England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		16/12/2003

Mr Justice Evans-Lombe:

1. In this appeal the appellant, Ringside Refreshments ("Ringside") is appealing an assessment to Value Added Tax ("VAT") by the Commissioners of Customs and Excise ("the Commissioners") in respect of supplies of "fast food" to the public through outlets controlled by Ringside but staffed by self employed individuals ("the operators"). The matter was referred to the VAT & Duties Tribunal which concluded on the 7^th April 2003 that those supplies were properly assessable to VAT but disallowed the imposition of a penalty consequent on Ringside's failure to account for VAT in the past. The decision of the tribunal is appealed by Ringside to this court.
2. Ringside is a family partnership which has carried on business as a caterer in various different ways. They now only carry on that business in the way which is the subject matter of this appeal. The appeal to this court is made pursuant to section 11 of the Tribunals and Inquiries Act 1992 which permits such an appeal only on grounds of error of law. It follows that, in considering this appeal, this court is bound by the findings of fact which the tribunal has made. The tribunal's decision was only concerned with "the underlying principle, namely whether there is a single business of catering to the public or the appellant is a wholesale supplier of food ingredients to the operators." Since the underlying facts found by the tribunal are set out with clarity in their written reasons I propose to quote them, verbatim, in this judgment. The relevant passages in the tribunal's reasons begin at paragraph 5 as follows:-

"5 The appellant's principle place of business – indeed only place of business if its case is correct - is a building in a suburb of Wolverhampton. The building was referred to as a "factory" although as we understood the evidence it contains only offices and storage facilities – mainly freezers – for the food which the appellant sells. The operators visit the premises in order to obtain the stock they need and do so much as one would do in a supermarket, that is by walking around the freezers and other display equipment, selecting appropriate foods, placing them in a trolley and then paying for the purchase at checkout. Although we heard that credit is occasionally given, we accept that as a rule operators are expected to, and do, pay immediately. The appellant will take back, and give credit for, unsold goods if they remain in saleable condition.

6 Operators are, if they wish, given an invoice according to their purchases. We recognise that many will not take the invoice, but accept that they are made available. There were several examples in the bundle, each of which bore the following, or similar words:

"Customers are respectfully reminded that all goods purchased, whether for cash or credit, become their property from the moment they receive them. Thereafter purchasers are solely responsible for the safety and condition of all goods in their possession."

7 Sales to the public are made by operators from a fleet of vans and kiosks all owned by the appellant. The vans are typically of the Ford Transit type fitted with equipment for cooking and storing food and with an opening onto a serving counter on the nearside. The vans can be driven to their trading position. The kiosks, however have to be towed or, in some cases carried on the back of another vehicle to their trading position. Though smaller than the vans, they are of the same general design with cooking facilities but, in most cases, only very limited storage capacity.

8 We were provided with photographs of the kiosks and the vans. They carry the same livery, being painted, principally white, but with red and blue additions suggestive of an adaptation of the American National flag. The trading name shown prominently on each side is "Mr Sizzle". The name and address of Ringside Refreshments appears on the vans and kiosks in small lettering… while in the interior, exhibited in a position at which members of the public could see it, each has a plaque stating that the particular outlet is operated by the person in charge of it. …

9 The Operators are required to enter into an agreement with the appellant [Ringside] in terms of what is described as a "purchasing contract". Its provisions are of some importance and accordingly we set them out in full:

1 I the undersigned hereby apply to buy from you the various ingredients that I require to produce hot dogs and hamburgers for resale by me to the public, together with any other goods which from time to time you agree to supply. In doing so I realise that I must comply with the general terms and conditions described below.

2 I agree to pay for the goods promptly, and in any case within 24 hours of my receiving receipt of such goods, but it is understood that I am to be credited in full for any goods returned by me within that time, provided that such goods are in a condition fit for resale.

3 I understand that the price I must pay for the various goods will be determined by you, and will vary from time to time at your discretion.

4 In consideration of my trading with you on this basis you will (as and when I decide to buy your goods) lend me, free of charge, a vehicle receptacle or such other means as might be appropriate, in order that I can prepare and sell the products referred to, to the public. I undertake to keep the said vehicle or other equipment in good, clean order and to return it to you at the end of each days trading in a whole and undamaged condition and to recompense you immediately any loss or damage sustained.

5 You will also lend me, on a similar basis at such equipment apparatus, implements and over-clothing as is required to comply with any existing or future statutory regulations relating to the operation of a food business. I agree to ensure that all such items are clean and serviceable before each days' trading, and to report promptly to you defects that I discover.

6 I declare that I am trading on my own account, without any partners, and I understand quite clearly that it is for me to meet any income tax or VAT liability which arises as a result of my operating a food business as described herein. I also undertake not to sell any products other than those produced by my purchases from you. [On the contracts actually signed this paragraph was highlighted].

