United Kingdom VAT & Duties Tribunals Decisions

 


Portman Escort Agency v Revenue & Customs [2006] UKVAT V19728 (23 August 2006)

19728

Value Added Tax - whether escort agency's services were confined to the performance of an agency or introductory function or whether they extended to the full provision, as principal, of the escort services - construction of the contract between the agency and escorts and whether the contract was intended to create legal relations - consideration of whether the facts were consistent with the structure assumed by the contract - Appeal allowed

LONDON TRIBUNAL CENTRE

PORTMAN ESCORT AGENCY Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents Tribunal: HOWARD NOWLAN (Chairman) KEN GODDARD Sitting in public in London on 11, 12 and 13 January and on 10 July 2006 Eamon McNicholas, counsel, instructed by the VAT Consultancy, for the Appellant Robert Kellar, counsel, for the Respondents © CROWN COPYRIGHT 2006 DECISION

INTRODUCTION

1. This was an appeal on the fairly common point of whether the Appellant trader, Portman Escort Agency ("Portman") was liable for Value Added Tax only on the introductory or agency fees that it received, or whether it was liable for significantly more VAT on the basis that it was providing, as principal, the full service that on the more limited construction it had merely arranged. This issue has arisen in relation to numerous trades including those of hair dressing, driving schools, the provision of contract catering services, and indeed escort agencies, lap dancing clubs and massage parlours. Whilst in virtually all of the reported cases the terms of the contract between the appellant, purporting to act only as agent, and the counter-party providing the arranged services, has been of considerable significance, the novel feature of this case is the fact that the terms of the contract in the present case appear almost to be decisive in favour of the analysis that Portman is providing the full service of providing escorts, such that it should be paying VAT on the separate consideration received by the girls on top of the VAT that it anyway pays on its undisputed agency fees. The main questions for us thus revolve around the proper interpretation of the relevant contract, and the more difficult issues of whether the contract can virtually be disregarded, or whether the conduct of the parties is at such variance with the terms of the contract that the contract should not govern the VAT treatment of the Appellant.
2. The appeal relates to alleged under-declarations of VAT by Portman for the periods 09/01 to 12/03, the amount of VAT and interest in dispute being £97,932.26. The assessment essentially relates to VAT on the consideration received by the individual escort girls, the actual amount of which is unknown to Portman and to HM Commissioners for Revenue & Customs ("HMRC"), such that HMRC have computed the VAT in dispute on various assumptions. None of these calculations was in issue before us. The only question for us to determine was the issue of principle as to whether Portman was rendering only an introductory service such that it was subject to VAT on its "agency fees" only, or whether it was providing to customers the full service of providing escort girls.

THE EVIDENCE AND THE FACTS.

3. Evidence was given before us by Mrs. Jean Baylis and her husband Mr. Eric Baylis, by four officers of HMRC, namely Mark White, Gary William Shoebridge, Michael Clarke and Kenneth Vincent Ralph, and (after the adjournment) by a woman called Caroline.
4. Mrs. Jean Baylis was one of the partners in the partnership running the Portman agency, the other being her sister-in-law, Mrs.Muriel Baylis. The latter took little part in the day to day running of the business, in part because of ill-health. Mrs. Jean Baylis was thoroughly familiar with the business and its administration and her evidence, and that of her husband, Mr. Eric Baylis, who worked without remuneration, gave a full description of the way the business operated. The evidence from the four HMRC officers merely confirmed the accuracy of their witness statements, which reflected the results of site visits. We will refer in due course to the evidence given by Caroline.
5. There was little dispute about the facts given in evidence and we can fairly summarise the factual position as follows.
6. Mrs. Baylis has been involved in the running of an escort business from the premises used by Portman today since 1979. In the past the business was run by a company, and more recently Mrs. Jean Baylis ran the Portman agency while her sister-in-law ran a fairly similar Kensington Escort Agency, but at all material times to this appeal, the Kensington agency had ceased trading or its business had been transferred to the Portman agency and the two sisters-in-law were the current partners in Portman.
7. The business of Portman (referring to the two alternative analyses at this stage) is that of either providing girls to male customers to accompany those customers on dinner, theatre, dancing dates etc, or it is the business of effecting the introduction of girls to men whereupon the girls then agree to go out on such dates.
8. Portman attracts girls to work for it, or through its agency, by advertising and by word of mouth. We were told that there was a fairly rapid turnover in the girls, with many staying for only a month or two, and the longest serving having been working with the agency for only about 10 months.
9. On applying to Portman a new girl would be interviewed by Jean or occasionally by Eric Baylis and if thought suitable to work as an escort, the girl would generally be asked to sign a one page contract, which is best quoted in full.

