19193
VAT — massage parlour — whether supplies made to masseuses standard-rated supply of facilities or exempt supply of licence to occupy rooms — on facts held standard-rated supply of facilities — appeal dismissed
MANCHESTER TRIBUNAL CENTRE
MR BYROM, MRS KANE & MR KANE trading as SALON 24 Appellant
- and -
HER MAJESTY'S REVENUE AND CUSTOMS Respondents
Tribunal: David Demack (Chairman)
Alban Holden
Sitting in public in Manchester on 6 July 2005
Mr Nigel Gibbon, solicitor of Omnis VAT Consultancy, for the Appellant
Miss Sara Williams, of counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents
© CROWN COPYRIGHT 2005
DECISION
Introduction
- The question for decision in this appeal by Mrs Kane, Mr Kane (her former husband) and a Mr Byrom, the partners in Salon 24, is whether supplies they make at their massage parlour to ladies euphemistically described as masseuses are exempt supplies of licences to occupy land, as they contend, or are standard rated supplies of the various facilities they provide, as the Respondents maintain. The Appellants submit that their supplies mainly consist of room rentals: the Respondents respond that such rentals are merely incidental to the supply of facilities.
- If the supplies are standard rated, the Appellants accept that they were liable to register for VAT as long ago as 1997; if they are exempt, then they were not liable to be registered. But if we find that the supplies made are mixed, some being exempt and others standard rated, there may have been a liability to register, if and when also being matters for determination.
The facts
- Mrs Brenda Kane, a partner in Salon 24, and Mrs Allyson Hughes, a member of the Respondents' Joint Shadow Economy Team at Salford both gave evidence to us, and each party produced a bundle of copy documents. Based on that evidence, we make the following findings of fact.
- The Appellants trade as a "massage parlour" from a salon in central Manchester. But the services their masseuses provide, to quote their solicitor Mr Nigel Gibbon, are "of a different nature from those of pure massage". We agree: the services, if not those of prostitution, are akin to it.
- At ground floor level, the salon consists of a reception area, a kitchen, a storeroom-cum-toilet, a separate ladies toilet, a day room or lounge for use by masseuses awaiting customers, a changing room for the masseuses, a shower room (containing a washing machine and drier), and a seating area for customers awaiting masseuses' services. At first floor level, there are four (until June 2002, three) rooms in which masseuses entertain customers, a toilet, and an additional room for use by masseuses and their clients, referred to in evidence as the 'fetish room'. We were given no further information about the fetish room, and find it unnecessary to enquire into its use.
- Each of the first floor rooms used by masseuses is sparsely furnished by the Appellants with a double bed, a chair and a television set for playing video recordings. The Appellants provide the basic bed linen and towels. Any other items provided to or for use by customers are supplied by the individual masseuses.
- Until fairly recently, the Appellants entered into a written contract with any lady wishing to offer massage services, the terms thereof being those following:
"We will rent you a room at the above address on the day(s) of your choice, the current rate is £110.00 per day which must be paid in advance on the day you hire a room. The rent paid includes costs towards the use of our laundry facilities, charges to ourselves from Roynet for credit card payments by your clients and advertising.
Upon payment of the rent we will allocate you a room which is solely for your use during the day. Our opening hours are 10am until 10pm, seven days per week, we may close on Bank Holidays.
As you are self employed, all liabilities with regard to Income Tax, National Insurance Contributions, VAT and Public Liability Insurance are your own responsibility."
- We find that the Appellants provide the services referred to in the letter on the terms mentioned, but that the list of services provided is not comprehensive. The salon's opening hours are determined by the Appellants. Large notices found throughout the premises confirm the masseuses are self-employed. They are in these terms:
"Please note that the masseuses at this establishment are self-employed. Any enquiries with regard to quality of service or price should be directed to your masseuse.
Any enquiries regarding the premises, should be directed to Salon 24"
- If not all the rooms available for masseuses are occupied on a particular day, Mrs Kane, as receptionist, or another receptionist will contact regular masseuses to see whether they are prepared to fill the vacancy or vacancies. If so, they may be offered a reduced daily rental.