7 I am aware that whilst I am trading, I must do everything possible to comply with any instructions given by a police or public health officer, and I will endeavour to maintain the highest possible standards of hygiene at all times. In particular, I know that I must always wear a clean overall over my normal clothes and that under no circumstances must I smoke whilst I am actually operating my business. I also know that food should not be left uncovered any longer than necessary, and that the lids of food containers should be opened only to effect a sale. Counters and other surfaces must always be kept clean and tidy, and there must always be a supply of clean, hot water available from the apparatus provided. I understand also that I must keep good standards of personal hygiene, and that my hands and fingernails in particular must be regularly scrubbed using the soap, brush and hot water provided. Implements such as tongs and serviettes must be used as far as possible to avoid the direct handling of food. At the end of each days trading, I will inspect the area around my unit and pick up any litter which is attributable to my presence, and place it in the receptacle provided, for return to your premises.

8 I declare that I have read and understand the contents of this document, and that I enter into this contract as a purchaser of your products and as a borrower of your vehicle and other accessories."

3. It appears that after some hesitation the commissioners now accept that the operators are properly described in the agreement as self employed. The tribunals' description of the facts continues at paragraph 13 after describing the evidence of Mr Matthews, given to the tribunal of the similarities between Ringsides' trading operations and those of a conventional franchising company, as follows:-

"13 Mr Matthews conceded that he would normally expect that a franchise agreement should provide that the franchisee had a defined trading site, and for the agreement to have a specified term, both important, if not crucial features which were lacking here; and it would be more usual for payments for equipment and materials to be segregated (we were to learn that the cost of the goods sold by the appellant to the operators was inflated in order to reflect the cost to the appellant of providing the vans and kiosks). Most franchisers expected a capital sum to be paid by the franchisee at the outset, but that was not universal practise. The appellants operation lacked some common features of a franchise and, at present, could not realistically be considered to be franchise operation, but Mr Matthews view was that it so closely resembled one that it would not require a great deal by way of change to turn it into a franchise properly so called. The major necessary change, as we understood his evidence, was the introduction of a minimum term – he suggested a year – over which the agreement between the appellant and each individual operator would run.

14 The four operators from whom we heard evidence all told us that they regarded themselves as self employed; each had been told by the appellant before they signed the purchasing contract that this was a requirement, and its implications were explained to them. They also considered that they were running their own businesses, buying their stock from the appellant and then cooking and selling it on their own account. Mrs Gurcsak told us that she had not realised that the prices she was paying for the ingredients were higher than she might have paid elsewhere, but the other three witnesses told us they had realised that this was so, and accepted it as a form of payment for the use of a van or kiosk. None had obtained any insurance; the vans were insured by the appellant and none of the operators thought it necessary to obtain any cover of their own, for example for public liability risks. In fact the appellant did have such cover; Mr Smith [a partner in Ringside] told us that it had been taken out to protect the appellant if, despite its view of the position, it were nevertheless to be determined that the appellant had some liability arising out of the operators trading activities. Each of the operators told us that the "Mr Sizzle" name was well known and respected in Wolverhampton and the surrounding towns, and they were pleased to be able to trade under that name."

4. In paragraphs 15 to 18 of their reasons the tribunal describes evidence given by the operator witnesses, and apparently accepted by the tribunal, to the effect that they appear to have been able to choose the times at which they traded from Ringsides' vans and kiosks using Ringsides' equipment which I will hereafter refer to as "the equipment". The tribunal's description of the facts continues at paragraph 19 as follows:-

"19 All of the operators whom we heard told us that they met sundry expenses, such as the cost of laundry of their protective clothing and the provision of loose equipment such as knives, and that those who had vans paid for their own fuel. Before they began trading each had been provided with two or three days training which consisted of working with an established operator. None was paid for the training days.

20 It was apparent from the photographs that a price list is displayed outside the kiosks and inside the vans. Those outside the kiosks consisted of pre-painted boards and we learnt that the prices displayed were predetermined by the appellant which also provided the boards. The terms of the purchasing contract do not preclude the selling of products at higher or lower prices than those prescribed by the appellant, but it was quite clear from the evidence we heard that this was no more than a theoretical possibility, if it could be said to amount even to that. Mr Smith told us that he was aware that he could set a maximum price, though not a minimum. If the operator chose to sell for less than the advertised price, the appellant would not be adversely affected (save perhaps if customers demanded lower prices from all the operators) because of the way in which it fixed the prices of the raw food it sold to the operators. Although there was no express prohibition on their doing so it was quite obvious from his evidence that Mr Smith would have objected if an operator was to remove the appellant's price board and replace it with one of his own. It was evident that none had done so, and that none of those whose evidence we heard had even considered the possibility…"

5. At paragraph 21 the tribunal describe Mr Smith's evidence of how he imposed strict operating rules on operators in order to protect the "well established reputation" of the registered trade mark name "Mr Sizzle" in order to maximise Ringsides' turnover which derived "almost entirely from the sales to the operators". Mr Smith accepted that the prices at which raw materials were sold to operators was sometimes "conspicuously higher prices than those at which they could be obtained elsewhere, as a means of recovering a fair charge for the provision of the van or kiosk and the equipment." At paragraph 22 the tribunal describe how from time to time those prices were discounted and how the tribunal found it "significant that the discount was calculated by reference to the retail value of the goods, rather than the amount spent by the operator with the appellant." The tribunals description of the facts continues at paragraph 23 as follows:-

