on the tribunal's finding of fact it would have been impossible for them to do so."
- Having considered Kieran Mullen in detail Evans-Lombe J set out the proper approach as follows:
"[33] The first question is to decide what was the relevant supply and by whom it was made. It is not in issue that the relevant supply was made by the operators when they provided customers with prepared and cooked food from the vans or kiosks of Ringside on pitches for which Ringside were the licensees. It is next necessary to decide in what capacity the operators were making their supply. Once it is conceded that the operators are not the employees of Ringside the starting point is to analyse the contractual terms which operated between Ringside and the operators. As I have already found in my judgment the contracts construed strictly on their terms alone are only consistent with a principal to principal relationship between Ringside and the operators. In particular that is the result of cll 1 and 6 of the contract.
[34] The next question is whether the evidence, at the level of appeal, the tribunal's findings of fact, indicates that the parties to those contracts treated the written agreements as shams by actually operating their relationship differently or otherwise behaved inconsistently with the contracts between them continuing in force. It seems to me that it is plain that the findings of fact by the tribunal do not reveal such shams or such inconsistent behaviour.
[35] It follows, it seems to me, that the tribunal ought to have concluded that the relationship between Ringside and the operators was a principal to principal relationship and not one where the operators are to be treated as agents for Ringside."
- The last case in this line of authority is the decision of Mann J in Spearmint Rhino Ventures (UK) Ltd v Revenue and Customs Commissioners [2007] STC 1252. The issue was whether dances and "sit downs" performed by lap dancers amounted to the supply of services to customers by them or by the club in which they worked. There was a contract in place between the club and each individual dancer. A notice to customers was displayed by the club. It set out the tariff for the various entertainments on offer. It also said that "dancers are under exclusive contracts to perform at this club and not considered employees." The Tribunal held that the services were supplied by the club through the dancers as agents. Mann J allowed the club's appeal. He analysed the contract and held that it did not create an agency. Under the terms of the contract the dancer was given a licence to use the club in order to perform her own services. Mann J continued (§ 37):
"The documents, therefore, do little or nothing to suggest an agency. However, they are not the entire story. The true relationship between the parties is to be gleaned from the overall effect of the documents, coupled with any other relevant facts bearing on the question."
- The facts which he considered to be relevant were those which showed whether the actions of the various parties corresponded to their contractual arrangements. It went no further than that.
- Although the Tribunal were referred to this line of cases they distinguished them (§ 56) and chose to follow the decision of Laws J in Customs and Excise Commissioners v Reed Personnel Services Ltd [1995] STC 588 which they regarded as laying down a different approach. I must now examine that case to see whether it does indeed lay down a different approach. Reed carried on business providing temporary nurses to hospitals. While nurses were self-employed as regards their agency work, Reed retained a high degree of control over their activities. Agency nurses were paid by Reed at an hourly rate according to timesheets, less deductions in respect of income tax and national insurance contributions. In accordance with a code of practice within the NHS the rate payable to agency nurses was fixed and Reed was obliged to pay agency staff whether or not it had been paid by the client for the work done (it followed the same practice where staff were provided to private hospitals). The issue was whether Reed was making exempt supplies within the meaning of section 17 item 1 (d) or item 4 of Group 7 of Schedule 6 to the VATA 1983. If it was (as the Commissioners contended) it was not entitled to recover its input tax. If it was not (as Reed contended) then it was entitled to recover its input tax. What is, to my mind, of critical importance was that the issue was the proper classification (rather than the identification) of the services that Reed provided. Thus as Laws J said the issue was "the nature of the supplies made by Reed". He continued by saying (p. 591):
"I certainly accept that where any issue turns wholly upon the construction of a document having legal consequences, the exercise of construction is one of law for the judge. But for the proper resolution of a case of this kind, there are I think two qualifications. The first is that the concept of making a supply for the purposes of VAT is not identical with the performance of an obligation for the purposes of the law of contract, even where the obligation consists in the provision of goods or services. The second is that, in consequence, the true construction of a contractual document may not always answer the question—what was the nature of the VAT supply in the case? In so far as the answer to that question is not concluded by the legal process of construing the documents, there remains a question of fact…" (Emphasis added)
- Laws J then turned to a detailed analysis of the contractual documents which governed the relationship between Reed and the nurses on the one hand, and Reed and the hospitals on the other. He concluded (p. 594) that the contractual documents were not ambiguous and made clear what Reed's obligations were. He said also that there were no materials outside the documents which defined the parties' contractual relationships. He observed that the Commissioners' argument proceeded on the premise that the contracts must conclude the issue as to Reed's supplies. Laws J continued (p. 595):
