Scottish Court of Session Decisions

EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
Lady Paton Lord Hardie Lord McEwan	[2009] CSIH 17 XA99/07 OPINION OF THE COURT delivered by LADY PATON in APPEAL under section 11 of the Tribunals and Inquiries Act 1992 by JOPPA ENTERPRISES LIMITED Appellant; against A decision of the VAT tribunal sitting at Edinburgh issued on 30 May 2007 and communicated to the appellant on 31 May 2007 ­­­­­­­­­­­­­­­­­_______________

Appellant: Logan, Advocate; R.S.C. Solicitors

Respondents: Ghosh, Advocate; Shepherd & Wedderburn LLP

6 March 2009

Introduction
[1] The appellant company runs a sauna in Edinburgh. Various services are provided, including massage. The establishment has police approval and a licence from the City Council. The respondents are the Commissioners for Her Majesty's Revenue and Customs. The issue in this appeal is whether the whole of the door money generated in the course of the sauna business should be aggregated to the appellant's income and charged to Value Added Tax (VAT). The period in question is September 2002 until June 2005.

The legislation
[2] Section 1 of the Value Added Tax Act 1994 provides that VAT is charged on a supply of goods or services in the course of a business by a person whose turnover is large enough for him (or it) to be registered for VAT. The VAT ("output" tax) is the liability of the person who makes the supply, and the tax is payable by the supplier to Customs and Excise. By sections 2(1)(a) and 19, the VAT payable by the supplier is normally charged on the consideration for the supply. The output tax may be reduced by input tax, namely VAT charged to the supplier by third parties.

The appellant's business arrangements
[3] During the relevant period (September 2002 until June 2005) a customer entering the sauna was generally greeted at reception by Ian or Charles Haig, acting on behalf of the appellant. There, an entry fee was charged, calculated on a sliding scale related to the length of time that the customer wished to spend with a hostess in a private room. The charges were £20 for 30 minutes in the room; £25 for 45 minutes, and £35 for 60 minutes. Without payment of that entry fee, the customer could not gain admission and enjoy the facilities. Once inside, the customer was entitled to saunas, showers, non-alcoholic refreshments, television, newspapers, the company of a hostess during a "sit-down" (usually one hour of her company in the general lounge area) and also the company of a hostess in a private room containing inter alia a bed, mirrors, and spa-bath. The hostess charged a separate fee for the sit-down, and the customer gave her the money. In relation to the private room, any additional services there offered to the customer by the hostess were negotiated within the room and were paid for by the customer directly to the hostess. It was possible to book a particular hostess in advance of arriving at the sauna.

[4] At a hearing before the VAT tribunal in April 2007, evidence was led and submissions made. The main issue in contention at that stage was whether the hostesses were employees or agents of the appellant, or whether they were self-employed. By their decision dated 30 May 2007, the tribunal held that the hostesses were self-employed, and that any money received by them directly from the customer was income attributable to them for services rendered direct to the customer. That income was not aggregable to the appellant's income chargeable to VAT. Those findings are not contested in the present appeal.

[5] What is in dispute is the income derived from the entry fee or door charge. The money generated from the entry fees was kept at reception for a period. At a convenient time, the money was divided up. Out of each entry fee, £5 was retained by the appellant; one half of the balance was paid to the relevant hostess, and the remaining half retained by the appellant in name of rent owed by the hostess to the appellant for the supply of the room and the supporting facilities. That dividing-up process implemented an agreement reached between the appellant and each hostess, contained in an unsigned document (the "Pool of Girls Agreement") the relevant terms of which were as follows:

"What is expected of Joppa Enterprises Ltd
Provide the premises and accommodation.

Arrange and pay for advertising for new girls for pool.

Receive clients at the door, collect the split entrance and massage fee and pass the customer through.

Explain the current charges set at the door and that these are subject to change by mutual arrangement between the pool and the company ..."

[6] The customers were unaware of those contractual arrangements between the appellant and the hostesses.

[7] The appellant paid VAT on the £5 retained from the entry fee, and also on the one half balance retained for the supply to the hostess of the room and supporting facilities.

The tribunal's decision so far as relating to the income generated at the door

[8] In addition to finding that the hostesses were self-employed, the VAT tribunal made the following findings in respect of the income generated by the door entry charge:

"It is the view of the tribunal that [the entry fee] was payment for a service provided or facilitated by the appellant. Its precise sub-division is not related to particular services or known to the payer of the consideration. The service provided to the client was entry to the premises and the opportunity to avail himself of the facilities therein whatever they may be provided by the women present there. That in the view of the tribunal is the supply and it is taxable...

