United Kingdom VAT & Duties Tribunals Decisions

Mallinson & Anor (t/a The Hair Team) v Revenue and Customs [2005] UKVAT V19087 (24 May 2005)

19087

VALUE ADDED TAX — hairdressing salon — agreements to licence a fixed space and to provide services — whether separate exempt supply of licence to occupy land and of standard-rated services — no — single supply of a package — whether licence or services dominant — services — entire package standard-rated — misdirection — extent of tribunal's jurisdiction — value of misdirection — no relief available even if within tribunal's jurisdiction to grant it — appeal dismissed

MANCHESTER TRIBUNAL CENTRE

WILLIAM EDWARD MALLINSON & MARK WOODRIDGE
t/a THE HAIR TEAM and LEON JAIMES MOULD t/a LEON JAIMES HAIR FASHIONS

Appellants

- and -

HER MAJESTY'S REVENUE AND CUSTOMS Respondents

Tribunal: Colin Bishopp (Chairman)

Marilyn Crompton

Sitting in public in Manchester on 21 and 22 March 2005

Brian Corbould, VAT Consultant for the Appellants

Andrew Macnab of counsel instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2005


 


DECISION
1. In these appeals which, although they were not formally joined, we heard at the same time, William Mallinson and Mark Woodbridge, who trade in partnership as The Hair Team, and Leon Jaimes Mould, who trades on his own account as Leon Jaimes Hair Fashions, challenge assessments to VAT. The amounts assessed, though important in themselves to the Appellants, were not in dispute. The question for our determination is the underlying one, namely the incidence of VAT on the supplies which the Appellants make to the self-employed stylists who work in their salons. The issues are, in all material respects, identical in each case.
2. It is not disputed that the stylists are indeed self-employed. Although there are some differences between the cases, in essence the Appellants grant the stylists a licence to occupy a specified area within their salons in exchange for payment and in addition provide various services, for a further payment. The Appellants' case is that the fees paid for the licences are exempt from VAT while the services are standard-rated, and they have, historically, accounted for VAT on that basis. The Respondents maintain, while accepting that if there truly are two discrete and distinct supplies, the licence fee is exempt while the supply of the remaining items is standard-rated, that there is in reality a single supply of standard-rated service and goods which enables the individual stylists to carry on the business of hairdressing. Alternatively, they say, if there is a supply of a licence to occupy land, it is not economically dissociable from the supply of services and goods and is to be regarded as ancillary to that supply, and the two should be treated as a single standard-rated supply. The Appellants retort is that if the two supplies should be treated as if they were a single supply, it is the supply of the licence which is dominant, and the entire supply should correspondingly be exempt.
3. Additionally, the first Appellant (but not Mr Mould) also contend that they have been misdirected by the Respondents, and that the assessment notified to them should be discharged on that account, irrespective of its merits. We shall return to that issue at the end of this direction.
4. The Appellants were represented by Brian Corbould, a VAT consultant, and the Respondents by Andrew Macnab of counsel. Each provided us with a helpful skeleton argument. We heard evidence from Samantha Taylor, a stylist working in the first Appellants' salon, from Mr Mallinson and from Mr Mould. We had in addition the unchallenged statement of Kim Harrison, a hairdresser working in Mr Mould's salon. The parties provided us with bundles of documents and large numbers of authorities of the Court of Justice, the domestic courts and of this tribunal.
5. Among the documents were copies of what appeared to be two separate agreements between the first Appellants, referred to in the agreement as "the salon" and Miss Taylor. We express ourselves in that way because Miss Taylor, in her evidence, referred to it as a single agreement, but what we have appears to be one agreement consisting of a single page, dated 19 November 1986, with clauses numbered from one to five, and a second agreement, undated, but which seems to have been made at the same time, with clauses numbered from one to fourteen. Mr Mallinson, when he gave his evidence, said that he considered them to be two distinct agreements signed on the same day. We observe that the two agreements overlap, but there does not seem to be any inconsistency between them.
6. The effect of the first agreement is that Miss Taylor is to be provided by the salon with an area of 16 square feet, accommodating a chair, in a specified area of the salon, although the salon reserves to itself the right to require Miss Taylor to move to another area on three day's notice. The agreement provides that Miss Taylor is a licensee, and not a tenant. The space is said to be provided in order to enable Miss Taylor to carry on her own business of hairdressing. The fee for the licence was initially £100 per week but, Miss Taylor told us, the fee has been renegotiated on two subsequent occasions. The first agreement deals with the allocation of space only, but the second, while repeating some parts of the first agreement, provides also for the supply by the salon to Miss Taylor of "basic materials and stock", for 10 per cent of her total takings, in addition to which she is required to pay a further 10 per cent of her takings. This agreement is, if we may say so, very poorly drafted. The basic materials and stock are undefined, but it emerged from the oral evidence that they included goods such as shampoos and other consumables. The oral evidence also showed that the salon provides laundered towels, a telephone, a till, the services of juniors employed by the salon, and the use of some equipment, such as basins for washing client's hair and large, rather than hand held dryers. Confusingly, the agreement suggests that Miss Taylor is to pay a further 10% of her takings as a service charge, but it became clear from the oral evidence that there was only a single 10 per cent charge.