"But in my judgment the premise is false. First, as I have already said, the concept of "supply" for the purposes of VAT is not identical with that of contractual obligation. Secondly, in consequence, it is perfectly possible that although the parties in any given situation may conclude their contractual arrangements in writing so as to define all their mutual rights and obligations arising in private law, their agreement may nevertheless leave open the question, what is the nature of the supplies made by A to B for the purposes of A's assessment of VAT. In many situations, of course, the contract will on the facts conclude any VAT issue, as where there is a simple agreement for the supply of goods or services with no third parties involved. In cases of that kind there is no space between the issue of supply for VAT purposes and the nature of the private law contractual obligation. But that is a circumstance, not a rule. There may be cases, generally (perhaps always) where three or more parties are concerned, in which the contract's definition (however exhaustive) of the parties' private law obligations nevertheless neither caters for nor concludes the statutory question, what supplies are made by whom to whom. Nor should this be a matter for surprise: in principle, the incidence of VAT is obviously not by definition regulated by private agreement. Whether and to what extent the tax falls to be exacted depends, as with every tax, on the application of the taxing statute to the particular facts. Within those facts, the terms of contracts entered into by the taxpayer may or may not determine the right tax result. They do not necessarily do so. They will not do so where the contract, though it tells all the parties everything that they must or must not do, does not categorise any individual party's obligations in a way which inevitably leads to the conclusion that he makes certain defined supplies to another. In principle, the nature of a VAT supply is to be ascertained from the whole facts of the case. It may be a consequence, but it is not a function, of the contracts entered into by the relevant parties." (Emphasis added)
- Laws J then referred to Music and Video Exchange and MacHenrys (both of which involved three parties) without any hint of disagreement. He continued:
"Where the facts involve only two parties there is necessarily little or no room for argument over who supplies what to whom. Where there are three (or more), the position may be very different. It should in my judgment be recognised that in that situation the parties' contractual arrangements, even though exhaustive for the purposes of their private law obligations, may not—as indeed they need not—define and conclude issues arising as to supplies under the 1983 Act; and where they do not, the resolution of such issues remains a question of fact for the tribunal."
- He then explained that although the contracts in the case before him fully distributed the parties' private law obligations they did not "put beyond question the nature of the supplies made by Reed". That was a question of fact for the tribunal, with which he declined to interfere.
- What I understand Laws J to be saying is that the identification of the parties' obligations is a matter of contract. But once their obligations have been identified, the nature or classification of those obligations, and in particular whether they answer a particular statutory description, is not necessarily concluded by the contract. It may well be, even in a tripartite situation, that they do; but it is not inevitable. Read in this way, it seems to me that Reed exemplifies a common method of reasoning. The court is often called upon to decide whether a written contract falls within a particular legal description. In so doing the court will identify the rights and obligations of the parties as a matter of construction of the written agreement; but it will then go on to consider whether those obligations fall within the relevant legal description. Thus the question may be whether those rights and obligations are properly characterised as a licence or tenancy (as in Street v Mountford [1985] AC 809); or as a fixed or floating charge (as in Agnew v Commissioners of Inland Revenue [2001] 2 AC 710), or as a consumer hire agreement (as in TRM Copy Centres (UK) Ltd v Lanwall Services Ltd [2009] 1 WLR 1375). In all these cases the starting point is to identify the legal rights and obligations of the parties as a matter of contract before going on to classify them.
- Reed was quoted with approval by the House of Lords in Eastbourne Town Radio Cars Association v Customs and Excise Commissioners [2001] STC 606. The issue in that case was whether an unincorporated association whose members were taxi drivers was making taxable supplies to those members. Its rules provided that its purpose was to facilitate the supply of certain services by third parties to members as joint principals. The services included the supply of radio facilities. Radio operators were employed under contracts which stated that their employers were each of the members of the association. Lord Slynn referred with approval to the judgment of Laws J in Reed (§ 14) and said that if looked at only as a matter of contract, between the various drivers and the employees, it might well be that since the association was not a legal entity the employers would be the various drivers from time to time. What precluded this conclusion was a deeming provision in the VATA 1994 which deemed the association to be carrying on a business if it provided facilities or advantages to its members. Lord Hoffmann said that the question turned on two questions: whether there was an association; and if so whether it was providing facilities to its members in accordance with its rules and in return for payment into the funds of the association. He answered both those questions in the affirmative. The remaining Law Lords agreed with both Lord Slynn and Lord Hoffmann. This, as it seems to me, was a case in which the case was decided on the application of the deeming provisions in the VATA 1994 to which the precise nature of the contractual arrangements was not relevant.