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- The Appellants advertise the services of the masseuses in the Manchester Evening News. Their weekly advert, so far as relevant, reads as follows:
"Femmes at Salon 24
10am – 10pm 7 days
0161 XXX XXXX
Park St
Private Parking
All major credit cards welcome."
We find that the Appellants provide parking facilities. The services of the masseuses are also advertised on the salon's website which the masseuses established and which they continue to operate.
- The Appellants do not operate an appointments system, customers being expected to accept any masseuse available on their arrival at Park Street. On a customer entering the salon, the receptionist introduces him to a masseuse. He then pays £40 to the Appellants. This sum may be paid in cash or by credit card. Some 50 per cent of customers pay by credit card. The customer then separately negotiates a fee with his masseuse for whatever services he requires. If the customer wishes to use the fetish room, he is required to pay an additional fee of £20 to the Appellants. The masseuse collects the fee agreed for her services and it is placed in a cash box which each masseuse has and which is held by the Appellants for security reasons. In evidence, Mrs Kane maintained that fees agreed between masseuses and customers could not be paid by credit card. It is unnecessary for us to find whether that is in fact the case; suffice it to say that since the Appellants advertise that they take payment by credit card, we should find it unusual if only part payment could be made in that way. We were told nothing of the course of events after the end of negotiations between the masseuses and customers. Nor were we told whether some customers visit the salon regularly, or whether it is mainly patronised by casual one-off visitors.
- The Appellants are responsible for security of the Park Street premises, and have CCTV as part of their security system. They are also responsible for cleaning and maintaining the premises, and for their heating and lighting. They provide telephone services, pay the business rates for the premises, and presumably have the usual form of insurance cover for business premises.
- The Appellants do not provide a laundry service to the masseuses, but they allow them to use the washing machine and drier at Park Street. On occasions, the receptionist may load and switch on the washing machine for a masseuse, but that does not form part of the contract between the Appellants and the masseuses. The Appellants provide six lockers which half a dozen regular masseuses use for storage purposes.
- By letter of 30 September 2004, the Commissioners of Customs and Excise notified the Appellants that they were liable to register for VAT, contending that the sum paid by each masseuse was the consideration for a standard-rated supply of services. The letter was accompanied by a Form VAT 1, the VAT registration from. As they did not consider themselves liable to registration, the Appellants did not complete and submit the form VAT 1. The Appellants appeal against the Commissioners' decision, and the requirement that they register.
The relevant legislation
- The law upon which the Appellants rely to claim that the services they supply are exempt from VAT is to be found in the Value Added Tax Act 1994, Section 31(1) thereof gives effect to art. 13 of EC Council Directive 77/388 (the Sixth Directive) providing that "a supply of goods or services is an exempt supply if it is of a description for the time being specified in Schedule 9 …". Schedule 9 includes the following:
"Group 1 – Land
Item No 1. The grant … of any licence to occupy land …"
Submissions and conclusion
- In support of the Appellants' claim that their supplies constituted such a licence, Mr Gibbon submitted that each daily room rental satisfied the conditions for such a grant. Therefore he contended that the masseuses had an exclusive right to occupy land and, on the authority of the Belgian State v Temco Europe SA (Case C-284/03), a basket of services did not prevent there being an exempt licence. He principally relied on the judgment of the High Court in Appleby Bowers v Customs and Excise Commissioners [2001] STC 185, where the issue was whether one element of the Appellants' supplies was merely ancillary or incidental to, or a necessary or integral part of, any element of the transaction. In Appleby Bowers, Neuberger J cited with approval the following extract from the judgment of Millett LJ in Customs and Excise Commissioners v Wellington Private Hospital Limited [1997] STC 445 at p.462:
"The proper inquiry is whether one element of the transaction is so dominated by another element as to lose any separate identity as a supply for fiscal purposes, leaving the latter, the dominant element of the transaction, as the only supply."