The terms of the written contract.

10. The contract was headed by a blank space into which the girl's name was to be inserted, and then read as follows:-

"This agreement is made the day of between (hereinafter referred to as the "Agency" of the fist part and hereinafter referred to as the "Escort" of the second part.

WHEREBY IT IS AGREED as follows:

1. The Escort Agency will carry on business from London W. And will call upon the services of the Escort as necessary to provide the services of an Escort for clients of the Agency.

2. The Escort shall offer her services to the Agency as an independent contractor and this contract is not to be construed in a manner to create a contract of employment between the Agency and the Escort. The Escort agrees to provide her services to the Agency on the condition set out in this document or as varied in writing from time to time during the period for which she is providing services to the Agency.

3. The Escort will not disclose her address or telephone number to any clients of the Agency but will refer any enquiries to the Agency. To contravene this will result in immediate dismissal.

4. The Escort confirms that she was born on the day of and has no criminal conviction or findings of guilt against her.

5. (a) The Escort also confirms that she is not nor never has been a prostitute. (b) The Escort also agrees that under no circumstances will she use the facilities of the Agency to promote prostitution in any way.

6. The Escort Agrees that being an independent contractor she will be responsible for all her Income Tax, National Insurance Contributions and any other taxes payable excluding Value Added Tax on the services provided to the clients of the Agency for which the Agency will be responsible.

7. The Escort confirms that she will undertake to provide Escort services for clients of the Agency at no risk to the Agency and accepts that the Agency are not responsible for any loss, injury or other damage howsoever caused whether attributable to the negligence of the Agency its servants or Agents or otherwise.

8. The Escort will report to the Agency and account to the Agency for all monies received by the Escort for the services provided to the Agency in the following manner namely:- (a) on being sent from the Agency to meet the client the Escort will pay to the Agency the sum of £ being the Agency's fee for introducing the Escort to the client. In the event of the client refusing to pay the Agency's fee to the Escort the Escort must leave the client forthwith and notify the Agency by telephone or by personally calling at the Agency within 30 minutes thereof. On receipt of £ the Escort will receive £ commission. (b) Upon receipt of the fee from the client the Escort must telephone the Agency to confirm that the client agrees with the Agency's condition. (c) On receipt of the Agency fee from the client the Escort will obtain the client's signature on the sheet headed "Conditions and Requirements for Customers". If the customer refuses to sign that form the Escort must leave the client forthwith and notify the Agency as set out in paragraph (a) above. (d) The Escort agrees that she will not enter into any relationship with the client other than that of Escort. She will not date the client privately nor go to his private residence or hotel room. Failure to adhere to the instruction will result in immediate dismissal. (e) At the termination of the Escort's services for the customer the Escort will communicate with the office by telephone or by personal attendance unless the hour indicates otherwise.

9. The Escort agrees that it will be the right of the Agency to terminate the use of her services forthwith or without giving reason. The Escort further agrees that in the event of a customer refusing or failing to abide by the conditions and requirements of the Agency the Escort will terminate her coming to the notice of the Agency for her contract will automatically cease.

10. The Agency agrees to use its best endeavours to obtain suitable clients for the Escort but is under no obligation to provide any set number of clients in a period."

At the bottom of the contract there are various boxes that will indicate the height, hair colour, eye colour, hobbies and marital status of the Escort; then a line for the Agency to sign the contract; and further boxes for the Escort to sign, giving her "correct name", address and phone number.

11. Without at this stage seeking to interpret or comment on the meaning of this contract, there are a number of further points related to the origin of this contract, the way it was dealt with by the Agency and the girls, and other points relevant to the basic terms of the relationship that we should summarise.

The origin of the written contract, and the "Customer Requirements" sheet.

12. The origin of this contract and indeed of the sheet headed "Conditions and Requirements for Customers" referred to in Clause 8 of the contract is that at a time when the Department of Employment monitored and apparently licensed escort agencies, the Department required the then Agency (probably a predecessor to Portman itself) to enter into this contract with the Escorts. This was many years ago. No evidence was given as to the thinking behind this requirement but it seems fairly self-evident that the Department required the contract to be entered into in order to ensure (or at least to appear to make some effort to ensure) that the escort agency was not being used by the girl escorts or indeed the proprietors of the agency as a cloak for prostitution.
13. The second document that the Department of Employment required the agency to ensure that clients signed was one headed "Conditions and Requirements for Customers". This required customers to give their name and address, and then had five numbered headings as follows:-

1. "For Wining, Dining, Dancing, Theatre.