The facts in the present case are unique to it and we only note that, had the contract between the establishment and the women, the Pool of Girls Agreement, been differently framed, there might have been an argument that the reasoning in Spearmint Rhino Ventures (UK) Ltd ... by Mann J would have required to have been given particular consideration. In the present case however we do not have a clear contract upon which reliance can be placed to exclude consideration of the surrounding circumstances. The circumstances here are not contractually so clear and specific as to exclude the normal inference that what the client paid at the door was payment for a supply of services and subject to VAT.

Decision
The tribunal's decision is that though there has not been a full account of tax due, the assessment is flawed and cannot stand. The tribunal is unable to ascertain on the information before it, what the correct amount of tax should have been, and accordingly give the respondent an opportunity to formulate what tax is said to be due on the full door entry fees collected by the appellant which, if it cannot be agreed, can be returned to the tribunal for a decision."

The grounds of appeal
[9] The grounds of appeal argued before this court were as follows:

"...In terms of [the decision of the VAT tribunal dated 30 May 2007] the tribunal allowed the appellant's appeal and quashed the assessment against which the appeal was made, but found that the appellants ought to have accounted for the full amount of the door money received at [the] establishment and continued the matter for the VAT payable on that amount to be assessed.

The appellant appeals against that decision on the following grounds:

"2....the tribunal ...failed to give consideration to or identify the relevant legal criteria by which they have reached their decision. The tribunal [have] not addressed the legal submissions or the relevant cases of Kieran Mullin Ltd v Customs and Excise Commissioners [2003] STC 274; Ringside Refreshments v Customs and Excise Commissioners [2004] STC 426 and Spearmint Rhino Ventures (UK) Ltd v HM Revenue and Customs [2007] EWHC 613 (Ch). Had they done so they would have appreciated:

a. That the fact [that] the subdivision is not known to the payer is not a determining or relevant factor; and

b. That the fact that the service identified is rendered to the client (even as a single service if that has been determined) is not a basis for determining that the whole of that supply is made by the appellant (if this essential finding is made in any event which is not accepted) and therefore taxable so far as the appellant is concerned.

3. The true issue which the tribunal needed to determine in relation to the monies paid at the door is whether the proportion of the monies received by the women fell to be aggregated with the income received by the appellant on which VAT is already accounted for. The tribunal ... failed ... to address the agreed facts recorded at p14, numbers 65 and 66 and the tribunal's own additional findings-in-fact at p26 and 27. Had they done so they would have appreciated that the key to determining whether the monies received by the women fell to be aggregated with the income received by the appellant was the contractual relationship between them. In light of their findings about the self employed status of the women and the reasoning as to why their income for sexual services did not fall to be aggregated with the income of the appellant they have misdirected themselves in law by aggregating the monies paid at the door".

Submissions on behalf of the appellant
[10] On behalf of the appellant, it was contended that the tribunal had erred in law in holding that the whole income generated by the entry fees was aggregable to the appellant's income for VAT purposes. Their finding that the hostesses were self-employed (and not employees of the appellant) taken with the contractual arrangements and the administrative and financial structure of the appellant's business meant that only £5 and one half of the balance retained from each entry fee was aggregable to the appellant's income for VAT purposes. The one half of the balance paid over to the hostess was aggregable to the self-employed hostess's income for VAT purposes. The Pool of Girls agreement was a genuine agreement. Thus if an entry fee of £25 was charged, £5 thereof represented the appellant's provision of facilities to the customer (the premises, heating, lighting and other facilities); £10 represented the provision of facilities to the hostess (the use of a private room, spa bath and other facilities); and the remaining £10 represented money belonging to the hostess herself for the provision of her services to the customer. It was irrelevant that the customer did not know whether and if so, how, the entry fee was to be divided: Kieran Mullin Ltd v Customs and Excise Commissioners [2003] STC 274; Ringside Refreshments v Customs and Excise Commissioners [2004] STC 426. The income attributable to the self-employed hostesses should not be aggregable to the appellant's income for VAT purposes.

