First-tier Tribunal (Tax)

[2011] UKFTT 141 (TC)

TC01015

Appeal number LON/2005/1054

Exemption – Hairdressing Salon – licence granted to stylists to use basement – whether single exempt supply of licence to occupy land – No – Appeal Dismissed

FIRST-TIER TRIBUNAL

TAX

ANNETTE GLEN-JONES t/a SOPHISTICUTS Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

TRIBUNAL: JOHN BROOKS (TRIBUNAL JUDGE)

NORAH CLARKE (MEMBER)

Sitting in public at Eastgate House, Newport Road, Cardiff on 28 January 2011

Brian T Corbould, tax adviser, for the Appellant

Sarabjit Singh, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2011

DECISION

1.       Mrs Annette Glen-Jones appeals against a decision contained in a letter dated 28 September 2005 from HM Revenue and Customs (“HMRC”) that income described as “rental income” in her accounts is taxable at the standard rate.

Evidence and Facts

2.       We were provided with a bundle of documents which included copies of the correspondence between the parties and a copy of an ‘Independent Contractor Licence Agreement’ (the “Licence”), the original of which was made available for us at the hearing. The Licence was in a form prepared by the National Hairdressers’ Federation and entered into by Mrs Glen-Jones and a Mrs Lisa Hughes (then Evans) on 18 September 2001. We heard from Mrs Glen-Jones who gave oral evidence and we were provided with a witness statement made by Mrs Lisa Hughes on 2 October 2006 to which, although taken into account, we attach less weight than would have been the case had Mrs Hughes given oral evidence before us.

3.       From this evidence we make the following findings of fact.

4.       Mrs Glen-Jones operates a hairdressing salon from premises in Tonypandy under the name “Sophisticuts”. The premises consists of two floors, a ground floor and a basement which, although it has a door leading to a lane behind the building, is generally accessed through a door onto stairs from the ground floor. The basement, which contains two styling chairs, wash basins, a small kitchen area, a waiting area for clients and a washing machine and tumble drier, was used by Mrs Lisa Hughes who operated from there as an independent stylist with her own clientele under the terms of the Licence paying initially £400 a month which was reduced to £320 a month on 11 November 2001. Janet Williams, another independent stylist also operated from the basement under a separate licence granted by Mrs Glen-Jones on the same terms as Mrs Hughes. On the ground floor, where Mrs Glen-Jones works with her two employees, are two styling chairs, wash basins and waiting area.

5.       Under the terms of the Licence the parties agreed that it was granted “to provide the Licensee with a service area in the salon owned and operated by the owner (clause 4.4.1) and that “the Licence does not give the Licensee exclusive occupation of the Designated Area or the Salon and the Owner is entitled to enter and use the Designated Area at any time provided that such entry shall not in any way hinder or obstruct the Licensee’s business activity in accordance with the terms hereinafter appearing (clause 4.4.2). In practice, although Mrs Glen-Jones did have unrestricted access to the basement, other than to make use of the washing machine and tumble drier for the purposes of the ground floor salon whenever necessary, she only went to the basement to remove rubbish at weekends when it was not used by the stylists.

6.       Clause 5.2 provides that “the Licensee is not entitled to exclusive occupation of the Designated Area and confers no tenancy whatsoever upon the Contractor and that possession of the Salon is retained by the Owner until expiration or termination of the Licence Agreement.

7.       Although the “Designated Area” is defined by clause 4.3 as the area of “4 square metres within the Salon, which is for the purposes of identification only shown and edged red on the plan” annexed to the Licence Mrs Glen-Jones explained, and we accept, that the 4 square metres referred to in the Licence was an area around the chairs on the ground floor which the stylists were permitted to use, in addition to the basement, if they had clients who were unable to use the stairs to the basement.

8.       Mrs Glen-Jones also, as part of the Licence, provided the stylists with “facilities and services” (clauses 6.1 and 6.3) and “equipment” (clause 6.5) which according to the schedule to the Licence included “chairs suitable for a hairdressing business, mirrors, free standing hot hair dryers, access to toilets and wash room facilities, reception facilities, reasonable use of the telephone, heating and lighting, hot and cold water and a laundered towel service” all of which Mrs Glen-Jones agreed was essential for the stylists operation. However, in practice the stylists generally used their own telephones and their clients would call them direct to make appointments. The laundry service was the use of the washing machine and drier in the basement that was also used, without restriction, by Mrs Glen-Jones for the ground floor salon. The “reception facilities” consist of a desk with a telephone and an appointment book which was used to record the appointments for clients of both the ground floor salon and the stylists operating from the basement.   