2. Type of girl customer requires ………………

3. Period of employment ………………..

4. To act in proper gentlemanly manner at all times.

5. Not to entertain in your room, or accommodation."

Under these headings there was a box to be filled in, preceded by the word "Amount", with below that a further box to be completed, indicating the "Commission for Escort". On a large sample of these forms shown to us the two relevant amounts inserted here were £80 and £5, the significance of which will be clear when we have summarised the various cash and money movements below.

14. Some considerable time ago the Department of Employment apparently realised, according to Jean Baylis's evidence that "the personal information given by the girls was always false and that they (the Department) and us (Portman) were never truly aware of who they really were". Accordingly the Department "gave up trying to regulate the girls as they could not get correct information from the girls".
15. Whilst the Department of Employment thus ceased to require Portman or its predecessor to enter into this contract and to require customers to complete the forms, Portman has nevertheless continued to ask girls to sign the contract and to fill in the Customer sheets. No evidence was given as to why the contracts were still used, though it was somewhat indicated that they were used because they had always been used. It was not specifically stated that the contracts were used because they enabled Portman to ensure that there was no prostitution, or to be able to assert that they had taken steps with a view to ensuring that there was no prostitution, but this appeared to us to be a possible or likely explanation.

The way in which the contract and "Customer Requirements" documents were dealt with.

16. Whatever the reason for the continued use of the contracts, there was considerable evidence that the contracts were not taken very seriously. Mr. Baylis for his part suggested that he had never read the contract and we had no reason to doubt this remark. It was indeed not clear that he always asked girls to sign the contract, and certainly if they declined to sign, this was of no significance. If they were suitable, the agency would still act for them, or "take them onto its books". Mrs. Jean Baylis seemed to be slightly more interested in getting the forms signed, and she generally kept the forms (until they were destroyed when a girl "left"). However whether the forms were signed or not, it still appeared that little significance was attached to them. The girls invariably signed both in their assumed names and ostensibly in their real names, but they very rarely gave an address, the phone number given was invariably that of a mobile, and normally a "pay as you go" mobile, and there was no way of knowing whether even the name given as the real name was the real name or not. The majority of the forms were also signed wrongly in some way. Often the girls signed where Portman should have signed, and on many occasions no-one signed for Portman.
17. In a substantial sample of the sheets containing the "Customer requirements", there was no single example of any of the choices in heading 1 being indicated, and the blanks in headings 2 and 3 were never completed. Most of the forms gave only a first name for the customer. In the vast majority of the cases where any form of address was given, this was a London hotel, usually with an accompanying hotel room being indicated. Also several of the names of the customers appeared false. Naturally other people may share the names of famous people so that the names may have been genuine but nevertheless it seems slightly strange that William Tell, Ronnie Kray, Robbie Williams, Robin Cook and Mr. Putin should constitute about half of the clients who gave more that a first name only. One customer, giving only a first name and a mobile number, gave his address as "Black Jag", with a rough indication as to where the black Jaguar was to be found.

Other terms.

18. Although the written contract contained some terms relevant to money movements, it failed to refer to other more important points and we will summarise these whilst now describing the premises used by Portman, the two different ways in which escort engagements might be obtained for girls, and the way in which girls might be made available for escort business.

Premises.

19. Portman's premises in Chiltern Street comprise a main reception room, a private lounge, a waiting lounge for girls, a kitchen and a bathroom. The method of operation was that girls currently wanting escort business would gather in the "waiting lounge". Whilst there they could use the kitchen to prepare food and they could use the bathroom. Potential clients could then seek girls for escort engagements in one of two ways, the two apparently generating approximately equal amounts of business.

The two methods of dealing with potential clients' requests for escorts.