- Reed was again referred to with approval in Tesco plc v Customs and Excise Commissioners [2003] STC 1561. The issue was whether vouchers and points awarded to Tesco customers under a Clubcard scheme were "granted for a consideration" within the meaning of the VATA 1994. Jonathan Parker LJ considered the authorities in great detail. He summarised his conclusions as follows (§ 159):
"So what is the correct approach in the instant case? There are number of pointers in the authorities referred to in Part 3 of this judgment, under heading (a) 'Authorities as to the approach to be adopted in analysing the relevant transaction'. The more significant of such pointers in the context of the instant case seem to me to be these: 1. The resolution of the issue as to the application of para 5 in the instant case depends upon the legal effect of the Clubcard scheme, considered in relation to the words of the paragraph (see British Railways Board especially [1977] STC 221 at 223, [1977] 1 WLR 588 at 591 per Lord Denning MR: see [34] above). 2. In considering its legal effect, the entire scheme must be examined (what is the "entire scheme" for this purpose being objectively determined by reference to the terms agreed) (see Pippa Dee especially [1981] STC 495 at 501 per Ralph Gibson J: see [33] above). 3. The terms contractually agreed may not be determinative as to the true nature and effect of the scheme (Reed, see [36] to [38] above): it is necessary to go behind the strictly contractual position and to consider what is the economic purpose of the scheme, that is to say "the precise way in which performance satisfies the interests of the parties" (see the Advocate General's opinion in Mirror Group, para 27: see [41] above). 4. Economic purpose is not the same as economic effect. The fact that two transactions have the same economic effect does not necessarily mean that they are to be treated in the same way for VAT purposes (see Littlewoods especially at para 84 per Chadwick LJ: see [42] above). 5. Equally, the economic purpose of a contract (what the Advocate General in Mirror Group called the "cause" of a contract: see para 27 of his opinion: at [41] above) is not to be confused with the subjective reasons which may have led the parties to enter into it (in so far as those subjective reasons are not obviously evident from its terms) (see Mirror Group para 28: at [41] above). The Advocate General went on to observe (an observation which seems to me to be particularly apt in the context of the tribunal's decision in the instant case):
"… failure to distinguish between the cause of a contract and the motivation of the parties has been the source of misunderstandings, … and has complicated the task of categorising the contracts at issue.""
- The third of the pointers is that the legal effect of the scheme must be considered by reference to the terms agreed: in other words as a matter of contract. Reed is cited for the proposition that the contractual terms may not be determinative of the nature and effect of the scheme. But going behind the contractual terms serves only a limited function: that is to say the identification of the economic purpose of the scheme. And that in turn is not to be confused either with its economic effect, or the subjective reasons which led the parties to enter into it. Applying these principles to the facts of the case before him, Jonathan Parker LJ considered that it was irrelevant whether members of the pubic buying premium goods knew or considered whether the price they paid included a payment for points or vouchers (§ 161). He continued by examining the contractual arrangements between Tesco and its customers in order to determine whether the points or vouchers were granted for a consideration and came to the conclusion that they were not.
- In Debenhams Retail plc v Customs and Excise Commissioners [2005] STC 1155 the issue was whether Debenhams were accountable for VAT on the whole of the "ticket price" paid by a customer using a store card, or whether part of that price (2.5%) could be treated as a separate contract for the supply of card-handling services which were exempt from VAT. Mance LJ referred to the general domestic principles applicable to the interpretation of contracts (§ 10) which, he said, were just as relevant to the understanding of the legal effect of a contract in a European (i.e. VAT) context. He then said (§ 34):
"The contractual effect of the new arrangements represents, as I have said, a starting (although not necessarily the finishing) point in any analysis of the incidence of VAT."