"23 All of the pitches from which the operators traded were held on local authority licences in Mr Smith's own name, although that was, he said a matter of convenience. He explained that, when street trading became regulated some years ago the local authorities generally granted licences to those already trading in preference to newcomers. Since, at that time, the appellant was itself engaged in street trading, it seemed sensible to take the licences in the name of the senior partner. They had been retained in order that the appellant should be in a position to have a reasonable number of "Mr Sizzle" vans and kiosks trading in the area. We saw a number of copies of applications to local authorities for permission for an operator to "assist" Mr Smith on the pitch. It appeared to us that local authorities realised that this was a fiction, and that the nominal" assistant" would be operating the pitch himself. Apparently this system is no longer in use. The operators could, if they wish, trade from other pitches and they did so from time to time, particularly near football grounds. Mr Smith accepted however that he kiosks were always placed on the appellant's pitches and we were left with the distinct impression that none of the operators have their own, registered pitches but "with the limited exception of occasions such as football matches" traded only from the appellant's pitches. Mr Smith made it clear he attempted to place the better operators on the better pitches in order to maximise sales."

6. The tribunals' description of the facts continues at paragraph 26 as follows:-

"26 New operators were recruited mainly by recommendation or by advertising. Mrs Gurcsak had approached an operator who was already trading to enquire how she might become an operator herself and Mr Ball and Mr Green had been recommended by friends, while Mr Yakub had seen an advertisement in the local job centre. It was apparent from Mr Smith's evidence that the appellant frequently placed advertisements in job centres and in the local press. We do not think the wording of the advertisements – which suggested that the position offered consisted of employment in the catering industry, is of the significance suggested by the commissioners; rather we accept Mr Smith's evidence that his advertisements were necessarily brief and they could not explain in detail of what was being offered. We are satisfied that the true nature of the engagement was explained to new operators before they entered into it; indeed we are sure that the appellant went to great pains to ensure that new operators understood exactly what the appellant's system was. However it was significant that Mr Smith referred to his "filling vacancies" when taking on new operators: and we were impressed too by his evidence that many operators remained for short periods, often only a few weeks, and few stayed for a s long as a year. …

27 It was apparent from his evidence that Mr Smith encountered some difficulty in retaining operators. Nevertheless, there were occasions when he decided to dispense with an operator: either because he breached the terms of the purchasing contract (there were, for example, periodic spot checks to ensure that operators were not selling items similar to those provided by the appellant but which they had bought elsewhere), or because he failed to work sufficiently frequently or achieved poor sales. In that case, or if an operator allowed a friend to stand in for him too frequently, Mr Smith had no compunction about obtaining a replacement and simply terminating the first operator's engagement. Just as he accepted that an operator could terminate the arrangement at a moments notice, so he considered he was able to terminate the loan of the appellant's van or kiosk summarily.

28 Mr Smith agreed that the appellant insured not only the vehicles, but also against public liability risks. He explained that this was because of the high turnover of operators; it did not wish to be exposed to risk. As far as he was aware, and despite the terms of the purchasing contract, none of the operators had in fact obtained his own insurance cover. Although the van users paid for their own fuel, all of the expense of maintaining the van and kiosks was borne by the appellant. "

7. It seems to me that the provisions of the agreements which each operator signed can only be construed as a contract between principals in which Ringside agreed to provide each operator with the equipment from and with which they would be able to prepare and sell fast food to the public, using raw materials sold to them by Ringside at prices fixed by Ringside. The agreement contained provisions which the operators were required to comply with when preparing and cooking the food for sale. The terms of the agreements restricted the operators to using raw materials supplied by Ringside. Although there was no express provision, the discretion conferred by the agreements on Ringside to fix the prices at which operators were able to purchase raw materials enabled Ringside to recoup the cost of the provision of the equipment to the operators. The tribunal's findings do not show that either Ringside or the operators behaved inconsistently with the terms of the agreements which the operators signed. There were, however, further restrictions, not covered by the agreements to which the operators were subject. The agreements contained no provisions for duration. It seems, however, that both Ringside and the operators regarded the agreements as terminable without notice. Thus Mr Smith was able to refuse to allow an operator whose performance he regarded as unsatisfactory from continuing as an operator. Equally operators seemed to have been able to choose when they would work but always subject to the threat that if they absented themselves too much and so their turnover was reduced, Ringside would not renew their agreement.
8. Ringside had effective control over the prices at which operators sold to the public and over the pitches from which those sales were to be made. The operators retained the gross proceeds of their sales to the public from which they paid some of their operating expenses such as fuel.
9. Liability to pay VAT arises under the Value Added Taxes Act 1994. Materially to this judgment that Act provides:-

"1 Value Added Tax

(1) Value Added Tax shall be charged, in accordance with the provisions of this Act –

(a) On the supply of goods or services in the United Kingdom (including anything treated as such a supply)…

(2) VAT on any supply of goods and services is a liability of the person making the supply… .

4 Scope of VAT on taxable supplies

(1) 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.

(2) A taxable supply is a supply of goods or services made in the United Kingdom other than an exempt supply."