20. Under the first, a potential client would come to the premises, having seen them advertised in one of the publications such as "What's On". The potential client would be dealt with by the receptionist in the main reception room, and girls would then come through from the waiting room to meet the potential customer. If the customer liked one of the girls he could ask to have a conversation with the girl in the "private lounge". It was stated in evidence that the girls were then free to decline an engagement with a prospective client if they did not like the client. It was also asserted that the girls could freely negotiate what particular service they were to give and what their fee would be. Assuming that the client and the girl agreed on the service and the fee, the client would then go back to the reception room and pay the agency fee of £80 to Portman either in cash, by cheque or credit card, and the "Customer Requirements" form would be filled in generally in the way summarised in paragraph 17 above.
21. Although the figures were not filled in in either of the blank boxes in Clause 8(a) of any of the numerous written contracts that we were shown, the agency fee was always £70 and more recently £80 and out of this the girl was always paid £5 commission. It was said that the origin of the payment of £5 commission to the girls was "lost in the mists of time" but the payment was presumably recognition of the fact that in securing a customer the girl had brought agency business and agency fees to Portman.
22. Having secured the customer the girl would then leave on the particular engagement, and receive her separate fee almost always in cash. Portman itself would not know how much the girl had charged or received. There was a time when Portman had been prepared to use its credit card facilities so as to take the fee due to the girl as well as its own agency charge in one credit charge transaction. In those days it would then debit the girl with a 10% handling charge in case there were problems with receiving monies from the card company or (in the very rare case when cheques were taken "from reliable customers") problems with bouncing cheques. The balance of 90% was always regarded as "held for" the girl, and was accounted for to the girl. Portman however ceased to take the girl's fees by credit card in 2003 because there were often problems with the girls receiving further moneys in cash from a client who had already paid by credit card, with the client then complaining if the credit card chit was presented for payment as well. Problems of this sort led to Portman losing its facility to take payment by credit card for a period, and therefore Portman stopped this facility.
23. The other way in which customers engaged escorts was simply to telephone Portman, and describe their requirements, rather than go to the Portman premises. In this situation the receptionist would note the customer's requirements and would then select a girl who sounded suitable, and send the girl to an arranged rendezvous, taking with her a numbered receipt and "Customer Requirements" form. In this situation the girl would still be free to negotiate the services she was prepared to give and her fee but she would have to collect in cash the £80 (or net £75 taking into account the £5 commission to which she would be entitled) due to Portman as its agency fee. The girl would have to account for this fee to Portman when she next came into the agency, and as security for the payment of this fee, Portman always took a deposit from the girls of £160 (i.e. two agency fees) so that it could recoup itself out of the deposit if a girl ever failed to account for the agency fee to Portman.
24. There were no requirements for girls to be present in the waiting room in order to be available to be introduced to potential customers. Girls wanting work however knew that they were only likely to obtain engagements if they were available in the waiting room. Portman itself generally liked to have a few girls in the reception room to meet customer requests. Accordingly some sort of rota was maintained as to which girls would be available in the waiting room in each week, though we were told that there was no way in which girls were compelled to volunteer to wait in the waiting room, or indeed to be there even if they were on the rota.
25. On ceasing to be willing to work for or through Portman, a girl's deposit would always be refunded, unless anything was owing to Portman in respect of unpaid agency fees due by the girl. On leaving we were told that her contract, had one been signed, would be destroyed.

Suggested levels of the girl's fees.

26. Two factors were drawn to our attention in the course of the examination of witnesses which had a bearing on whether Portman fixed the fees to be charged for the girls.
27. The first was the feature that in the website that had once been operated by the now closed Kensington Agency, there had been a reference to the fact that not only was the agency fee then £70, but it was suggested that the girl's fee for a two hour engagement would be £200. It was said in evidence by Mrs. Baylis that that reference (albeit anyway on the Kensington web-site) was only giving an indicative fee. It was also said that it was the girls who had indicated to Portman that Portman should say to prospective clients that the fee would be likely to be at least £200. It was again emphasised that the girls never divulged what fee that had in fact charged and received, and that the girls were free to fix their fees in the conversations that they had in the "private room", or when initially meeting a potential customer out of the premises. It is also worth mentioning that we were shown other versions of the Kensington web-site that referred to the agency fee but made no mention of the girl's charge. Also there appeared to be no example of the Portman web-site (also now withdrawn) having made any mention of the girl's charges. It is also worth noting in the case of the Kensington web-site that did refer to the £200, that it was still made clear that the agency fee was a separate matter. It did not in other words refer just to a single aggregate charge of £270.
28. The other point brought to our attention was the feature that records indicated that when Portman had been prepared to take payments for the girls by credit card, the numbers demonstrated that the gross fees due to the girls, prior to deducting the 10% handling changes referred to in paragraph 22 above, had been reasonably consistently in the region of £200. They had certainly not always been at that level, but the majority were in that region. Without at this stage anticipating our decision, it is worth observing that these figures were mostly taken from transaction in 2001 to 2003, and naturally pre-dated the decision to cease taking credit card payments for the girls; there is necessarily no information about the level of fees taken in cash; and it seems reasonable to suppose that the fees negotiated slightly more freely and taken in cash would show greater variations than those collected for the girls in the office by the receptionist who might well have quoted the indicative fees.

Caroline's evidence.

