United Kingdom VAT & Duties Tribunals Decisions

Francis & Anor v Revenue & Customs [2006] UKVAT V19919 ( 05 December 2006)

19919

VAT – Registration – Single taxable person direction – Husband operating hairdressing salon on ground floor – Wife operating beauty salon in basement – Whether "closely bound to one another by financial, economic and organisational links" – EEC 6^th Dir (77/388/EEC) Art 4.4 – VAT Act 1994 s.84(7), Sch 1 para 1A, 2 – Appeal allowed

LONDON TRIBUNAL CENTRE

GEORGE FRANCIS & MRS HELEN FRANCIS Appellants

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents
Tribunal: THEODORE WALLACE (Chairman) MISS SHEILA WONG CHONG, FRICS

Sitting in public in London on 30 and 31 October 2006

Mrs Penny Hamilton, counsel, instructed by Chelepis Watson, Chartered Accountants, for the Appellants

Mathew Barnes, counsel, instructed by the Acting Solicitor for the Respondents

© CROWN COPYRIGHT 2006
DECISION
1. These were appeals by the two Appellants against notices issued by Mrs Christine Enyididie on behalf of the Commissioners under Schedule 1, paragraph 2 of the VAT Act 1994 directing that the two Appellants "be treated as a single taxable person carrying on the activities of a hair and beauty salon" and that they be registered for VAT from 10 August 2005. The directions were made on 11 July 2005. The Appellants are husband and wife.
2. Paragraphs 1A and 2(1) and (2) of Schedule 1 provide as follows:

"1A(1) Paragraph 2 below is for the purpose of preventing the maintenance or creation of any artificial separation of business activities carried on by two or more persons from resulting in an avoidance of VAT.

(2) In determining for the purposes of sub-paragraph (1) above whether any separation of business activities is artificial, regard shall be had to the extent to which the different persons carrying on those activities are closely bound to one another by financial, economic and organisational links.

2(1) Without prejudice to paragraph 1 above if the Commissioners make a direction under this paragraph, the persons named in the direction shall be treated as a single taxable person carrying on the activities of a business described in the direction and that taxable person shall be liable to be registered under this Schedule from the date of the direction or, if the direction so provides, from such later date as may be specified therein.

(2) The Commissioners shall not make a direction under this paragraph naming any person unless they are satisfied –

(a) that he is making or has made taxable supplies; and

(b) that the activities in the course of which he makes or made those taxable supplies form only part of certain activities …, the other activities being carried on concurrently or previously (or both) by one or more other persons; and

(c) that if all the taxable supplies the business described in the direction were taken into account, a person carrying on that business would at the time of the direction be liable to be registered by virtue of paragraph 1 above;

(d) …"

Paragraph 1 states when a person is liable to be registered.

3. Section 84(7) provides that where there is an appeal against a decision to make a direction under Schedule 1, paragraph 2,

"the Tribunal shall not allow the appeal unless it considers that the Commissioners could not reasonably have been satisfied that there were grounds for making the direction."