7. The agreement used by Mr Mould, though quite different in wording, is to the same effect: the stylist is granted a licence over the space allocated, and is to be supplied with (undefined) stock, for separate charges. A single agreement is used for both purposes. The agreement says nothing about equipment provided by the salon, nor the services of the juniors or the telephone, but we were told that they were included in the service charge.
8. Miss Taylor's evidence was that she entered into the agreements when she first began to work in the salon, moving from another salon where she had also worked as self-employed stylist. She chose her own hours of work, and though she normally worked from 9.00 am to 5.30 pm, except on Wednesday and Sunday, she could and did work at other times if she wished. She was, at present, one of five stylists working in the salon, and she understood that the other stylists had agreements similar to her own. Three juniors also worked in the salon; they washed clients' hair, cleaned cut hair from the floor, answered the telephone to make appointments (although Miss Taylor endeavoured to make her own appointments whenever possible), made tea and coffee and undertook similar tasks. They were employed by the salon and the cost of their employment was, as she understood, included within the service charge.
9. When one of her clients arrived, she would normally greet her, hang her coat up in an area of the salon provided for the purpose, then ask the client to sit either in the hairdressing chair, if it was not already occupied, or in the waiting area if it was. The juniors would normally offer the client a cup of tea or coffee. The salon has a stock of magazines, provided by the salon itself and by the stylists, which clients may read if they are waiting. When she was ready to begin dealing with the client, Miss Taylor told us, she took the client to the washbasin, near to but not within her 16 square feet area, where the client's hair was washed by one of the juniors. She was aware that no specific basin was allocated to Miss Taylor. The service charge included the provision of shampoo, towels and, Miss Taylor assumed, supplies of water and electricity and the other overheads of the salon.
10. Once the client's hair had been washed, the junior brought her to Miss Taylor's chair, where she dressed her hair. Miss Taylor told us that although the 16 square feet area was not physically marked out on the floor, she was conscious of the boundaries of her area and was able to keep within them whilst dealing with a client's hair. She never asked her client to sit in any other stylist's chair, nor did any other stylist ever use her chair. Miss Taylor had been using the same space in the salon ever since she began working there; she accepted that it would not materially affect her working arrangements if she were asked to move to a different chair. She accepted that, overall, the salon provided her with the facilities she needed in order to carry on her business.
11. It was apparent from Miss Harrison's statement that, although there are differences of detail, the arrangements between her and Mr Mould – which came to an end in 2000 – were materially identical, save that the area allocated to her extended, so we were told, to 40 square feet.
12. Mr Mallinson explained that he and Mr Woodbridge ran their salon in the way they did because it met the preferences of the self-employed stylists, who felt that by working in this way they could maximise their earnings. They each had their own business, within the salon, servicing their own clients from their own specified areas, and contributing to the cost of facilities they used in common. Although Mr Mallinson accepted that the structure which was adopted resulted in a VAT saving, he was insistent that that was not the motive for it. He acknowledged that the calculation of the licence fee and the service charge, respectively, was unscientific and, probably, the service charge, viewed in isolation, was uneconomic. The amounts he charged, which differed from one stylist to another, were the subject of negotiation rather than of calculation based on cost; indeed, it was clear that Mr Mallinson had no real idea of the value of the licence, taken alone, and had not even attempted to impose a service charge mathematically linked to the cost of providing the service and goods it represented. It was apparent from his evidence that as long as the salon made a profit from the arrangement, Mr Mallinson did not mind what the proportions of licence fee and service charge were.
13. Mr Mould agreed that, apart from differences of detail, he ran his salon in very much the same way. The fees he charged were imposed by reference to a different formula but in essence his own was the same – to make an overall profit, rather than to cover each component cost separately and, like Mr Mallinson, he had made no attempt to arrive at a licence fee and service charge which individually, represented the value of each supposedly separate supply. Though he was insistent that the stylists did not in fact encroach on each other's areas, Mr Mould accepted that there was no physical impediment to their doing so and that the effect of his arrangement was that he had provided to the stylists a fully equipped salon in which they could work.
14. We were referred by the parties to a very large number of authorities dealing with the identification of single, composite, and multiple supplies, particularly in the hairdressing industry, but we think in fact we need refer to only three.
15. The first is the judgment of the Court of Justice of the European Communities in Card Protection Plan Limited v Customs and Excise Commissioners [1999] STC 270 where, as is well known, the Court was called upon to decide whether the taxpayer made a single supply of insurance, to which its other services to its customers were merely ancillary, or alternatively it made distinct supplies of the insurance and of the ancillary services. At paragraphs 26 to 32 of its judgment the Court of Justice said:

"26. By its first two questions, which should be taken together, the national court essentially asks, with reference to a plan such as that offered by CPP to its customers, what the appropriate criteria are for deciding, for VAT purposes, whether a transaction which comprises several elements is to be regarded as a single supply or as two or more distinct supplies to be assessed separately.

16. It must be borne in mind that the question of the extent of a transaction is of particular importance, for VAT purposes, both for identifying the place where the services are provided and for applying the rate of tax or, as in the present case, the exemption provisions in the Sixth Directive. In addition, having regard to the diversity of commercial operations, it is not possible to give exhaustive guidance on how to approach the problem correctly in all cases.
17. However, as the court held in Faaborg-Gelting Linien A/S v Finanzamt Flensburg (Case C-231/94) [1996] STC 774 at 783, [1996] ECR I-2395 at 2411-2412, paras 12 to 14, concerning the classification of restaurant transactions, where the transaction in question comprises a bundle of features and acts, regard must first be had to all the circumstances in which that transaction take place.
18. In this respect, taking into account, first, that it follows from art 2(1) of the Sixth Directive that every supply of a service must normally be regarded as distinct and independent and, second, that a supply which comprises a single service from an economic point of view should not be artificially split, so as not to distort the functioning of the VAT system, the essential features of the transaction must be ascertained in order to determine whether the taxable person is supplying the customer, being a typical consumer, with several distinct principal services or with a single service.
19. There is a single supply in particular cases where one or more elements are to be regarded as constituting the principal service, whilst one or more elements are to be regarded, by contrast, as ancillary services which share the tax treatment of the principal service. A service must be regarded as ancillary to a principal service if it does not constitute for customers an aim in itself, but a means of better enjoying the principal service supplied (see Customs and Excise Comrs v Madgett and Baldwin (trading as the Howden Court Hotel) (Joined cases C-308/96 and C-94/97) [1988] STC 1189 at 1206, para 24).
20. In those circumstances, the fact that a single price is charged is not decisive. Admittedly, if the service provided to customers consists of several elements for a single price, the single price may suggest that there is a single service. However, notwithstanding the single price, if circumstances such as those described in paras 7 to 10 above indicated that the customers intended to purchase two distinct services, namely an insurance supply and a card registration service, then it would be necessary to identify the part of the single price which related to the insurance supply, which would remain exempt in any event. The simplest possible method of calculation or assessment should be used for this (see, to that effect, Madgett and Baldwin (at 1208, paras 45 and 46)).
21. The answer to the first two questions must therefore be that it is for the national court to determine, in the light of the above criteria, whether transactions such as those performed by CPP are to be regarded for VAT purposes as comprising two independent supplies, namely an exempt insurance supply and a taxable card registration service, or whether one of those two supplies is the principal supply to which the other is ancillary, so that it receives the same tax treatment as the principal supply."
22. We heed the warning of Lord Hoffmann in Dr Beynon and Partners v Customs and Excise Commissioners [2005] STC 55 at [19]:

"[19] In the course of argument your Lordships were also referred, as were the courts below, to a number of cases, both in this country and in the Court of Justice, which were decided before the Card Protection case. Submissions were made as to whether the principles on which those cases were decided had application to this case. Their Lordships think that there is no advantage in referring to such earlier cases and their citation in future should be discouraged. The Card Protection case was a restatement of principle and it should not be necessary to go back any further."

23. We bear also in mind what Laws J said as the relevance of contractual obligation to liability for VAT in Customs and Excise Commissioners v Reed Personnel Services Limited [1995] STC 588 at 595:

"First … the concept of 'supply' for the purposes of VAT is not identical with that of contractual obligation. Secondly, in consequence, it is perfectly possible that although the parties in any given situation may conclude their contractual arrangements in writing so as to define all their mutual rights and obligations arising in private law, their agreement may nevertheless leave open the question, what is the nature of the supplies made by A to B for the purposes of A's assessment of VAT. In many situations, of course, the contract will on the facts conclude any VAT issue, as where there is a simple agreement for the supply of goods or services with no third parties involved. In cases of that kind there is no space between the issue of supply for VAT purposes and the nature of the private law contractual obligation. But that is a circumstance, not a rule. There may be cases, generally (perhaps always) where three or more parties are concerned, in which the contract's definition (however exhaustive) of the parties' private law obligations nevertheless neither caters for nor concludes the statutory question, what supplies are made by whom to whom. Nor should this be a matter for surprise: in principle, the incidence of VAT is obviously not by definition regulated by private agreement. Whether and to what extent the tax falls to be exacted depends, as with every tax, on the application of the taxing statute to the particular facts. Within those facts, the terms of contracts entered into by the taxpayer may or may not determine the right tax result. They do not necessarily do so. They will not do so where the contract, though it tells all the parties everything that they must or must not do, does not categorise any individual party's obligations in a way which inevitably leads to the conclusion that he makes certain defined supplies to another. In principle, the nature of a VAT supply is to be ascertained from the whole facts of the case. It may be a consequence, but it is not a function, of the contracts entered into by the relevant parties."