10. Section 30 of the Act provides that in addition to exempt supplies there are supplies which are to be treated as "zero rated". Supplies which are zero rated are set out in Schedule 8 to the Act. So far as relevant to this judgment that schedule zero rated "food of a kind used for human consumption" except food supplied "in the course of catering". Thus, unless such supply is to be treated as in the course of a catering operation by Ringside, the supply of raw materials by Ringside to the operators would be zero rated whereas the supply by the operators of cooked and prepared food made from those raw materials to the public would be liable to VAT because made "in the course of catering". Section 3 and Schedule1 of the Act, as in force at the material time, provided that suppliers with an annual turnover resulting from taxable supplies of more than £47,000 had to be registered for VAT and so subject to it. It is highly unlikely that any of the operators had turnovers sufficient to require registration. It follows that if they are to be treated as suppliers to the public distinct from Ringside, those supplies will not be charged, and were not charged, to VAT.
11. So far as material to this judgment the further material provisions of the act are as follows:-

"5 Meaning of supply; alteration by treasury order

(1) …

(2) Subject to any provision made by that schedule [schedule 4] and to Treasury orders under sections (3) and (6) below-

(a) "Supply" in this Act includes all forms of supply, but not anything done otherwise than for a consideration;

6 Time of supply

(1) The provisions of this section shall apply…for determining the time when a supply of goods or services is to be treated as taking place for the purposes of the charge to VAT.

(2) Subject to sub section (4) to (14) below [immaterial] a supply of goods shall be treated as taking place –

(a) If the goods are to be removed, at the time of the removal;… "

12. It follows that the facts found by the tribunal reveal two relevant "supplies". The first is the supply by Ringside to the operators of the raw materials for the preparation and cooking by the operators of food to be sold to the public and the equipment with which to do so, taking place at the time of delivery to the operators. The second supply is that by the operators of the prepared and cooked food to the public taking place on delivery of that food to purchasers at the time of purchase. This appeal concerns the second of those supplies.
13. The commissioners contend that notwithstanding that they accept that the operators are self-employed, they nevertheless "represent Ringside in such a way that there is only a single business of which Ringside is to be regarded as the proprietor". The tribunal accepted the commissioners' contentions concluding at paragraph 35 of the reasons that they were "quite satisfied that the entire operation was so closely, even autocratically managed by Mr Smith that any sense the operators might have had that they were in control of their own affairs was illusory. We conclude that there is only one business, and that the sales to the public are, in "substance and reality", made by the appellant through its agents, the operators."
14. The material passages in the tribunals' reasoning are to be found in paragraphs 32 to 34 of the reasons as follows:-

"32 The test to be applied in cases of this kind is to be found in the judgment Ognall J in Burrell (trading as The Firm) v Customs & Excise Commissioners 1997 STC page 1413 at 1415 where he said that "the tribunal should examine the substance and reality and should conclude that there are only separate taxable entities if: (1) the so called separate businesses are sufficiently at arm's length each from the other; and (2) the businesses have normal commercial relationships each with the other." We consider that a useful self contained test, though it needs to be considered against the background of the decision of The Court of Appeal in Potter v Customs & Excise Commissioners 1985 STC page 45 on which Miss Williams placed some reliance, in which it determined that the tribunal had been correct in asking itself the question whether retail dealers were properly to be regarded as the representatives of the wholesale distributor from which they obtained their supplies. There was, Miss Williams suggested, an exact analogy here and we accept that the possible existence of an agency is a factor we must keep in mind.

33 Mr Gibbon [for Ringside] identified the purchasing contract as the central feature of this case. We think he was right to do so, since, without it, there does not seem to us to be any possible doubt that the "substance and reality", to use Ognall J's words is that the operators were not truly running their own discrete businesses of selling cooked food to the public; they were no more than the appellants' casual labour, wholly dependent on the appellant not only for the goods they sold but also for the means of selling them. It is in our view quite inimical to the existence of an independent business that its proprietor cannot determine where he will work or what prices he will charge to his customers. The degree of control exercised by the appellant went far beyond anything we could consider acceptable if there are to be several businesses. The incidental features particularly the short time for which most operators remained with the appellant, the "loan" – in reality the provision for disguised payment - of the vans and kiosks without which the operators could not have traded at all, and Mr Smith's description of how he felt no impediment to dispensing with an under-performing operator, seem to us to be clear indicators that the operators were the appellants' agents, the means by which it sold its goods to the public.

34 Is the fact that the operators bought the goods from the appellant, so that they were selling their own goods to the public, sufficient (as Mr Gibbon maintained (to transform the relationship? In our view it is not. We regard that feature of the case not as the, or even an, indication that there were separate businesses, but as the means by which the appellant ensured that its operators behaved responsibly when trading from its outlets, and by which it protected itself against the irresponsible or dishonest. We do not think it is of any real significance that the consequence of their having bought the food was that the operators remuneration was directly linked to the difference between the price they paid the appellant and the amount they were able to obtain from customers; that is no more, in our view, than the formulae upon which they agreed. The entire mechanism for the sale of goods to the operators was related to their retail value, itself determined by the appellant, and, we conclude their wholesale prices were pitched at a level which allowed the efficient operator to make a reasonable income while maximising the appellant's return."