4. There were four witnesses : the two Appellants, Michael Voniatis FCCA, of Chelepis Watson, and Mrs Enyididie. Since the focus is on the direction by Mrs Enyididie, we start with her evidence.
5. On 7 March 2005, Mrs Enyididie, who was part of Customs' Shadow Economy Team, visited 8 Camberwell Church Street, SE5 as part of a "Street Sweep" which involved visiting all businesses which were not registered for VAT. She was told that the owners were not available and left a trader registration response sheet. She made no notes of that visit. Two response sheets were returned on 4 April, one completed by each Appellant. Both showed turnover below the registration threshold. Mr Francis gave his turnover for the year to July 2004 as £54,395 and that for the 7 months following as £30,355. Mrs Francis gave her turnover for the year to April 2004 as £50,824 and that for the 10 months following as £42,347. He gave the name of his business as "Head to Toe (Hair)"; she gave hers as "Head to Toe (Beauty)".
6. Mrs Enyididie had formed the impression at her visit in March 2005 that there was one business and having received the separate response sheets went back on 8 April. She collected a business card but was told that the owners were on holiday. She saw two appointment books and was told that one was for hair and one for beauty. She looked around while there and left after about 10 minutes, without making any notes. She did not speak to any customers.
7. On 4 May Mrs Enyididie visited the premises by appointment under the guidance of Roger Piper, who was senior to her. She noted that Mr Francis told her that he owned the building and his wife rented downstairs. She noticed a reception desk in each section. She saw no telephone at the beauty section and was told that the telephone in the hair section was shared. They spent 20 minutes at the premises and then went with Mrs Francis to the office of the accountants, again by appointment.
8. Mrs Enyididie and Mr Piper interviewed Mrs Francis and Mr Voniatis for about half an hour at the accountant's office before Mr Francis arrived. Mrs Enyididie had prepared a list of matters to be covered. She asked the questions with Mr Piper asking follow up questions; she made brief notes. Mrs Francis told her that she was a sole trader and had been since about 1987. She rented from her husband for £4,600 a year paid quarterly under an informal agreement and had no other premises. She had one full-time employee earning £200 a week and one part-time employee at £110 a week. She kept separate payroll records. She drew money weekly in cash noting the amount. Mrs Francis said that she did not take credit cards, being paid in cash and cheques. Prices were last changed 2½ years ago at the same time as the hair prices. Purchases were separate from those for Hair. The opening times were 9.00am to 6.00pm Monday to Saturday apart from 7.00pm Friday, the same as for Hair. There was no till. Mrs Francis cashed up at the end of the day.
9. She noted that Mrs Francis started the business downstairs, her sister-in-law owning upstairs. Her sister-in-law moved to America selling the lease to Mr Francis. He now owned the freehold. Rates and electricity bills came in his name and were split 50/50 with Mrs Francis paying him cash. Payments were made separately. There were separate bank accounts.
10. Mrs Enyididie noted that Mr Francis started business 5 years after his wife. He paid two full-time employees £145 a week each and one part-time employee £92. He was paid in cash and cheques. He used the same accountant as his wife. Bills were split.
11. After the interviews Mrs Enyididie noted some points, partly based on what she had seen at the premises and partly on what she had been told. She noted that the nail desk was located in the hair section; this referred to a trolley for nail manicures. She noted that there was a combined price leaflet which was updated at the same time with the same opening hours. She noted, "Same customers." She recorded a hair invoice as checked with "Mrs Francis". There was a shared telephone line. An EDF electrical test covered both premises
12. They interviewed Mr and Mrs Francis before looking at the records which Mr Voniatis produced in two folders, one for Mr Francis and one for Mrs Francis. The records consisted of purchase and expense invoices, cash payments sheets, takings records, bank statements, cheque stubs, paying in books and annual accounts. The records were separate. Some gas bills were addressed to Head to Toe; some were in one folder and some in the other; Mrs Enyididie assumed that if they were in Mrs Francis' folder she had paid them. She noted that electricity and telephone bills were paid by either. Where there were joint supplies there was one account. She noted that Mrs Francis had signed for three Team 3 deliveries.
13. On 5 May Mrs Enyididie wrote to Chelepis Watson that the two salons should be considered as one business and that Mr and Mrs Francis should register for VAT. She listed the following points: combined price list; opening hours and customers; nail desk; no formal agreement for rental and utility bills; utility bills paid by either; common accounts with some suppliers; Mrs Francis signed for 3 hair deliveries; appointments booked through one telephone number; "to the eyes of customers, it's seen as just one business"; price lists for both displayed in hair section.
14. On 12 May Chelepis Watson replied defending the Appellants' position. They pointed out that Mrs Francis bought the business five years before her husband and traded separately, stating that the businesses were not intentionally kept separate to avoid registration. Each wanted their own business and did not want to go into partnership. Neither business supported the other financially, both were viable and there was no common interest in the proceeds. The businesses were separate, neither benefiting from the other apart from a few customers who used both. There were no common management, employees or equipment. The combined price list and telephone were to save costs. The nail desk was reflected in the rent.
15. On 25 May Mrs Enyididie wrote confirming her position. She referred to the necessary links at paragraph 14.6 of Leaflet 700/1/02. These relate to a direction under Schedule 1, paragraph 2. She specified financial links, economic links and organisational links which she had identified.
16. Under "1. Financial Links" she wrote,

"I noticed while inspecting your client's records that various bills including the shop utility bills listed below were paid by either business."