[11] There were arrangements in the present case, as in Ringside Refreshments, for providing services in a combined way. Thus the door charge represented a combined service, with the appellant providing part, and the hostess providing part: cf the circumstances in Ringside Refreshments where the arrangements between the parties resulted in the provision of services in a combined way, with one of the parties fixing the rate. The combined aspect of the arrangement determined liability to VAT, and that question had not been properly addressed by the tribunal.

[12] A similar type of arrangement could be found in Spearmint Rhino Ventures (UK) Ltd v Revenue and Customs Commissioners [2007] STC 1252, where the fee for a "sit-down" (£250) was divided £210 to the dancer, and £40 to the establishment. It had to be accepted nevertheless that in the particular circumstances in Spearmint, the dancer collected the whole sum of £250 from the customer, and (without the customer's knowledge) paid £40 therefrom to the club. Also the entry fees to the club were kept in their entirety by the club, and were wholly aggregable to the club's income for VAT purposes. But despite those features, the case emphasised that the focus should be upon the actual business arrangements, and not the customer's perception. The tribunal in the present case should have determined the actual contractual relations between the parties, and on that basis, ascertained what services were provided to whom, by whom. The findings-in-fact made by the tribunal excluded employment and agency. There was no suggestion of a sub-contract. Accordingly the relationship between the appellant and hostess was principal to principal, with each party liable to account for his or her own income. Thus from a £25 entry fee, the appellant should be liable to VAT on £15, and the hostess liable to VAT on £10. The tribunal had erred in failing properly to analyse what was involved in the contractual relationship between the parties; in other words, what the service was; who provided it; and to whom was it provided.

[13] Counsel invited the court to quash the tribunal's decision that the appellant was liable for VAT "on the full door entry fees collected by the appellant"; to remit to the tribunal to proceed as accords; and to hear parties on the question of the expenses of the appeal.

Submissions on behalf of the respondents
[14] On behalf of the respondents, Mr Ghosh accepted that the hostesses were acting as principals. The only question was whether the entry charge was paid to the appellant as door money, or as a pre-payment for a service by the hostess. The following facts were relevant: (i) The client paid a lump sum at the door, having been told what the charge was. (ii) The client paid the appellant, and no-one else. (iii) The client paid the money before he had seen or agreed to contract with any particular hostess as to any specific service, at any price (all of which took place after the door charge had been paid). (iv) The client was unaware of the private arrangement between the appellant and each hostess.

[15] Six propositions in law were relevant to the facts:
1. In the context of consideration for the supply of services, money was to be attributed to the supply with which there was an immediate or direct link: cf Apple and Pear Development Council v Commissioners of Customs & Excise [1988] 2 CMLR 394. In the present case, the client paid money at the door before he had selected any hostess or service, or agreed any price. There was no evidence that he could obtain a refund in the event that he did not select a hostess. The money was paid in order to gain admission to the premises. The fact that a client might have contacted the appellant in advance to request a particular hostess did not detract from the fact that the entry charge was a prerequisite of gaining admission in order to be able to enjoy the facilities and services offered.

2. The client contracted with the appellant in order to obtain entry. He had not at that stage contracted with any particular hostess. Thus there was no other supply to which to attribute that money.

3. Any private arrangement between the recipient of the consideration (the appellant), and another person (the hostess), was irrelevant when considering the status of the consideration: cf Spearmint Rhino Ventures (UK) Ltd v Revenue and Customs Commissioners [2007] STC 1252 (where the cash fee obtained from the client by the dancer was treated in its entirety as her fee). The appellant's obligations to a creditor were not relevant, whether known to the client or not.

4. The client's knowledge of whom he was paying, and what he was paying for, was critical when seeking to identify the supply to which there was an "immediate and direct link". If the customer did not know that he was making a purported pre-payment to a hostess whom he had not yet selected, one could not treat it as such a pre-payment. The authorities cited by the appellant, namely Spearmint Rhino Ventures (UK) Ltd, Kieran Mullin Ltd, and Ringside Refreshments, related to the customer's knowledge of questions of employment or agency or being a principal, and did not detract from the proposition that it was relevant to know to whom one was making payment, and for what supply.

5. There was no evidence that the appellant was acting as anyone's agent: the appellant's appeal depended upon the proposition that the relationship between the appellant and the hostess was one of principal to principal.

6. There was no pleading, evidence or argument relating to some sort of trust.

[16] Counsel concluded by submitting that there was no question of a mixed supply or a combined service being given to a customer. The appeal should be dismissed.