- Following a comprehensive analysis of the contractual arrangements he concluded (§ 47):
"I come to the question which is of direct relevance for VAT purposes. Did DR make a taxable supply of goods for a consideration which consisted of 97.5% or 100% of the total paid by customers? If as I consider there was only one contract between a customer and DR, whereby at the most the customer was required and agreed to pay 2.5% of the total consideration to a third party, DCHS, then it is common ground that DR is to be treated as having made a supply for a consideration consisting of 100% of the total paid by the customer: see para 34 above. The domestic contractual position is, in other words, not just the starting point, but also the finishing point on this hypothesis."
- Having considered Reed and the later cases in which it has been cited with approval, I do not consider that it is at odds with Kieran Mullen and the cases which have followed it. Kieran Mullen is concerned with identifying the parties' rights and obligations. Reed is concerned with classifying them. Sometimes (as in Reed or Tesco) the correct VAT answer will depend on whether the identified rights and obligations fall within some descriptive phrase in the VAT legislation. Sometimes (as in Eastbourne) the right VAT answer will depend on whether statutory deeming provisions override the common law contractual position. But it seems to me that in all cases the first step must be to determine what the parties' contractual rights and obligations were.
- I would summarise my conclusions as follows:
i) Where two or more persons (call them A and B) are involved in the supply of goods or services to an ultimate consumer (call him C) different contractual structures may entail different VAT consequences (Kieran Mullen (§ 8));
ii) Those consequences will follow whether C knows about the contractual arrangements between A and B or not (Kieran Mullen (§ 32); Tesco (§ 161));
iii) The starting point for determining the true relationship between A, B and C is an analysis of the contractual arrangements between them (Kieran Mullen (§ 34); Ringside (§ 34); Debenhams (§ 34));
iv) Where the contractual arrangements are contained wholly in written agreements, this will be a question of construction of the agreements. But a contract may be partly written and partly oral, in which case what the parties said and did may throw light on the extent of their contractual obligations (Carmichael v National Power plc [1999] 1 WLR 2042);
v) The apparent contractual arrangements will not represent the true relationship between A, B and C if the contractual arrangements are a sham; or if the parties have failed to operate the contractual arrangements; or if the evidence is wholly inconsistent with the apparent contract (Kieran Mullen (§ 36); Ringside (§ 34); Music and Video Exchange (p. 223));
vi) The identification of the true rights and obligations of the parties will be the same, whether the question arises in the context of VAT or in the context of an action for breach of contract; and is the same whether the question arises in a domestic or a European context (Music and Video Exchange (p. 223); Debenhams (§ 10));
vii) Having identified the true rights and obligations of the parties, it will then be necessary to decide how those rights and obligations should be classified for the purposes of VAT (Reed (p. 595));
viii) Sometimes this will be concluded by the terms of the contract themselves; but it may not be (Reed p. 595). If it is not then the classification of the parties' rights and obligations for the purposes of VAT may involve the application of particular deeming provisions of the VATA (Eastbourne Town); or deciding whether the nature of the supply falls within a particular description (Reed); whether there is one contract or more than one (Debenhams); or in some cases deciding whether on the true construction of a single contract there is one supply or more than one (as in Customs and Excise Commissioners v Plantiflor Ltd [2002] 1 WLR 2287);
ix) Depending on the true relationship between A, B and C the conclusion might be that A makes a supply to B, who makes an overall supply to C; or A and B may make separate and concurrent supplies to C (Kieran Mullen (§ 32)).
- I must now examine the Tribunal's reasons for their decision. As I have said they are contained in paragraphs 56 to 58 of their decision, which I must quote in full:
"56. We accept Mr Smith's distinction between this case, where the client specifically engages an agent, and those cases referred to by Mr Tritton where the person paying for the service would not for one moment consider engaging an agent for such purposes as a hairdressing appointment or buying a hotdog. It is perhaps of some small relevance that it is normal to refer to 'customers' in the hairdressers or at a hotdog stand, whereas those people engaging Mr Mills' services would more commonly be referred to as 'clients'. We have set out in extenso above the passages relied on by Mr Smith from the case of Reed, and we adopt that reasoning here. We do not find that the contracts/agreements entered into by A1 Lofts create the type of agency relationship argued for. Whilst from the contractor's point of view it may appear that his obligation is only to the client, and Mr Mills' intention was undoubtedly that A1 Lofts should have no obligation to the client above and beyond that of finding the appropriate contractors and those matters which are covered in the extremely limited guarantee, that was not how the relationship was viewed by Mr Ashley-Hacker. His evidence was clear: namely that he had no other contract than that with A1 Lofts, and he would ultimately look to A1 Lofts if the head contractor did not provide a satisfactory service. He had no notion that A1 Lofts considered that he had a contractual relationship with any of the other contractors who worked on his loft conversion.