She then specified (a) two gas bills, (b) electricity bills, (c) a BT bill and (d) a water bill. During her evidence she said that she meant that the whole of some bills was paid by one business and the whole of other bills was paid by the other. Mr Barnes realistically accepted that the bills did not support her conclusion under financial links. We are satisfied that her conclusion on this was wrong.

17. Under "2. Economic Links" she wrote,

"The points below prove that there is an economic link between the two businesses as the activities of one part benefits the other part and they are supplying the same circle of customers."

She instanced (a) the same opening hours, (b) the lack of formal written evidence between the two owners regarding rent, utility bills and the nail desk; (c) the appointments being booked through the one telephone number and (d) the perception of customers.

18. Under "3. Organisational Links" she wrote,

"The following points below also prove that your clients have common management, common employees, common premises and common equipment."

She instanced (a) that "both appointment books were upstairs and were dealt with by one member of staff"; (b) the combined price list with prices updated at the same time; (c) the nail desk was located in the hair section; (d) hand towels and stationery were supplied to both businesses through one account; (e) three deliveries for the hair business were signed for by Mrs Francis; (f) the prices for both businesses were displayed in the hair section.

19. She wrote that, "with regards to the VAT registration, it's irrelevant that both businesses commenced at separate times." She wrote that "with a common entrance, common price lists, combined gift vouchers, one telephone number for appointments, one business name above the premises and one entry in yellow pages, we do not see how customers could fail to believe that there was one business."
20. She wrote that if the registration form was not completed by 15 June a direction to register would be made.
21. On 11 July 2006 the two directions under appeal were issued by Mrs Enyididie. The decision was by her although the May visit was under the guidance of Mr Piper. Mr Piper endorsed the decision on 17 August 2006. The decision was confirmed in a letter of 27 October 2005 by Bill Beedie, Appeals Review Officer.
22. In cross-examination, Mrs Enyididie said that her conclusion that the circle of customers was the same was her assumption. She said that she had not disregarded the explanations in the interviews as to the common bills. As to the common premises, she said that as long as businesses in the same building can prove that there is no link, Customs would accept that they are separate. She accepted that the price lists were on the side wall where they could be seen through the front window.
23. The documentary evidence before the Tribunal was as follows: notes by Mrs Enyididie of a visit on 4 May 2005; a VAT Audit Report compiled by Roger Piper in August after the direction had been given; a price list covering both activities; a common visiting card; trader registration response sheets by each Appellant; a deed dated 25 March 1992 in respect of the premises; completion statement; copy cheques from Mrs H Francis trading as Head to Toe (Beauty) to G Francis and Head to Toe Hair; schedules of payments by Mrs Francis; insurance policies in the name of Mr Francis; the accounts of Mr Francis to 31 July 1992, 1996, 2004 and 2005; the accounts of Mrs Francis to 30 April 1991, 1996, 2004 and 2005; photographs; P35 Listings; daily takings records; bank statements; invoices from Viking Direct and Team 3; rates demand; appointment books extracts; diplomas issued to Mrs Francis; licence issued by Southwark Council; receipts from Salon Services (Dulwich); three gas bills; BT bill; water bill; copy gift vouchers and correspondence. Most of this material was before Mrs Enyididie, although unfortunately she kept no clear record of what she saw. Some of the accounts before us were drawn up later.