29. Towards the end of the hearing on 13 January it became clear that much would depend on whether we decided that the relationship between Portman and the escorts was realistically governed by the terms of the written contract, or whether in the alternative we concluded that the contract was virtually a sham, and that the relationship between the parties could more reliably be discerned from other indicators. Whilst we had heard evidence from Jean Baylis and Eric Baylis that the contract was entered into without much attention to what it said because it had always been entered into, and no-one was concerned if the girls refused to sign or signed in far-fetched names, we had heard no evidence from any of the escorts as to whether they intended to be bound by the contract. The case was accordingly adjourned for the Appellant to decide whether to call an additional witness to provide some insight into this aspect, and on 10 July the hearing resumed, with the Appellant's counsel wishing to call Caroline as a witness.
30. Counsel for HMRC had indicated in advance that objection would be taken to the feature that Caroline wished to give her evidence without giving her real name or address either to the Tribunal or to HMRC. HMRC indicated that they had no objection to the written decision referring to her as "Miss X", or as "Caroline", but they did object to her refusing to reveal her true name and identity to the Tribunal and to HMRC in the hearing. Counsel for HMRC also indicated that in the light of judicial comments emphasising how undesirable it was for witnesses to give their evidence in this way, they would ask the Tribunal to indicate its reasons for allowing Caroline to give evidence and conceal her real identity if the Tribunal did allow her to give her evidence in this manner.
31. It was self evident to us that the reasons why Caroline wished to remain anonymous had nothing whatever to do with VAT or the potential reliability of her evidence insofar as it might have a bearing on the fair and proper resolution of the VAT dispute before us. Without questioning her it was clear that she was either worried about publicity or worried (not that the slightest suggestion emerged that she was in any way promoting prostitution) that there were criminal offences geared to prostitution. Since she herself had seemingly nothing whatever to gain by giving her evidence, and since HMRC admitted that if any suspicion of a criminal offence emerged in examination or cross-examination, HMRC would have a duty to notify other authorities of that possible offence, it seemed to us that Caroline's concerns were entirely understandable. More significantly it seemed to us that they would in no way prejudice the evidence that she might give in relation to the VAT dispute. We accordingly allowed Caroline to give evidence without revealing her true identity, because we thought that Caroline's evidence might assist us in arriving at a fair resolution of the VAT dispute and we had no remote concern in this case with the factors that might have concerned Caroline. In the event we add that we found her evidence entirely trustworthy, seemingly "untutored" in that much of what she said rather supported the case advanced by HMRC, and much of her evidence, and certainly the content of her written witness statement, had little bearing on the difficult issues.
32. The points that emerged in the examination and cross-examination of Caroline that we consider material were as follows:-

1. She only went out a couple of times as an escort, once to a restaurant and once to a casino, and then ceased to act as an escort because she did not like the work. She subsequently worked, and still works, occasionally as a receptionist between 3.00 p.m. and midnight.

2. She did agree her fees herself and could choose not to go on an engagement with a client.

3. The clients paid her in cash, and not on Portman premises. The client paid Portman direct.

4. When she left, nothing was deducted from her deposit which was returned.

5. As an occasional receptionist she was uninvolved with any signing of contracts.

6. She thought that the agreements were designed to "list who was working there".

7. Asked whether her fees were in line with the indicated £200, she said "No, not in my case".

8. She said different girls seemed to charge roughly £200. She knows that girls sometimes have amounts in mind that they would wish to charge.

9. She provided no sexual services at all.

10. Girls can work when they want. Girls fill in a form to say when they aim to be "in".

11. Coffee and drinks, including wine occasionally, were available to prospective clients in the reception or private room. It sounded as if alcoholic drinks were rarely provided.

12. Agency fees are sometimes taken by credit card, but girls' fees are never now taken in this way. There is no longer a portable credit card machine available to girls.

13. Whilst she had not been much concerned with the contract, it was made clear to her that Portman was an escort agency, and she was not to provide sexual services. If prostitution was discovered she would have had to leave.

CONTENTIONS ON BEHALF OF THE APPELLANT

33. It was contended on behalf of the Appellant that:-

•    in fact and in law all that Portman did was to make standard rated introduction supplies to the customers;

•    on the authority of Customs & Excise Commissioners v. Reed Personnel Services Limited [1995] STC 588, the private law contractual position is only a starting point in analysing the services rendered for VAT purposes;

•    it was possible to construe the written contract as meaning that Portman only rendered introductory services, and that the other services were directly rendered by the escorts to the customers;

•    on the authority of Freemans plc v. Custom & Excise Commissionerss [2001] STC 960, Customs & Excise Commissioners v. First Choice Holidays plc [2003] STC 934 and EC Commission v. French Republic, Case C-40499 29/3/01 ECJ, Portman should only be liable for tax on the consideration that it received, and Portman never received or had any entitlement to receive any consideration other than its agency fees; and that

•    the right question for us to address was whether the girls or Portman supplied the escort services remunerated by the "tip" (that is the fee received by the girls).