15. The case of Potter v The Customs & Excise Commissioners referred to in paragraph 32 of the tribunals reasons was a decision of the Court of Appeal concerned with the application of VAT to sales of "Tupperware" by "dealers" recruited by the manufacturers who bought their stock from the manufacturer's distributor at a discount and onward sold the stock to the public at informal gatherings of their friends and contacts. At page 46 of the report the Master of the Rolls defined the issue in the following terms:-

"The essence of the problem is that the dealer pays the distributors 70% of the recommended selling price but receives a higher price, usually the full recommended selling price, from the individual purchasers. The issue is whether Value Added Tax is payable by the distributors on the sums received by them or on the higher price paid by the retail customers. This, in turn, depends on whether the dealers purchase from the wholesalers and then resell to the retail customers or are agents of the distributors in the sense that they create contractual relations between the distributors and the retail customers. If the purchaser from the distributors is the dealer Value Added Tax is payable on only the 70% of the recommended selling price received by the distributors. Whether in that event Value Added Tax would also be payable on the price paid by the retail customer to the dealer would depend on other considerations such as the turnover of the dealer. If, however, the dealer is not a purchaser from the distributor, but is the distributors' agent to effect a sale by the distributor to the retail customer, the distributor is undoubtedly liable to pay Value Added Tax on the price paid by that customer. The taxpayers contend that the dealers are principals buying Tupperware from them and reselling it to the retail customers."

16. Under the heading "the scope of the appeal" the Master of the Rolls continued at page 47:-

"… we were urged by counsel for the Crown to approach the appeal as did Woolf J on the basis that while the final answer is indeed a question of law it depends on an appreciation of matters of fact and degree which are solely for the tribunal."

17. The Master of the Rolls listed the tribunals' finding of fact under the headings "neutral", "pointers towards agency" and "pointers to a relationship of principle". One of the latter points was that " the dealer has complete freedom to decide on the retail selling price."
18. It appears that in that case the dealers completed a "dealership application form" which described their relationship with the distributors. By contrast with the present case that form does not seem to have clearly pointed to a "principal to principal" relationship. The Master of the Rolls expressed his conclusion at page 51 of the report in the following way:-

"I accept that the tribunal asked itself the right question. I also accept that Woolf J correctly defined the scope of the courts right to intervene. However I am quite satisfied that, to adopt the formulation of Woolf J, the tribunals decision was unreasonable or to adopt the kinder test proposed by Lord Radcliffe in Edwards (Inspector of taxes) v Bairstow that decision was inconsistent with the only reasonable decision on the facts. The use of the word "agent" in any mercantile arrangement is, of itself, wholly uninformative of the legal relationship between the parties and the use of the words independent agent takes the matter no further. Either is consistent with a self-employed person acting either as a true agent who puts his principal into a contractual relationship with a third party or with such a person acting as a principal to whom the exclusive rights have been granted…

Allowing the tribunal the fullest latitude to attach what weight it thought right to the various factors, I am driven to the conclusion that a decision in favour of the principal to principal relationship is quite inevitable. The only indication to the contrary appears to be Mrs Osborne's' description of her remuneration as "commission". I am fortified in this conclusion by the fact that the tribunal, and Woolf J, appear to have overlooked what is perhaps the most telling factor, namely the layout and wording of the summary with its reference to "dealer price". Such nomenclature is wholly inconsistent with a relationship of agency."

19. In the present case the tribunal have also, correctly, defined the fundamental issue as being whether or not the arrangements between Ringside and the operators was one which constituted the operators agents for Ringside in the legal sense when they sold the prepared and cooked food to the public or whether that relationship was one of principal to principal. As in the Potter case Ringside "are dissatisfied in point of law" namely that the tribunal have concluded their relationship with the operators was one constituting the operators their agents.
20. In Kieran Mullin Ltd v Customs & Excise Commissioner 2003 STC p274 Mr Justice Park was dealing with an appeal from a VAT tribunal which had decided that certain self employed hairstylists who were provided with access to the premises of a company whose business was one of operating hairdressing salons provided their services to the salon company and not to the customers thereby making the company liable to VAT on the amounts the customers paid. The headnote of the report summarises the facts of the case:-

"KML owned or operated 8 hair dressing salons. Some of the stylists who worked in the salons were employed by KLM 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 salons were properly staffed by competent and well equipped stylists, who would provide the customers the standard 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 to KML by way of chair rental and service charges were calculated. The balances of the receipts belonged to the stylists and they were paid to them."

21. The issue in the case was summarised by the judge at page 276 of the report as follows:-

"The dispute which the case is about concerns the proper VAT treatment where a customer's hair is treated by a self-employed stylist. Is the hairdressing services to the customer supplied by KML or is it supplied by the stylist? It has been recognised for sometime that it is possible for the relationship to be structured either way and that the critical question turns on the nature of the relationship between the owner of the salon (here KML) and the stylist…

I find that I cannot view the appeal in precisely the same way as either counsel. For Customs & Excise Mr McNab says that the decision of the tribunal was a decision of fact which cannot effectively be challenged on an appeal limited to errors of law… for KML Mr Young agrees that the question before the tribunal was one of fact but he submits that the tribunal's decision was such that no tribunal properly instructed in the law could have reached it, and was therefore liable to be reversed on appeal in accordance with Edwards v Bairstow 1956 AP p14.