Facts

24. We find the following facts.
25. Mr Francis operates a hairdressing salon on the ground floor of 8 Camberwell Church Street, SE5. Mrs Francis operates a beauty salon in the basement. Access to the basement is by an internal stairs from the ground floor salon. The entrance is through the ground floor salon.
26. The freehold of the building is owned by Mr Francis who purchased it for £100,000 in November 1996. The upper floors contain three flats which Mr Francis lets furnished. Mrs Francis pays rent of £4,600 a year to Mr Francis by cheque in four quarterly instalments; there is no written tenancy agreement. £600 of this sum is in respect of an oral licence to place a trolley for nail manicures on the ground floor, there being insufficient space in the basement.
27. Before November 1996 Mr Francis was the lessee of the ground floor and basement at £8,000 per year having taken an assignment in 1992 from Mrs Angela George, his sister.
28. From March 1987 Mrs Francis operated the beauty salon in the basement, trading as "Head to Toe (Beauty)", and Mrs George carried out a hairdressing business as "Head to Toe (Hair)" in the ground floor. They shared the utility bills, rent, rates and water rates equally. They were young girls starting in business and used a joint price list and card to keep printing costs down.
29. Mr Francis took over the business from his sister in 1991 some months before the lease was assigned, acquiring the equipment at cost. The arrangements for sharing utility bills, rent, rates and water were continued without any written agreement.
30. The telephone accounts were in the name of Mr Francis, trading as From Head to Toe, and the water services account was in the name of Mrs Francis, trading as From Head to Toe. The rate demand was to Mr Francis. The gas bill was addressed to "From Head to Toe." All of those accounts were paid in cash at the bank, the cost being split equally. Each of the Appellants recorded such contribution in his or her cash payments record.
31. There was a common toilet for both floors in the basement together with a staff room which was used by the staff of both businesses. Mrs Francis paid for disposable hand towels by credit card. Southwark Council requires such towels for each business.
32. Accounts at different banks were kept for the two businesses and separate annual accounts were prepared by Chelepis Watson. Staff were paid by cash which was again recorded. Separate P35s were issued.
33. Mrs Francis holds a diploma issued in 1981 by the Tao Faculty of Remedial Electrolysis and a diploma from the Town & Country Health and Beauty School. Mrs Francis is licensed to use the premises as an establishment for special treatments. The licence, which is issued by Southwark Council under the London Local Authorities Act 1991, is subject to the condition that treatments may only be administered by the persons specified in the licence. The Council requires each therapist to have a diploma. Mrs Francis is licensed to administer massage, manicure, electrolysis, sunbeds and waxing. Simone Smith is licensed to administer massage, manicure, electrolysis, waxing, pedicure and facials. Latoya Dedrick is licensed to administer beauty therapy. Simone Smith is employed full-time and Latoya Dedrick part-time. The licence is also subject to further rules and conditions which were not produced in evidence. One of those conditions is that prices must be displayed so as to be visible to the public. There is no front window to the basement. The Beauty price list is displayed in a frame about 60 to 70 cms high with lettering about a centimetre high on the side wall next to the front window of the ground floor so as to be visible from the street. The Hair prices are in a similar frame above or below.
34. The fascia board outside the premises shows "From Head to Toe Hair & Beauty". Head to Toe is in blue, the rest is in red.
35. There is a single printed price list on a leaflet for both hair and beauty treatments, headed "From Head to Toe Hair and Beauty Salon" with the address and a single telephone number. The opening times are given as 9.00am-6.00pm Monday to Saturday, apart from Friday when the premises close at 7.00pm. 47 different prices are given for hair treatments and 33 different prices for beauty and slimming and body Treatments. The leaflet states "Gift Vouchers available for hair and beauty treatments."
36. There is a single Gift Voucher "From Head to Toe Hair and Beauty Salon", each voucher being numbered. The vouchers are numbered. When issued either "Beauty" or "Hair" is written at the top. Sometimes the voucher is for a specified sum, sometimes it is for a specified treatment. The vouchers have an expiry date.
37. There is a single card used by both with the same print font as that on the front of the price list. This is given to customers booking appointments.
38. On the ground floor opposite the entrance which is on the left facing in there is a flight of stairs on the left leading down to the basement. On the right of the entrance is a desk with a telephone and some chairs. There is a small notice advertising sunbeds for £5 by the telephone. The manicure trolley is close to the reception desk. On both sides of the ground floor are the normal chairs, basins and hair drying and other equipment for a hairdressing salon.
39. In the basement there are three treatment rooms and a curtained-off area under the stairs with a sunbed. The toilet and staff room are at the back. There is a desk and chairs at the back beside the entrance to the staff room. Client record cards for the Beauty salon are kept in a box on the desk.
40. There is no receptionist. Mrs Francis often sits at the upstairs desk if not giving a treatment, there being no window downstairs apart from the staff room. She or whoever answers the telephone will say "Head to Toe". If it is not clear whether the customer wants hair or beauty they are asked whether it is for hair; if it is for hair she calls one of the hairstylists if free. Only the hair stylist will know how long the booking should be for. If a stylist answers the telephone, she calls down if the customer asks for beauty. Some beauty treatments are time specific, for example half an hour body massage, however the time needed for waxing will vary both with the therapist and the client. Only a few appointments can be made without knowledge of the treatment required. Enquiries from customers who call in are handled similarly. There are separate appointment books for hair and beauty, each with separate columns for each stylist or therapist; new sheets are used for each day. There are three hair stylists. If Mrs Francis is not upstairs, whichever of the stylists is free answers the telephone.
41. Before 1992 Mr Francis was a civil servant with the Employment Department and had no business experience. He does not know how to cut hair. He calls into the premises for short periods during the day and goes there every night to cash up the hair takings and check takings against payment slips. Unlike the beauty therapists, the hair stylists do not have to be qualified.
42. The opening times for the two salons are the same. If the premises were open and one part was unmanned there would be a security risk with products and equipment. On two days when the beauty salon was open but not the hair salon, Mrs Francis had to have one of her staff upstairs.
43. All the equipment is owned by Mr or Mrs Francis, none being leased. Both businesses made reasonable profits. Both had credit balances at the bank; Mr Francis had bank loans of £40,000. There were no loans between the two businesses.
44. Some of the customers are common to both businesses, however many are not. Sometimes beauty clients have their hair done afterwards if staff are available. In this event they pay separately. A number of the regular beauty clients do not have their hair done.
45. Sometimes Mrs Francis signs for deliveries to Mr Francis. However most supplies are not delivered but collected in a car which is registered in her name although Mr Francis paid part of the purchase price.
46. The Appellants were confused about the insurance. The property insurance is in the name of Mr Francis since he is the freeholder. That policy covers contents and public liability. The liability cover includes a series of the activities carried on by Mrs Francis. The clear inference is that when Mr Francis filled in the proposal form he did not inform the insurance company that his wife was conducting the beauty business. The accounts of Mrs Francis for the last two years show no debit for insurance. Mrs Francis thought that she had separate cover.
47. Price changes take effect at the same time because of the common price list.