CONTENTIONS ON BEHALF OF THE RESPONDENTS

34. It was contended on behalf of the Respondents that:-

•    the essential issue was whether Portman was liable as a principal for the supply of the escort services;

•    the cases of F Di Resta and Miss D Di Resta 18641 4 May 2004 and Stephen Paul Rudd T/A Duo's Spa and Sauna 16844 11 April 2000 decided by the VAT Tribunal both gave helpful guidance on the critical distinction between providing services as principal and merely acting as agent where another party provided the main service, and supported HMRC's case;

•    the Tribunal case of Robert and Julie Polok 17287 20 Feb 2001 was easily distinguished because in that case the contract was plainly based on an agency concept whereas the reverse is so in the present case;

•    the terms of the written contract in this case in its totality, and in particular clauses 1, 2 an 6 clearly provide and assume that Portman is providing the full escort services as principal

•    the contract places significant control on the manner in which the escorts do business;

•    in most cases the contract was signed and where the contract is signed even the Appellant has not resiled from the position that the relationship between the parties is governed by the contract.;

•    the contract has been relied on in dealings with the Department of Employment and has been continuously used even after the contract ceased to be required by that Department;

•    there are no individual contracts between the customers and the escorts

•    some premises were made available for the escorts;

•    advertising implied that Portman provided a unified service; and

•    Portman indicated "guideline prices" for the escort service, and web-site documentation, and the figures recorded when the girl's fees were taken by credit card also supported the proposition that the guideline price for two hours time was £200.

OUR DECISION

35. We have not found this case an easy one. Its essential difficulty is that much of the evidence and in particular the money movements create a picture that is at variance from the relatively clear structure assumed and indeed provided for on our interpretation of the written contract. Our decision is that certain parts of the contract are virtually a sham and are not genuinely meant to govern the legal relations between the parties. This leaves us concluding that the service rendered by Portman is a service of acting as introductory "agent" between escorts and customers, with the contract for the provision of escort services being made by each escort on each occasion when a girl agrees on a particular service to be provided for a fee that she agrees with the client, entirely unknown to Portman.

The fundamental question.

36. It appears to be common ground that the right question that we have to answer here is who, out of the escort girls and Portman, actually renders the escort service to customers.

The four theoretical possible structures.

37. There appear to us to be four possible structures that might have been adopted, and they effectively amount only to two when minor differences are ignored.
38. Both the first and second structures would have involved Portman alone being the contracting party with customers, undertaking to procure and provide that others acted as escorts for Portman, enabling Portman to satisfy its obligations to provide escorts for customers. Portman could have achieved this either using its employees or by using independent contractors. The differences between those two sub-divisions are minor. If the girls were employees the result would have been that Portman would have been responsible for PAYE, and employers' NIC in respect of salary paid to the girls and there would have been no possibility of the girls rendering services (to Portman) that were liable to VAT. All three of those incidental points would have changed if the girls were independent contractors and not employees, albeit that the girls' individual gross receipts might well have left them well below the registration limit for VAT purposes. The critical common thread to these two structures is that under both, Portman would have been rendering the full escort service to its customers, and would have been liable for VAT on the full receipts.
39. The third and fourth structures would have existed where Portman was acting only as agent, either in a strict sense or in a loose sense. In the case of strict agency, the contractual position would have been that Portman would have had authority to bind the girls contractually to perform services for clients, but the principals in relation to those services would have been the girls. Portman would essentially have been providing an agency service to the girls, and receiving its commission from the clients. In the present case there is absolutely no evidence to suggest that there was a strict agency situation. Indeed plainly there was not in that we accept the evidence that the girls were free to agree on the services that they would perform, on where they would perform those services (notably always off Portman's premises) and on how much they would charge. Since it appeared undisputed that the girls did have control over those three critical points, and since significantly Portman would never have known any of the three resultant essential points of the contract, it seems clear that Portman was hardly striking binding contracts for the girls. Thus the fourth, and potentially relevant, structure is the one where Portman would have been acting as an agent in the loose sense of being an "introducer", still rendering a service to the girls and in a sense the customers, but not actually entering into binding contracts. The critical common thread to these two structures, and we consider that it is only the last that we need to dwell on, is that the provider of the escort services under both would have been the escort girls and not Portman.

The proper interpretation of the contract.