57. The clients were at no stage aware of the separate existence of A1 Designs, MML or MMA. These companies were also said to have separate contracts with the client. We do not accept that the client's perception in this matter is irrelevant. Were things to go wrong, and we accept Mr Mills' evidence that this has very rarely happened, and were the contractor in question's insurance inadequate to remedy the particular defects, we have no doubt that the client would look to A1 Lofts for a remedy, as indeed Mr Ashley-Hacker said he would. The fact that A1 Lofts might succeed (although in our view it would not), in such a situation, nonetheless, as was said by Laws J (as he then was) whilst the parties' contractual arrangements may be exhaustive for the purposes of their private law obligations, they need not define and conclude issues arising as to supplies under the 1994 VAT Act. In our view this is such a case. As was also said by Laws J, the concept of VAT supply is not coterminous with the concept of a contractual duty. At no stage does the contract between the client and A1 Lofts say that A1 Lofts will negotiate separate contracts on behalf of the particular client, which would be expected were the limit of A1 Lofts' obligations to be that of finding the contractors who would then form a separate contract with the clients. Clause 8 of the A1 Agreement with the client gives the Project Manager the right to suspend the work and withdraw all the contractors from the property in the event of non-payment by the client. This in our judgment indicates very clearly that there is no contractual relationship between the client and the contractors. If A1 Lofts were merely an agent in the manner claimed, and the contractors were independently providing their services, then any failure by the client to pay would be a matter for the contractors to sue the client, not A1 Lofts.
58. Clause 10 of the A1 Agreement, the Interpretation section, is not consistent with agency in that the agreement is said to constitute the entire agreement between the parties, and no reliance is to be placed upon any prior oral or written representations. It was part of Mr Mills' case that the clients were fully informed of the situation at the meetings which took place prior to the concluding of the agreement and the representations made orally were part of the whole agreement."
- The first point that the Tribunal make in paragraph 56 is that the Kieran Mullen line of cases does not apply because the alleged agency was an agency in which the principal was the consumer rather than the supplier. But in my judgment this is not a relevant distinction. It is a factual distinction, to be sure, but that fact was not relevant to the legal approach described by Park J. The point in the Kieran Mullen line of cases is that the first task is to identify the true legal relationship between the various parties; and that where it purports to be governed by a written contract the starting point is to construe the contract. The reasoning in Reed, which the Tribunal said they were applying, does not, in my judgment, absolve the Tribunal from the task of first construing the contract; and then asking whether there are proven facts which would justify a departure from the contract. The Tribunal then went on to contrast the understandings of the contractors and Mr Mills on the one hand, and that of Mr Ashley-Hacker on the other. But the subjective understandings of the parties are not relevant to the construction of the contract itself. The Tribunal return to the perceptions of the client in paragraph 57. But it is unclear whether the Tribunal are saying that the client's perceptions are relevant to the construction of the contract (which they are not) or whether they are saying that on the facts they are finding that the contract is a sham or has otherwise been departed from. A finding of sham would be difficult, given that the Tribunal found that both Mr Mills and the contractors intended that the contract would represent their true rights and obligations. I might add that, contrary to the assertion in paragraph 56, Mr Ashley-Hacker's evidence as recorded by the Tribunal was not clear. He said, for instance, that he understood that A1 Lofts would act as his agent; that the document he received was not inconsistent with the explanation he had been given; that he did not know what would happen if a builder on site did not rectify work and A1 Lofts could not "persuade" him to; and that he did not know what his rights were. The Tribunal made no finding that Mr Ashley-Hacker considered that A1 Lofts were legally liable for the building works. The furthest they went was to say that he thought that they would have the necessary "leverage" to get the work done. Continuing with that theme the Tribunal said that if things went wrong Mr Ashley-Hacker would look to A1 Lofts for a remedy. They said that they did not consider that A1 Lofts would succeed in resisting a remedy, but did not explain why they came to that conclusion. If, as the Tribunal thought, A1 Lofts would have been liable to Mr Ashley-Hacker if things went wrong would it have been a contractual liability; and if so, under what contract? And if A1 Lofts would not have been liable, that must have been because it was not contractually obliged to supply the whole package.