Appellant's submissions

48. Mrs Hamilton said that under Schedule 1, paragraph 1A(1) the purpose of a direction under paragraph 2 is to prevent the maintenance or creation of any artificial separation of business activities from resulting in an avoidance of VAT. Paragraph 1A(2) specifies factors which must be considered in determining whether the separation is artificial. She pointed to the words "closely bound" in sub-paragraph (2). Notice 700/1 issued by Customs equates "artificial" with a "contrived device". She said that it was not alleged in the Statement of Case that the original businesses started in 1987 by Mrs Francis and Mrs George were artificially separated, nor was this put to Mrs Francis in cross-examination. The legislation required the separation to be artificial and that the artificial separation has been created or maintained. Nothing had changed apart from Mr Francis taking over the business of Mrs George. She submitted that there was no evidence on which Customs could reasonably have been satisfied that there had been the necessary creation or maintenance of any artificial separation of the business activities.
49. Alternatively she submitted that the decision had been Wednesbury unreasonable, adopting the approach of the Tribunal in Reayner, Colegate and Reayner v Customs and Excise Commissioners (1998) Decision No.15396 at [64]-[70] in applying the test in John Dee Ltd v Customs and Excise Commissioners [1995] STC 941 per Neill LJ at page 952g. She also cited Mike Kiernan's Beer Tent Co Ltd v Customs and Excise Commissioners [2002] Decision No.17794 at [46].