In my opinion however, there were issues of law as well as issues of fact which needed to be addressed by the tribunal. In particular the outcome of the case is, in my view, largely dependent on the nature of the relationship between KML and its self-employed stylists; and that relationship or at least the starting point for it, is substantially affected by the contents of the Rent a Chair agreements. What is the meaning and effect of those agreements is to considerable extent a question of law. As I will explain later the prima facie effect of the agreements was that the self-employed stylists who operated on the basis of them supplied their hairdressing services directly to the customers. There are still questions of fact to be considered, but in my opinion the facts found by the tribunal and relied on by it do not lead to any departure from the result which flows from the agreements by themselves. Thus I base by decision to allow the appeal, not on Edwards v Bairstow principles…but rather on the proposition that the tribunal applied tests which were not the correct tests in law, and that, if it had applied the correct test, it would have allowed the appeal instead of dismissing it."

22. At page 279 of the report Mr Justice Park sets out the provisions of the "Rent a Chair" contract. Those provisions were:-

"Whereby the Salon Owner agrees to provide a chair to rent and the Hairdresser agrees to rent the chair on the following terms and conditions:

1 The Hairdresser declares that he/she is a self-employed hairdresser and acknowledges that he/she is responsible for his/her own income tax liability and national insurance contributions and has submitted the appropriate arrangements to those departments.

2 The Hairdresser agrees to abide by the appropriate rules as contained in the Company Instruction Booklet.

3 The chair rental may be varied according to the situation of the salon, experience of hairdresser, seasonal variations of trade etc.

4 [A restrictive covenant restraining the hairdresser for one year after the termination of the contract from operating as a hairdresser within half a mile of the salon]

5 During the periods 1^st April to 31^st October and 1^st November to 31^st March a rent free period of two weeks and one week respectively will be granted for holidays.

6 The Hairdresser will except in his/her agreed weekly rest day, be in attendance at the salon where he/she is working during normal opening hours appropriate to that salon.

7 One weeks notice by either party is required to terminate the contract."

23. It is to be noted that there is distinct similarity between clause 1 of the contract in question in the Kieran Mullins case and clause 6 of the contract in the present case.
24. Mr Justice Park made a number of comments on the provisions of the contract in that case at page 280 of the report. Three of them are of relevance to the present case. Under heading (2) he said:-

"The tribunal having set out the terms of the agreement in its decision, continues immediately to make the following important finding of fact… "we find that self-employed stylists of KML operate their businesses in accordance with the terms of the Hairdressing Rent a Chair contracts." Thus the contracts are not shams, in the sense that when they were made the parties did not intend them to take effect according to their terms. Nor has it been the case that the parties entered into contracts which said one thing, but at some time thereafter started to do something else instead."

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 paragraph 34 of the tribunals reasons. On the other hand the tribunal does not find the contracts to be shams. Indeed on the tribunals finding of fact it would have been impossible for them to do so. It is plain that Ringside and the operators have throughout behaved in a manner which is consistent with the operators contracts remaining in force.
26. Mr Justice Park's comment under heading (3) is :-

"In my opinion the most important part of the contract is the general provision at the beginning, after the word "whereby"; KML agrees to provide a chair to the stylist to rent, and the stylist agrees to rent the chair. The contract does not go on to state explicitly what the stylist is to do with the chair which he or she rents, but the only realistic possibility is that he or she would use it to treat the hair of his or her own customers. If he or she was going to use it to treat the hair of customers of KML what point would here be in his or her renting it from KML."

27. The equivalent provision in the operators contracts in the present case was that contained in clause 1. What purpose would there be in a provision whereby the operators purchase raw materials from Ringside and pay for them, if they were then going to prepare and cook those raw materials to supply customers of Ringside?
28. Under heading (v) Mr Justice Park commented on the remaining provisions of the contract in this way:-

"Most of them deal with matters which are in my opinion consequential on the main provision. They indicate that, although KML wanted the stylists to be self-employed (as was indeed made explicit in paragraph 1), it nevertheless wanted to have a significant measure of control over how the self employed stylists would carry on their businesses. They could not just turn up or stay away as they liked, but were expected to be in attendance at the salon during normal working hours except for holidays and rest days. Paragraph 2 refers to rules in the Company Instruction booklet. These dealt with such matters as punctuality of attendance, dress and the provision by the stylist (whether employed or self-employed) of the tools and other equipment required. Like some of the other numbered paragraphs of the rent Chair contract they show a desire on the part of KML to have its salons properly staffed at all times by competent and well equipped stylists who would provide to customers the standards of service which KML required and that these matters applied to self-employed stylists as well as to employed stylists."