- The Tribunal say in paragraph 57 that at no stage does the contract between the client and A1 Lofts say that A1 Lofts will negotiate separate contracts on behalf of the particular client, which would be expected were the limit of A1 Lofts' obligations to be that of finding the contractors who would then form a separate contract with the clients. It is true that there is no express obligation to that effect. However "the Contractors" are defined by the contract as "tradesmen and other persons engaged by the Project Manager on behalf of and as independent contractors to the Client"; and A1 Lofts undertook an obligation in clause 2 (a) to "generally oversee and co-ordinate the conduct of the Works at the Property". The definition contemplates that A1 Lofts would engage the contractors on behalf of the client; and it is difficult to see how A1 Lofts could perform their express obligation to oversee and co-ordinate the conduct of the works unless they had done so. It is therefore a short step to implying a term that A1 Lofts would engage contractors on behalf of the client. But in any event, the real question is not whether A1 Lofts were obliged to engage contractors on the client's behalf; but whether they were authorised to do so. The Tribunal did not consider this question either as a matter of construction of the contract; or in their consideration of the wider circumstances.
- Clause 8 of the contract, to which the Tribunal next referred, is indeed a clause which is unusual. The particular feature of it on which the Tribunal relied is A1 Lofts' ability to withdraw the contractors in the event of non-payment by the client. The client's obligation to pay was an obligation to pay the Price to A1 Lofts in accordance with the payment schedule. The Price included A1 Lofts' own remuneration. So A1 Lofts did have some interest in payment being made. Nevertheless there is force in the Tribunal's point that if there really was a direct contractual relationship between the contractors and the client, it would primarily be the contractor's problem rather than A1 Lofts' if the client did not pay. This was, as the Tribunal said, a pointer towards the conclusion that A1 Lofts were supplying the full package of building services; but it needed to be weighed against the other provisions of the contract.
- Finally the Tribunal referred to clause 10 (the entire agreement clause), saying that it was not consistent with agency. They gave no reason for this assertion; and I cannot see why a contract of agency should not contain an entire agreement clause. It may be that the Tribunal only referred to this clause in order to rule that Mr Mills' pre-contractual oral explanations could not have affected the true nature of the relationship. If they were simply construing the contract then that would have been unexceptionable. But in paragraph 56 they had rejected that approach in favour of the approach that they derived from Reed. Consistent with that approach they ought to have considered Mr Mills' pre-contractual explanation in the same way as they considered Mr Ashley-Hacker's subjective understanding. There is, therefore, an internal inconsistency in the Tribunal's reasoning.
- In my judgment what went wrong was that the Tribunal adopted an unstructured approach to the question they were asked to decide; and got off on the wrong foot by taking the view that Kieran Mullen and Reed represented inconsistent approaches. They ought first to have construed the contract; and they should then have asked themselves whether in the light of the facts that they found, the written contract represented the true contract between the parties or was a sham or was otherwise superseded by some different contract. Once they had determined the legal rights and obligations of the various parties, they would then have been in a position to classify them for the purposes of VAT. The process of classification would have required them to determine two interlinked questions: to whom the contractors supplied their services, and what services A1 Lofts supplied to the client. Absent a finding of sham or departure from the written arrangements, the construction of the contracts is likely to be the finishing point as well as the starting point. What the Tribunal did, in my judgment, was to elide two different stages in the process of legal analysis. They neither construed the contract, nor squarely addressed the question whether the contract, as construed, represented the real bargain between the parties. In those circumstances I consider that the Tribunal's reasoning cannot stand.
- I have already summarised Mr Smith's argument before the Tribunal. He pointed to a number of features outside the contract which might tend towards the conclusion that the written contract did not embody the real contract that the parties made. The Tribunal did not refer to these features (apart from Mr Ashley-Hacker's perception) in their reasons for decision. What they make of them is a question of fact. In those circumstances I have come to the conclusion that the appeal must be allowed; but that it should be remitted to the Tribunal to reconsider its decision in the light of this judgment.