Customs' Submissions

50. Mr Barnes said that the word "bound" in paragraph 1A(2) should be given its plain meaning. Bound connotes tied together; inevitably there are grey areas. He accepted that "and" in "financial, economic and organisational links" is conjunctive. He said that some links may encompass all three aspects.
51. He submitted that the organisational links binding the Appellants together were the same premises with a common entrance, staff from either answering the telephone, use of the same leaflet so that prices have to be increased at the same time, the same opening and closing times and the need for Mrs Francis to have permission to display signs on the ground floor. He accepted that Mr and Mrs Francis do not involve themselves in the actual conduct of the other part but said that answering the telephone involved an element of organisation as did the payment of shared bills.
52. He adopted the passage from S W Launderettes Ltd v Customs and Excise Commissioners (1987) Decision No.2608 cited in Kiernan at [46]. He said that the position must be considered at the time of the decision. He said that if there is an artificial separation at that time it was not necessary for Customs to show its creation; it is sufficient if an artificial separation is maintained.
53. He said that there was nothing to show the person approaching the premises that there were separate businesses. There was one telephone, one card and one price leaflet. The car shown in Mrs Francis' accounts was used by both on occasion for business. The inference from the insurance policy must be that Mr Francis asked for cover for all the activities.
54. He said that bills were split with no analysis of relative use, there had been no increase in the rent paid by Mrs Francis since 1992 and there was no provision as to when bills would be paid. The evidence suggested relations which were so casual as to require the inference that they were really operating as one.

Appellant's Reply

55. Mrs Hamilton said that the requirement was not that relations should not be casual but that the separation should not be artificial. The case for Customs had concentrated on perception but that is often irrelevant. Customs had failed to address the lack of ties of a financial or economic nature. She accepted that there was some mutual support, that was more in the nature of organisation. There were no organisational ties binding them together. There was little or no common management, no common employees, no common equipment apart from the telephone and each business had its own delineated area. She submitted that there were insufficient links binding the Appellants to justify the conclusion that the separation was artificial and that the activities of each were only part of certain activities being carried on concurrently by both, within paragraph 2(2)(b).

Conclusions

56. We start from the vires in the Sixth Directive for the legislation providing for such direction. These are contained in the second paragraph of Article 4.4 which provides,

"Subject to the consultations provided for in Article 29, each Member State may treat as a single taxable person persons established in the territory of the country who, while legally independent, are closely bound to one another by financial, economic and organisational links."

57. It is trite law that the UK legislation must be construed consistently with the Directive. Under the Directive it is a pre-condition that the persons in question must be closely bound to one another by financial, economic and organisational links. The UK legislation read literally would merely treat such links as a factor in determining whether the separation is artificial. Mr Barnes rightly did not suggest this. It is clear from the Directive that unless the parties are so closely bound here is no power to make a direction.
58. Mr Barnes accepted in reply to a question from the Tribunal that the "and" between "economic" and "organisational" links is conjunctive rather than disjunctive. This is borne out by the French version which uses the word "et" rather than "ou". The necessary close links of all three types must be present. It is also to be noted that "closely bound" is "étroitement liées" in the French version which indicates that strong ties are required.
59. Section 84(7) provides that on an appeal against a direction under paragraph 2 of Schedule 1, the Tribunal shall not allow the appeal unless it considers that the Commissioners could not have been reasonably satisfied that there were grounds for making the direction.
60. In John Dee Ltd v Customs and Excise Commissioners [1995] STC 941 the Court of Appeal considered the jurisdiction of the Tribunal in an appeal against a requirement for security. Neill LJ said at page 952g,

"In examining whether that statutory condition is satisfied the Tribunal will, to adopt the language of Lord Lane consider whether the Commissioners had acted in a way in which no reasonable panel of Commissioners could have acted or whether they had taken into account some irrelevant matter or had disregarded something to which they should have given weight. The Tribunal may also have to consider whether the Commissioners have erred on a point of law."

The reference to Lord Lane is in relation to his speech in Customs and Excise Commissioners v J H Corbitt (Numismatists) Ltd [1980] STC 231, HL at page 230.