29. It seems to me that similar comments apply to the restrictions and control which Mr Smith exercised over the operators in the present case and which are characterised by the tribunal as close and autocratic control. In particular, in the Kieran Mullin case, KML fixed the hairdressers charges to the customers.
30. At page 285 of the report having commented on matters which are not relevant for the purposes of this judgment Mr Justice Park continues:-

"Accordingly I now proceed as if the decision had concerned only the self-employed stylists…I will first say how I myself believe that the issues should have been approached. Later I will review how the tribunal approached it. I first remind myself of what the precise question is. It is this. Assume that a customer goes into a KML salon and has her hair cut or styled by a self-employed stylist, who for the purposes of section 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 a 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 the relationship…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….

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….

So I begin with the Rent a Chair contract which on the face of things provides the contractual relationship between KML and the self-employed stylists…the critical provision of the contract is the one which provides that KML is to provide a chair to rent and that the self-employed stylist is to rent the chair. That provision is supplemented by the conduct of the parties whereby the stylists make payment to KML by way of chair rental and service charges, and KML provides receipts to the stylists for payments so made. In my judgment that contractual provision is consistent with it being the stylists, not KML who supply the hairdressing services to the customers. To put the same point the other way round it would be in conflict with the Rent a Chair contracts for the self-employed stylists to be providing personal services, analogous to the services of subcontractors, to KML in return for fees from KML and for KML to be supplying hairdressing services to the customers whose hair is dressed by the stylist.

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 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. In my opinion the evidence shows no such thing. Indeed any analysis of that nature would be contrary to the express findings of the tribunal I refer again to the finding at paragraph 35 of the decision: "We find that self-employed stylists of KML operate their own businesses in accordance of the terms of the Hairdressing Rent a Chair contracts." When I first read that paragraph I had difficulty in seeing how the conclusion to which I knew the tribunal was going to come could be consistent with it. The remainder of the decision did not resolve my difficulty. In my opinion the tribunal's conclusion that the hairdressing services to customers treated by self-employed stylists were supplied by KML, not by the stylists, is contrary to the terms and effect of the Rent a Chair contracts taken together with the finding that the self-employed stylists did in fact operate in accordance with the terms of the contracts.

There maybe another question of fact to be considered. Given that the provisions of the Rent a Chair contracts and of KML's instructions and rules for stylists (employed and self-employed) enable KML to exercise quite tight control over many aspects of the work of the self-employed stylists, does that mean that whatever the contracts may have attempted to say and however hard the parties tried to operate in accordance with them it was just not possible for the stylists (rather than KML) to be the person who supplied hairdressing services to the customers? The tribunal may have thought that that was the position although it does not specifically say. So in my judgment, however, there is nothing in the features on which the tribunal places reliance which means that, despite what the contract said, the self-employed stylists could not or did not supply hairdressing services to the customers.

There is no reason either of law or inherent in the nature of the business to prevent KML making and operating arrangements with a stylist to the following effect: (1) KML will permit the stylist to have a chair in one of its salons and to use the general facilities of the salon. (2) customers treated by the stylist will be stylist's customers not KML's so that (3) the stylist will be entitled to the prices paid by the customers whom he or she treats. (4) KML would charge the stylist for the use of its (KML's) chair and salon facilities; the charges will be fixed from time to time and will contain an element geared to the stylists receipts from his or her customers. (5) further if a stylist wishes to take advantage of this structure proposed to him by KML, KML will expect him or her to comply with a number of conditions including the following…"

31. The judge then sets out the various conditions and concludes by saying:-

"One can well imagine that other salons might not require them to be observed by other self-employed stylists. But if a particular salon does not require them to be observed, as KML did, does that in some way invalidate the earlier provisions of the package whereby the stylist not the salon provides the hairdressing services to his or her customers? In my opinion the answer is clearly no…

I therefore believe that in the circumstances which existed in the present case the structure within KML's self-employed stylists operated as a true "service to the customer structure" not a "services to the salon structure" and that Custom & Excise direction to KML to account for VAT on the prices paid by the customers treated by the self-employed stylists was not justified in law. I respectfully disagree with the conclusion of the tribunal.

Further I do not think that this is the sort of case in which the tribunal came to a conclusion of fact and the question for me on appeal is whether it was a conclusion within the "no mans land" of fact and degree as respects which an appellate court cannot interfere on an appeal limited to errors of law…in my opinion I can intervene because the tribunal applied the wrong tests and thereby erred in law. There are three specific points which I will make.

(i) In my opinion the tribunal paid insufficient attention to the terms and the legal effect of the Rent a Chair agreements. In the paragraphs of the decision under the heading conclusion it refers to some provisions of the agreement but not to the one which in my opinion is the one which really matters. For example the tribunal states in paragraph 64:

"The fact that the Rent a Chair contract specifically requires a self-employed stylist to be in attendance at her salon "during normal working hours appropriate to that salon" is sufficient on its own for us to find that the self-employed stylist supply their services to KML and not to the public"

I cannot agree with the specific point there made. The requirement for self-employed stylist to be in attendance during normal working hours seems to me to be neutral and whether, when a stylist is at a salon and treats a customers hair, it is KML or the stylist who is supplying the hairdressing service to the customer. It might, I suppose, be said that the stylist supplies to the salon a service of being present so that the salon is fully staffed but that does not mean that it must be KML which provides the hairdressing services to a customer. But my more fundamental point is that neither in that paragraph or anywhere else in the conclusion part of the decision is there any reference to the central provision of contract that KML is renting a chair to the stylist and the stylist is renting the chair form KML.