9.       The payments Mrs Glen-Jones received from the stylists was recorded as “rental income” in her accounts and treated by her as exempt for VAT purposes. On 12 August 2003 her business received an unannounced VAT visit and in the course of subsequent enquires by what was then HM Customs and Excise it was ascertained that Mrs Glen-Jones was only trading under the VAT registration threshold if she had been correct to treat the rental income as exempt. This led to correspondence between HM Customs and Excise and subsequently (after the amalgamation with the Inland Revenue) HMRC and Mrs Glen-Jones’s accountants and Mr Corbould. During this period the business turnover excluding the rental income exceeded the registration threshold and Mrs Glen-Jones became VAT registered with effect from 1 February 2004.

10.    As it was not accepted that the rental income should have been treated as exempt Mrs Glen-Jones was compulsorily registered on 22 March 2004. A central assessment in the sum of £33,413 was raised on 23 July 2004 in respect of the period between 1 November 1999 and 31 May 2004 of which £30,102.56 remains outstanding. However, HMRC have taken no steps to enforce this pending the outcome of this appeal. In a letter dated 12 July 2004 Mr Corbould, writing on behalf of Mrs Glen-Jones requested that HMRC reconsider the decision.

11.    There was a further delay while the parties waited for the decision of VAT and Duties Tribunal in the cases of Mallinson and Woodbridge and Mould v HMRC (“Mallinson”). In a letter dated 26 January 2005, which must have been written later as it refers to Mallinson, received by HMRC on 19 August 2005 Mr Corbould sought to distinguish Mallinson from the present case. This resulted in further correspondence leading to the letter from HMRC of 28 September 2005 against which Mrs Glen-Jones appealed on 10 October 2005.

Law

12.    Section 31 of the Value Added Tax Act 1994 (“VATA”), provides that a supply of goods or services is an “exempt supply” if it is of a description specified in schedule 9. Item 1 of Group 1 of schedule 9 VATA specifies as exempt the “grant of any interest in or right over any licence to occupy land”. The law in relation to this exemption from VAT was considered by Blackburne J in Holland (trading as The Studio Hair Company) and Vigdor v HMRC [2009] STC 150.

13.    Like Blackburne J at [49] we are also “content to adopt the following summary” set out in the decision of Briggs J in HMRC v Denyer [2008] STC 633 at [19]:

“(1) Because art 13B(b) [of  the Sixth VAT Directive 77/388 now replaced by art 135(1)(l) of Directive 2006/112 EC] confers an exemption from VAT, it must be strictly construed, but not so strictly as to deprive the exemption of its intended effect: see Belgium v Temco Europe SA (Case C-284/03) [2005] STC 1451, [2004] ECR 1-11237, paragraph 17 of the judgment of the Court of Justice.

(2) In common with other exemptions in art 13, this exemption is to be given a meaning independent of the definitions used in the legal systems of any particular Member State, and it must be derived from an interpretation of the exemption in the light of its context, and of the objectives and the scheme of the Sixth Directive: see Temco at paragraphs 16 and 18.

(3) The concept of the letting of immovable property within the meaning of art 13B(b) is essentially 'the conferring by a landlord on a tenant, for an agreed period and in return for payment, of the right to occupy property as if that person were the owner and to exclude any other person from enjoyment of such a right': see Temco at paragraph 19 and Sinclair Collis Ltd v Comrs of Customs and Excise (Case C-275/01) [2003] STC 898, [2003] ECR 1-5965, paragraph 25.

(4) The letting of immovable property is characteristically 'a relatively passive activity linked simply to the passage of time and not generating any significant added value', to be distinguished from other activities which are either industrial and commercial in nature, or which 'have as their subject matter something which is best understood as the provision of a service rather than simply the making available of property'. See Temco at paragraph 20 and, as an example of the provision of a service, the right to install cigarette machines in commercial premises examined in Sinclair Collis at paragraphs 27-31.