61. That test has been regularly applied by the Tribunal in interpreting section 84(7), see for example Reayner, Colegate and Reayner (1998). The wording of section 84(7) is not dissimilar to that in section 16(4) of the Finance Act 1994 where in order to make a direction the Tribunal must be "satisfied that the Commissioners or other person making that decision could not reasonably have arrived at it." It is clear that the Corbitt test is to be applied under section 16(4) and furthermore that it is for the Tribunal to determine the facts, see Lindsay v Customs and Excise Commissioners [2002] STC 588 and Golobiewska v Customs and Excise Commissioners [2005] V&DR 267, both decisions of the Court of Appeal.
62. Since the decisions in this case were made by Mrs Enyididie on behalf of the Commissioners, it is necessary to consider what facts she took into account, whether her assumptions as to the facts were correct and whether she applied the correct legal tests. Since the directions themselves contained no reasons, we have set out her letter of 25 May 2005 in some detail together with the evidence on which it was based.
63. It is clear that the directions could only lawfully be made if the two Appellants who were legally independent were closely bound to one another by financial, economic and organisational links. The fact that they are married does not mean that they were so bound and this was never suggested. We have already pointed out that they must be closely bound by links of all three types. We accept the submission of Mr Barnes that some links may encompass all three types, however he did not point to such links here.
64. The only financial link on which Mrs Enydidie relied was her assumption that the whole of some bills were paid by Mr Francis and the whole of others by Mrs Francis, see paragraph 16 above : this was simply wrong. She disregarded what they told her. There were no loans between the two business and no suggestion that either provided any capital for the other. Mr Barnes said that there had been no increase in the rent paid by Mrs Francis since 1992. This might suggest an element of subsidy of Mrs Francis, however there was no evidence as to this. We observe that the initial apportionment of rent between Mrs Francis and Mrs George suggests an element of subsidy the other way. The rent for basement premises with no shop front would normally be substantially less than half of that for the ground floor premises; this would be further reduced for shared staff room and toilet facilities sited in basement. It was not explained how the £600 for the placing of the trolley on the ground floor was reached. There was no evidence as to the rental value of the premises. We see no reason to believe that the equal split of utility bills was unrealistic.
65. We next turn to the economic links. There was clearly an element of mutual goodwill in the economic sense. The name of the businesses, the common leaflet with prices and the common visiting card are all factors as is the shared telephone number. However the unchallenged evidence was that while some customers were common to both many were not. It would have been a simple matter for Mrs Enyididie and Mr Piper to compare the appointment books to check this. Instead Mrs Enyididie assumed that they had the same circle of customers. The saving of costs through shared telephone, utility bills, price leaflet and visiting card was an economic link.
66. We finally consider organisational links. Contrary to Mrs Enyididie's letter of 25 May, there was no common management, there were no common employees and apart from the telephone no common equipment. The only use made by Mr Francis of the basement was the toilet and staff room. The only use by Mrs Francis of the ground floor was the telephone and the nail trolley. The most important aspect of organisational links must be management. It appears that Mrs Enyididie and Mr Piper who was overseeing her did not address any question as to this at all at the interview. There was no evidence whatsoever that Mr Francis played any part in the management of the Beauty business or that Mrs Enyididie played any part in the Hair business. The closest to any element of common management was that Mrs Francis may to some extent have co-ordinated the answering of the telephone; even this is not clear since it appears that it was answered by whoever was free at the time. Signing for some deliveries hardly constitutes common management.
67. We accept the submissions of Mrs Hamilton in full. In whatever way the legal test is applied we conclude that the Commissioners could not reasonably have been satisfied that there were grounds for making the directions. We find as a fact that the requirements in Article 4.4 of the Sixth Directive which are necessary for legally independent persons to be treated as a single taxable person were not satisfied. We find that the Commissioners could not reasonably have been satisfied that those requirements were met in this case, in particular the requirement that the businesses be closely bound together, whether in relation to the links viewed separately or as a whole. We find that there was no evidence that the separation of the businesses was artificial. We find that important parts of the factual assumptions on which the directions were based were either contrary to the evidence or were not supported by evidence. The perception of customers is only of very limited relevance to the links required under Article 4.4 and paragraph 1A(2). The appeal is allowed with costs.
68. Although we have concluded that Mrs Enyididie's conclusions cannot be sustained, we record that she gave her evidence well and fairly. It is a difficult area of law and in our view directions of this type should be made by officers more senior than her, although in this case it would have made no difference because her conclusions were endorsed by Mr Piper and also by Mr Beedie on review. In our view paragraph 14.6 of Leaflet 700/01/02 should be amended to make it clear that it is an essential pre-condition that the parties be closely bound and that this must be by links of all three types.
69. We direct that the Appellant serves a schedule of costs on the Respondents within 42 days and that the Respondents notify the Tribunal of any objections within 42 days thereafter.
THEODORE WALLACE CHAIRMAN
RELEASED: 5 December 2006

LON/05/1184