Discussion

[17] There are many ways in which a business may be structured, both administratively and financially. Businesses which appear prima facie similar may conceal a variety of financial and administrative arrangements with different VAT consequences. For example, where hair-dressing employees or self-employed stylists provide services to the salon, the salon may be liable to VAT on the income generated; by contrast where self-employed hairdressers provide services direct to the customer within a salon, the salon may not be liable to VAT on the income so generated, but the hairdressers (if their turnover is sufficiently high) may be liable. Similarly where a leisure establishment imposes an entry fee, and a self-employed dancer subsequently charges a customer a fee for a performance, the establishment may be liable to VAT on the door charge, and the dancer may be liable to VAT on the whole dance fee even although she pays a commission from that fee to the establishment.

[18] It is therefore for the tax-payer to choose how to arrange his affairs. The subtleties of the particular arrangement chosen may not be obvious to the customer. Each case will depend on its particular facts, and small variations in business set-up may result in significant differences in VAT liability.

[19] In our opinion, the financial and administrative arrangements described in the authorities relied upon by the appellant (namely Kieran Mullin, Ringside Refreshments, and Spearmint Rhino Ventures) are significantly different from the arrangements in the present case, and for that reason cannot provide the support for the appellant's contentions which counsel argued for. In Kieran Mullin (where self-employed hairdressers rendered services directly to the customer) and Ringside Refreshments (where hot-dog sellers acted as principals when selling products directly to the customer) there were, quite simply, no "entry fees". Customers could enter the hairdressing salon or approach the hot-dog kiosk or van without any preliminary entry payment. Thus we consider that the reasoning and decisions in those authorities (which focused upon the categorisation of persons as principals or agents, employed or self-employed, with further sub-categorisations into "services to the customer" or "services to the salon") cannot assist the appellant in relation to the correct approach to the entry fees charged in the present case.

[20] In Spearmint Rhino Ventures, an entry fee was indeed charged to a customer wishing to enjoy the facilities offered in the club. However that fee was not subsequently divided between the establishment and the club's self-employed dancers. The establishment retained the whole fee. Again therefore the decision provides no clear support for the appellant's argument, and indeed in that case it can be inferred that there was no dispute that the entry fees charged for admission and use of the facilities represented consideration for services supplied by the establishment (Spearmint), and thus were aggregable to Spearmint's income for the purposes of VAT.

[21] We therefore consider that the facts in the cases of Kieran Mullin, Ringside Refreshments, and Spearmint Rhino Ventures are not sufficiently similar to the facts of the present case to provide a sound basis for the contentions advanced by counsel for the appellant. Ultimately, the decision relating to the appellant's liability for VAT must depend on the particular facts of this case.

[22] Those facts are that the appellant charged a customer an entry fee based on a sliding scale, dependent upon the period of time stipulated by the customer. There was no finding that the fee was refundable in any particular circumstances. Nor was it established that the person collecting the entry fees at the door did so to any extent as agent for a hostess. Once the entry fee was paid, the customer was permitted to enter the premises and enjoy all the facilities therein, including entering into private negotiations with the self-employed hostesses. The customer was unaware of the subsequent subdivision of the door money in terms of the agreement between the appellant and hostess all as outlined in paragraphs [5] and [6] above.

[23] The proper analysis of those facts is, in our view, as follows. The entry fee represented payment of a consideration to the appellant for services supplied to the customer, namely access to the premises and permission to enjoy everything therein, including the lounge, refreshments, newspapers, television, the services of a hostess (with further charges being negotiated with and paid to her as necessary) and the use of a private room containing inter alia a bed, mirrors, and a spa-bath. Any subsequent division of the entry money between the appellant and each hostess in terms of a private agreement between them cannot, in our opinion, detract from the fact that by charging the entry fee, the appellant was supplying the above-mentioned services to the customer in exchange for a consideration. It is always possible that a different view might be taken if the person collecting the entry fee did so to any extent as agent for a hostess, but that was not a fact which emerged in evidence, nor was it an argument advanced in submissions.

[24] Accordingly, on a proper analysis of the particular facts of this case, we consider that the tribunal were correct in their decision that the appellant is liable to VAT on the full amount of the door money received at the sauna. In our view, standing the facts of this case, the tribunal's decision cannot be criticised.

Decision

[25] For the reasons given above, the appeal is refused. We reserve the question of expenses to enable parties to address us on that matter.