24. 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.
25. We need then to consider which of those to components was the principal supply. In our view, there is no doubt that it is the supply of the facilities of the salon, including in particular the use of the telephone and booking system, the communal system of receiving and accounting for payments, the use of the waiting areas and washbasins and the services of the juniors. It may well have been important to the stylists that they should have their own, fixed areas, but as Miss Taylor conceded in her own evidence, she could as easily have carried on her business from a different area if there were any need for her to move. The ability to use a chair for the cutting of a client's hair is obviously essential; the use of a particular chair is equally obviously not. We are quite sure that, by applying the Card Protection Plan test, one can arrive only at the answer that this was a single supply of a package, of which the dominant part is the taxable supply of goods and services and to which the incidental part is the supply of a fixed space. It follows that the entire supply is standard-rated and that the Respondents are right.
26. We have recorded those conclusions without considering the manner in which the values of the cheques for the licence and for other supplies were determined. As we have indicated, they were determined without regard as to cost and, as Mr Mallinson conceded, individually they may have been unrealistic even if in the aggregate they were fair to both sides. In Card Protection Plan, the Court of Justice dealt with the evidential value of there being a single charge, without considering the converse situation. One has, however, only to consider that the situation to conclude that it cannot be correct that a trader can affect the proper tax treatment of a composite supply by making, or purporting to make, two distinct charges for separate elements, the more so where, as having the distinct charge bear no relation to the total cost, or value, of the elements. Accordingly, we discard as irrelevant the fact that the agreements impose two charges on the stylists.
27. We turn last to consider the subsidiary point in Mr Mallinson's and Mr Woodbridge's appeal, though not in Mr Mould's, that there has been misdirection. It was common ground that, in 1988, the Respondents had told the Appellants that they were correctly accounting for VAT, by treating the licences granting space at the salon as exempt, and the supplies of services and goods as standard-rated. No adverse comment was made at a control visit in 1994, when it must be assumed that the visiting officer was aware of the manner in which the Appellants were accounting for VAT.
28. The position changed following litigation before this tribunal when, in Simon Harris Hair Design Limited v Customs and Excise Commissioners (1996) VAT Decision 13939, it concluded, in a case the facts of which are very similar to those of these appeals, that the salon owners made a single taxable supply, including the allocation of space. The change in the Respondents' practice which followed that case was publicised in their publication, VAT Notes No. 1 of 1996. The Respondents took the view that from April 1996, salon owners in the position of these Appellants should account for VAT at the standard rate on the entirety of the supplies that they made to self-employed stylists working in their salons. They accepted, however, that they could not show with certainty that all such traders had received the relevant publication by that date and, as they have done in the first Appellants' case here, they eliminated so much of the total assessment as related to the period from 1 April 1996 to 30 June 1996. Mr Mallinson and Mr Woodbridge maintained that they did not receive VAT Notes No. 1 of 1996, but continued to account for VAT in the manner in which had previously been approved and that they should not be assessed, retrospectively, for additional tax.
29. While not conceding that the Appellants did not receive VAT Notes No. 1 of 1996, the Respondents point also to Business Briefs 16/94 and 13/96. In the former, there were comments about the Respondents' view that salon owners were properly to be regarded as making a single standard-rated supply, and in the latter there were additional comments about the tribunal's decision in Simon Harris Hair Design. Mr Macnab's main point, however, was that the tribunal does not have the jurisdiction to discharge the assessment, or any part of it, on the grounds of alleged misdirection. He relied on Customs and Excise Commissioners v Arnold [1996] STC 1271, a decision of Hidden J, and on Farm Facilities (Forklift) Limited v Customs and Excise Commissioners [1987] VATTR 80, a decision of this tribunal, both of which indicate that the tribunal does not have any judicial review function – a point made with even greater force perhaps by the Court of Appeal in Customs and Excise Commissioners v J H Corbitt (Numismatists) Limited [1980] STC 231. Mr Corbould, by contrast, relied upon the tribunal's decision in C & G Developments Limited v Customs and Excise Commissioners (1987) VAT Decision 2384 in which the tribunal allowed an appeal upon the footing that a trader had been misled by a Customs officer to his detriment, one of the criteria set out in the written answer of Mr Robert Sheldon, then the Financial Secretary to the Treasury, in answer to a House of Commons question on 21 July 1978.
30. In our view, these Appellants are not in the same position as the Appellant in that case. It is true that, in 1988, they were told that they were accounting correctly for VAT in treating the licence fees as exempt and we can accept too that in 1994, if only by silence, that advice was repeated. But it is common knowledge that the law changes from time to time and in our view it is not sufficient for a trader to say, as these Appellants do, that having been given advice, they were entitled to rely on it indefinitely; there is an obligation on every citizen to keep himself advised of the current state of the law. It is not sufficient to say, as these Appellants do, "we did not receive VAT Notes No 1 of 1996". They must go further, for example by showing that, notwithstanding that publication, they had received further informed advice from the Respondents that they could continue to account for VAT on the basis that they had hitherto been using. Even on their own case, that is not the position here. We do not need to resolve the jurisdiction point; suffice to say that, even if we have the jurisdiction, there are no grounds on which we could properly exercise it in the Appellants' favour.
31. Both appeals are therefore dismissed. Mr Macnab made no application for a direction in respect of costs.

COLIN BISHOPP

CHAIRMAN
Release Date: 24 May 2005

MAN/99/0644 & MAN/02/0041