(ii) A closely related point is that the tribunal nowhere explains how its conclusion that KML, not the self-employed stylist supplies the hairdressing services to the customers can be reconciled with the central provision of the contract and the finding that the self-employed stylist operate their businesses in accordance with the contract. As I have said it appears to me that the conclusion cannot be so reconciled. At least the tribunal needed to explain how it can be but the decision contains no explanation.

(iii) The tribunal relies principally on the various elements in the contract and the instructions and rules (incorporated into the contract by paragraph 2) whereby KML has extensive powers of control over aspects of the activities of the self-employed stylists. In my opinion those elements would be relevant to a different question but owe, at most, of marginally relevance to the actual question which the tribunal had to decide. If it was established that the stylists provided their hairdressing services to KML and there was a dispute about whether they did that as employees or as independent contractors the degree of control which KML had over them and over their working hours would have been highly relevant. In the context of that question the concluding sentence at paragraph 69 of the decision would be appropriate: "we are quite satisfied that KML exercises a degree of control over its self-employed stylists that is incompatible with their being independent contractors." But as it appears to me the question is not whether the stylists are providing their hairdressing services to KML as employees or independent contractors. Rather it is whether they provide hairdressing service to KML at all, or whether they provide those services to the customers. On that question my opinion is that there is little relevance attaching to the question such as whether or not the stylists are free to stay away from the salons in normal working hours."

32. From time to time in the course of argument I pressed Miss Williams as to whether she was contending that the Kieran Mullin case was wrongly decided. She seemed reluctant to do so but finally did. In my judgment she was compelled to do so. There are no relevant differences between the considerations dealt with by Mr Justice Park in the Kieran Mullin case and those which I have to deal with in this case. In my judgment, and with great respect, the Kieran Mullin case was rightly decided and I gratefully adopt the approach of Mr Justice Park.
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 clauses 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.
36. It was Miss William's submission that the issues in this case, as were the issues in the Kieran Mullin case were essentially issues of fact, which, having been concluded by the tribunal could not be reopened on appeal. I disagree. Just as in the Kieran Mullin case, in my view, the tribunals treatment of the contract between Ringside and the operators reveals an error of law. As I have pointed out the tribunal does not find that the agreements made between the operators and Ringside were shams or that either party, in their conduct of their relationship acted inconsistently with those agreements remaining in force. Beyond pointing out that the effect of the agreements was to provide for a sale by Ringside to the operators of the raw materials necessary for the preparation of food to be cooked by the operators and thereafter sold to the public, the tribunal makes no effort to construe the effect of the terms of the agreement and apply them to the question of whether the relationship between Ringside and the operators was one of principal and agent, so that customers were actually dealing with Ringside when they purchased food, or principal to principal so that they were dealing with the operators. As in the Kieran Mullin case the tribunal concentrated on what they perceived to be the degree of control which Mr Smith exercised over the operators, consideration irrelevant or, at most, peripheral to the issue of whether there was an agency. Nowhere does the tribunal seek to reconcile their conclusion that there was here "all one business owned by Ringside in which the operators represented Ringside to the customers" with the provisions of the agreements which were plainly inconsistent with any such conclusion. This approach by the tribunal to the issue of whether or not there was an agency was erroneous. There is no special law of agency applicable to VAT cases.
37. The tribunal concluded that "the test to be applied in cases of this kind is to be found in the judgment of Ognall J in Burrell… where he said that "the tribunal should examine the substance and reality and should only conclude that there are only separate taxable entities if: (1) the so called separate businesses are sufficiently at arms length each from the other; and (2) the businesses have normal commercial relationships each with the other." We consider that a useful self contained test… ." As counsel for Ringside accepted the case of Burrell was cited as being a guiding authority on the issue by those appearing for Ringside before the tribunal. However the quotation from the judgment of Ognall J itself reveals that the considerations that that judge was dealing with were entirely different to those in issue before the tribunal. He was dealing with a case where the issue was whether two businesses owned by the same taxpayer were separately taxable or were, in fact, part of the same business. To that issue the degree to which there was interlocking control over the businesses was relevant. Although I have sympathy with the tribunal in the circumstances it seems to me that this again shows an approach by the tribunal to the issue in the case revealing an error of law.
38. It follows that, as Mr Justice Park in the Kieran Mullin case I regard myself as entitled to intervene on appeal on the ground that the tribunal's decision reveals errors of law.
39. I would add, in the alternative, that the tribunals decision in the present case was unreasonable in the light of their findings of fact being inconsistent with the only reasonable decision which could have been arrived at on those findings see the judgment of The Master of The Rolls in the Potter case at paragraph 51 which I have cited above.
40. For these reasons, in my judgment, this appeal should be allowed.