40. We agree with counsel for the Respondents that the clear intent and assumption of the written contract is that Portman is rendering the full agency services, contracting with the girls to provide services to it, Portman, so that Portman can render the full escort services to clients. Clause 1, the second sentence of Clause 2 and Clause 6 all appear to us to support this analysis, and to be inconsistent with any other construction. Clause 6 is not brilliantly worded because the contract has declared that the girls are independent contractors which means (as mentioned in paragraph 38 above) that there could conceivably be relevant services for VAT purposes being rendered by the girls to Portman for which Portman would secure an input deduction, when dealing with the VAT on its full services. The contract has however ignored this remote possibility and has simply confirmed that on the analysis of the structure that the contract itself assumed and declared existed then it would indeed be Portman that would be liable for VAT on the full escort services rendered to customers.
41. Whilst we accept that the contract assumes that Portman is providing escort services as principal, and Clause 1 in particular effectively declares that this is the legal position, we note that the factor that really governs whether Portman is the provider of the full service, with the girls rendering their services to Portman to enable Portman to supply its full service, is what Portman contracts to do viz a viz its customers, and whether in reality the girls are rendering their services to Portman, as distinct from rendering their own services directly to the customers. Addressing this issue it is noteworthy that the contract is extraordinarily silent on matters that would seem to be central to supporting the assumption clearly made by Clauses 1,2 and 6 of the contract. The contract is in other words silent on the level of obligation or lack of obligation that the girls might have in rendering their services; it fails to fix or say anything about how the girls are to be remunerated (save for the irrelevant provision of the £5 commission which is more supportive of the fact that the girls' readiness to render direct services has generated agency income for Portman for which the girls deserve commission); and it makes to reference to the factor that should follow from HMRC's contention, namely that it is the girls who fix the gross remuneration theoretically payable to Portman, albeit that this is of little significance because (agency fee apart) the fee fixed by the girls flows back to them as implicit remuneration (albeit that Portman neither sees the cash or receipts beyond the agency fee and does not even know what its theoretical gross remuneration may be).

The origin of the contract.

42. We accept the evidence that this contract was provided and required to be entered into with escorts by the Department of Employment. Having regard to the obvious interests of the Department, the structure assumed by Clauses 1, 2 and 6, as we said in paragraph 40, was sensible in that it would seem to give Portman more control over the girl's activities and it would also provide (to the Department) the useful feature that if the girls embarked on prostitution then it would follow that Portman would thereby be more obviously implicated. We also consider it highly likely that the true reason why this contract has continued to be used even after the Department ceased to monitor the situation is that some contract of this nature would either assist Portman in controlling and preventing prostitution or at least would enable it to argue, in a defensive manner, that it had made such efforts. We also think it appropriate to observe that counsel for Portman was manifestly walking a tight-rope in relation to the terms, and validity, of the contract in that from a VAT perspective he would, we assume, have preferred to say that the whole contract was a nullity, but from other perspectives Portman might need for equally or more important reasons to support the validity of the contract. On this issue we are inclined to think that we should decide the VAT issue in a way that we think is realistic, and we would also observe that Caroline's evidence (in particular the points that we have numbered as 9 and 13) seemed to suggest that aside from this contract Portman was trying to ensure that there was no prostitution.

The payment mechanics being at variance with the structure of the written contract.

43. Counsel for Portman argued that a conclusive factor in this case was that Portman never received the consideration that was in fact paid to the girls, so that even if we concluded that the business structure assumed and provided for by Clauses 1, 2 and 6 prevailed for all purposes, nevertheless Portman could not be liable for VAT on consideration that it did not receive and that it was not entitled to receive. We do not accept this proposition. If we concluded that Portman provided the escort services as principal, but that it did not have any right (at least viz a viz the girls) to receive some of the consideration for the services rendered by it to customers, one could not arrive at the analysis that the girls had separately provided services to the customers for consideration. For that would lead to two inconsistent descriptions of who was rendering the services. The reconciliation would thus have to be that Portman alone was rendering the escort services to customers, and Portman would implicitly have diverted part of its consideration from the customers to the girls to satisfy its separate debt to its independent contractors.

Does the contract, as interpreted, realistically govern the structure, and is the right analysis that Portman does render the escort services ?

44. Our decision is that in this case the contract does not realistically reflect the structure; that the reality is that Portman performs an introductory service and does not provide the full escort services; and that the escort services are rendered under a separate contract that the girls enter into when they agree with a customer what they will do, where they will do it, and how much they will charge.

45. Our reasons for arriving at this conclusion are as follows;-

•    The explanation of why this contract is entered into is perfectly clear and was summarised in paragraph 42 above. This reality does not suggest that the parties themselves regard the contract as significant in relation to the structure of the business of Portman or to the genuine contractual relations between the parties.