(5) The right to occupy an area or space for a period of time may not be a letting of immovable property if it is merely the means of effecting the supply which is the principal subject matter of the relevant agreement: see Sinclair Collis at paragraph 30.

(6) There may be a de minimis limitation on the exemption in art 13B(b) such that, for example, the conferring of a right to the exclusive use of a table in a Dutch coffee shop, for the purpose of selling narcotics, is inherently incapable of being a letting of immovable property: see the opinion of Advocate General Fennelly in Staatssecretaris van Financien v Coffeeshop Siberie vof (Case C-158/98) [1999] STC 742, [1999] ECR I-3971, paragraph 36, applied by Lord Slynn in Customs and Excise Comrs v Sinclair Collis Ltd [2001] UKHL 30 at [15], [2001] STC 989 at [15] in the House of Lords.

(7) An agreement may fall short of being a letting of immovable property if, on analysis, it confers merely a licence to use rather than to occupy land: see Sinclair Collis per Lord Nicholls at [35].

(8) An agreement is not disabled from being a letting of immovable property merely because the grantee's exclusive use is subject to conditions (such as a landlord's right to enter and inspect), or because it includes the right to use parts of the landlord's property in common with other occupiers: see Temco at paragraph 24.”

Submissions

14.    For Mrs Glen-Jones, Mr Corbould submitted that the present case “stands on all fours”  with the decision of the VAT and Duties Tribunal in the case of the Executors of M J Taylor & Mrs Pauline Taylor ((t/a Anglia Markets & Bantees) v HMRC [2007] UKVAT V20323 (“Taylor”) and as such, was an exempt supply of a licence to occupy land.

15.    He contended that the basement where the self-employed stylists worked was independent from Mrs Glen-Jones’s salon and that the joint use by the stylists and Mrs Glen-Jones of the appointment book was “superficial”. With regard to the telephone Mr Corbould argued that it was rarely used by the stylists who took bookings and used their own telephones. He accepted that Mrs Glen-Jones did use the washing machine in the basement and carried rubbish from the basement but that her use would not interfere with the business of the stylists and compared it to a landlord’s right to inspect.

16.    Mr Singh, for HMRC, relied on two decisions of the High Court, HMRC v Denyer [2008] STC 633 (“Denyer”) and Holland (trading as The Studio Hair Company) and Vigdor v HMRC [2009] STC 150 (“Holland”) submitting that their application to this case was sufficient “to dispose of the present appeal”. In addition he contended that the basement was not an independent entity from the ground floor and drew our attention to the combined appointment book and shared telephone.

17.    However, even if the basement was completely independent from the ground floor Mr Singh submitted it would not be an exempt supply of a licence to occupy land as it was not exclusively occupied by the stylists (see Case C-294-03 Walderdorff v Finanzamt Waldviertel (6/12/07) [2008] STC 3079). He further submitted that if there had been exclusivity of occupation by the stylists as the supply was of services, which included the supply of equipment necessary for them to be able to carry out their business, it cannot be an exempt supply of immovable property by Mrs Glen-Jones.  

Discussion and Conclusion

18.    The issue for us to determine is whether the supply by Mrs Glen-Jones to the independent stylists in this case was of hairdresser’s facilities and therefore taxable as contended by HMRC or whether, as argued by Mr Corbould, it is an exempt supply of a licence to occupy land. We first turn to the cases to which we were referred. 

19.    Denyer was the first decision of the High Court directly concerning the issue of the correct VAT classification of the supply of a hairdresser’s chair and its surrounding area. In that case the Tribunal had found, as a matter of fact, that an area surrounding the chair was identifiable and exclusively enjoyed by the stylist and, as such, there was an at least an exempt element in the supply. Although the High Court was bound by this finding of fact Briggs J found, at [37], that the Tribunal by excluding the waiting area and wash basins from the “package” [of the supply made to the stylist] “to an overly narrow view of the package as a whole, with the consequence that they over-rated the provision of the exclusive use of the chair and allocated area as being predominant.” He went on to say, at [43 - 44]:

[43] “In that respect, I have derived considerable assistance from the analysis of the Manchester Tribunal, chaired by Mr Colin Bishopp in Mallinson & Woodridge T/A The Hair Team and Leon Jaimes Mould T/A Leon Jaimes Hair Fashions (MAN/99/0644 & MAN/02/0041). At paragraph 18, the Tribunal said this:

“We do not doubt that, if the circumstances were right, the Appellants could grant to the stylists, licences for the exclusive occupation of areas in their salons. Mr MacNab did not, in terms, resist that argument, but it seems to us to be beside the point. The Appellants' argument depends upon our accepting that, even with such a licence, the stylists could realistically be regarded as carrying on the business of hairdressing within the space, whether of 16 square feet or of 40 square feet, allocated to them. In our view, the answer to that question is plainly no. Indeed, Miss Taylor's own evidence leads inexorably to the conclusion that she did not carry on a business solely within that confined space. An obvious omission is that the licence does not grant her the means by which she and her clients can gain access to the space from the public highway, but even if such an easement were granted, or implied, it is quite clear to us that she is able to carry out only a small part of her business from the confined space. It does not include any facility for answering the telephone to make appointments; for clients to wait; for hair to be washed, or for payment to be taken. In short, it is quite impossible for Miss Taylor to carry on the entire business of hairdressing from her allocated space. Even accepting (which, frankly we doubt) her assertion that she could cut hair without straying outside the space, the cutting of hair, in a modern salon, constitutes only part of the service of hairdressing. The claim that the supply of laundered towels, the wash basins, the telephone, the waiting area, the till and other services of the premises is no more than a means of better enjoying the licence to occupy a space, is, in our view, unsustainable. For that argument to succeed, it is necessary to show that the licence would be sufficient to enable Miss Taylor to carry out her business, even if those services were not provided. That is manifestly not the case. We are satisfied that the proper view is that the Appellants were supplying to the stylists a package including the allocation of space, the supply of goods and the provision of various services.”

[44] In my judgment, that paragraph provides a compelling analysis showing why in all chair letting hairdressers' arrangements including the present, the supply cannot properly be categorised as the letting of immovable property. Although in that case the other supplies were more generous than those in the present case, including for example the services of juniors, and large floor mounted hairdryers, the principled basis of that Tribunal's decision is both in substance, and word for word, equally applicable to the present case. Furthermore, it complements Warren J's analysis in the massage parlour case, and is entirely consistent with it.”

20.    In Holland Blackburn J said, at [90]:

“The essence of the matter, as it seems to me, is that, as the relevant jurisprudence has made clear, the exemption (which is to be strictly interpreted) does not extend to a licence to occupy land which is but one element of a package of supplies made by the taxpayer/lessor to his customer in consideration of a payment or payments by that customer where the supplies in question are commercial in nature or are best understood as the provision of a service and not simply as the making available of property. If that is the nature of the supply - a service rather simply the making available of property - there is no exempt licence: the licence element in the supply is standard-rated. Whether the resulting supply is properly to be regarded as a single indivisible economic supply which it would be artificial to split and, if so, how that supply is to be characterised for VAT purposes are issues that do not matter if all of its constituent elements are in any event standard-rated.”

21.    Taylor was a decision of the VAT and Duties Tribunal (Chairman Sir Stephen Oliver QC) in which the Appellants, who rented out an entire hairdressing salon which was visited by their son on “rare occasions”, succeeded in establishing that there was an exempt supply of a leasing or letting of immoveable property. However, unlike the present appeal, in that case the partners never had any hairdressing business operating as a going concern at the premises used by the two stylists to whom they granted a licence and such do not consider, unlike the decisions of the High Court in Denyer and Holland, that it can be applied to the somewhat different facts of the present case.

22.    Given the lack of exclusive possession of the basement by the stylists under the Licence and the unrestricted access enjoyed by Mrs Glen-Jones in practice leads us to conclude that the supply is not of a licence to occupy land. Also, having regard to the nature of the supply by Mrs Glen-Jones we find that, on the facts, it is in essence a taxable supply of hairdressing services and that the non-exclusive right of the stylists to occupy the basement is but one element of that supply.

23.    We therefore dismiss the appeal.

24.    This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

JOHN BROOKS

TRIBUNAL JUDGE

RELEASE DATE: 25 February 2011