- Case law has moved on since the Appleby Bowers case was decided. In Dr Beynon and Partners v Customs and Excise Commissioners [2005] STC 55 a decision of the House of Lords, at paragraph 19, Lord Hoffman warned that in cases concerned with the identification of single, composite and multiple supplies, there was no advantage in referring to cases decided before that of Card Protection Limited v Customs and Excise Commissioners [1999] STC 270 "and their citation in future should be discouraged. The Card Protection case was a restatement of principles and it should not be necessary to go back any further". Despite that warning, neither party cited the Card Protection case in argument. (It was referred to in the judgment of Appleby Bowers).
- The Card Protection case was decided by the Court of Justice of the European Communities and essentially dealt with the question of whether Card Protection made a single supply of insurance, to which other services to its customers were ancillary or, alternatively, it made distinct supplies of the insurance and of the ancillary services. Having indicated, at paragraph 26 of the judgment, that the essential question was what the appropriate criteria were for deciding, for VAT purposes, whether a transaction comprising several elements was to be regarded as a single supply, or as two or more distinct supplies to be assessed separately, at para 27, the court opined that:
"having regard to the diversity of commercial operations, it is not possible to give exhaustive guidance on how to approach the problem [of applying the exemption provisions in the Sixth Directive] correctly in all cases".
The Court continued:
"28. However, as the court held in Faaborg-Gelting Linien A/S v Finanzamt Flensburg (Case C-231/194) [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.
29. In this respect, taking into account, first, that it follows from art2(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 artificially be 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.
30. 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 Commissioners 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).
31. 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 56)).
32. The answer to the [the essential question] 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."
- And we remind ourselves that in Customs and Excise Commissioners v Reed Personnel Services Limited [1995] STC 588 at page 595, Laws J observed that the concept of supply is not identical with that of contractual obligation, so that, although the parties to a contract may conclude their contractual arrangements in writing to determine their private law obligations and mutual rights, their agreement may leave open the question of the nature of the supplies made one to the other for the purposes of the former's assessment to VAT.
- The Appellants' case depends upon our accepting that, even with an exclusive licence to occupy a room, a masseuse could realistically be regarded as carrying on her business within that room. In our judgment, she could not reasonably be so regarded. Mrs Kane's evidence made plain to us that a masseuse does not carry on a business solely within the room allocated to her. For instance, the licence makes no provision for a masseuse or her customers to gain access to her room from the street, but, even if it did, or it were to be implied, it is clear that she carries out only a small part of her business within the room. And whilst it might be possible for her to dispense with the Appellants' security services and cash handling facilities, for safety reasons they too are essential. We accept that use of lockers, and the day room may not be absolutely necessary, but they are ancillary matters that form part of the total package.
- Further, whilst the licence does provide for laundry facilities, Roynets' card handling arrangements, and advertising, it does not include any facility for telephone answering, reception of customers, the waiting and other arrangements for customers both before and after receipt of a masseuse's services, and car parking, all of which are essential elements of a masseuse's business. (For the sake of clarity, we should say that we do not accept that the supplies of laundry facilities, card handling and advertising are subsumed in the supply of the room rental).
- Mr Gibbon's claim that the various supplies above listed are merely a means the better to enjoy the licence to occupy a room cannot, in our judgment, be accepted. For it to succeed, the Appellants would have to show that the licence would be sufficient for a masseuse to carry out her business, even if the services in question were not provided. Clearly that is not so. In our judgment, the Appellants are, and at all material times were, supplying to masseuse a package including the provision of various services.
- We then turn to consider which, if any, of those supplies is the principal one. In our judgment it is the supply of the various facilities of the salon including in particular the use of the telephone and reception system, the use of the waiting areas, the advertising and the card handling facilities.
- Applying the Card Protection test, the only conclusion we can reach is that the Appellants make a single supply of a package of which the dominant part is the taxable supply of services to which an incidental part is the supply of a room. We therefore held that the Appellants' entire supplies are standard rated. We dismiss the appeal.
- In reaching our conclusion we have made no reference to the submissions of Miss Williams. Suffice it to say that whilst our reasoning may be slightly different from that she adopted, it inexorably lead us to the same conclusion.
DAVID DEMACK
CHAIRMAN
Release Date: 26 July 2005
MAN/04/0607