•    The way in which the contract is executed, if and when it is executed, shows that no importance is attached to it. By this we do not mean that Portman abandons any effort to control or prevent prostitution. It simply means that nobody takes the existence or the terms of this contract seriously. Nobody cares whether a girl refuses to sign it or whether she signs it in a fictitious name. Even if Counsel for HMRC is right to say that contracts have been signed in the case of 80% of the girls, the occasions where contracts have been signed both by Portman and by the girl, giving a real name, an address and something other than a "pay as you go" mobile number are minimal.

•    No evidence was given as to whether any party entering into the written contract had any idea what the provisions of the contract provided for as regards structure and the contractual status of the parties. We have no doubt however that no-one would have had any appreciation of these points at all. Clearly Eric Baylis would have been oblivious to the contractual structure suggested since we accept his evidence that he had never read the contract.

•    The case is quite different from the one where parties enter into a credit card agreement and sign it without having any idea what it says. In that situation it is known that the terms are non-negotiable, and are all carefully drafted to achieve the requirements of the dominant contracting party. People sign knowing that they are bound. In this case, the evidence suggests that one party signed the contract (on the occasions when it did sign it) for the peripheral reason that that procedure would assist it in demonstrating that it was endeavouring to eliminate prostitution, and the other parties, signing in fictitious names, did not care what they did.

•    We would not feel entitled to disregard the structural implications of the written contract on the above reasons alone, however, unless we also felt that the contract manifestly failed to reflect the true facts, and failed to contain clauses that would be required were it really to be effective.

•    Our findings of fact on the matters that we regard as central to the correct decision in this case are as follows. We accept that the girls were entirely free to decide whether to go out on any sort of escort engagement and could always refuse to do so. We also accept that the girls were not required, as such, to be available for "duty", in the Portman waiting room, but rather indicated when they intended to be "available", and the rota maintained was a record of the girls' declared intended availability. We also accept that it was the girls who negotiated with a customer what services she was to perform, how and where the services were to be performed, and how much the girl was to receive for those services. We also accept that whether in some or many cases, indicative charges were mentioned by Portman to customers, the very personal nature of the services makes it entirely credible that the girls would themselves fix their charges. And the only evidence given by the one girl who had been an escort in the past was that her charges had not been in the region of the suggested norm. We also accept that Portman never in fact knew what services a girl had performed, and how much she had been paid for those services

•    In the light of these findings of fact, we consider that these findings of fact are inconsistent with the structure assumed and declared by Clauses 1, 2 and 6. Had the contract been comprehensive, and we have to say "decidedly odd", it could have sustained the structure assumed by the relevant Clauses and our findings of fact. In other words it could have declared that "the services that Portman would render to customers would be those selected by the girls"; it could have provided clearly that Portman's remuneration would to be full gross takings, being the agency fees and the fees negotiated on Portman's behalf by the girls for the services as escorts; and it could have provided that the last amount would always be paid back by Portman to the girls, perhaps declaring that to save cash movements, the girls could simply retain as their remuneration all the variable amounts in excess of the "agency fees".

•    Since none of these matters were provided in the contract, and since the written contract was treated with such disinterest by all parties, we conclude that much the more realistic analysis is that Portman rendered only an agency service, essentially to the girls; and the girls themselves rendered whatever services they separately agreed to render to customers for whatever fee they separately negotiated with customers (all unbeknown to Portman).

•    We consider that this conclusion is amply supported by the reality of the personal services involved and the seemingly obvious fact that cash fees could vary considerably between different girls, and different service. It is also obvious that the direct contract between the girls and the customers will never be written, just as it is plain that scant regard is paid to the bits of paper that were completed (or are rather barely completed at all) by customers such as William Tell, Mr. Putin and Fred.

•    We have given consideration to the reality that advertising and presentation generally suggests that Portman monitors its girls carefully and that by using the Portman agency a customer secures a rather superior girl, a "Portman girl". We accept that there is reality to this but we do not consider that this factor conflicts with our agency or introductory analysis of the services rendered by Portman. Agents can seek to maintain a house style, and a standard, so that we consider that this consideration is neutral in relation to the key decision that we have to make.

46. For all the above reasons we allow Portman's appeal on the point of principle, and decide that Portman is liable for VAT only on its introductory or agency fees, including of course the element of those fees (the £5 commission) that is paid back to the girls.

Costs.

47. Portman request that we award costs in its favour. We award Portman its reasonable costs.

HOWARD NOWLAN CHAIRMAN RELEASED: 23 August 2006

LON/2004/900