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	United Kingdom VAT & Duties Tribunals Decisions
You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> Denyer v Revenue & Customs [2007] UKVAT V20121 (26 April 2007) URL: http://www.bailii.org/uk/cases/UKVAT/2007/V20121.html Cite as: [2007] UKVAT V20121

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20121

VAT – EXEMPT SUPPLIES - land - hairdressing salon - "chair rentals" - whether grants of interests in land - yes - whether provision of services a means of enjoying the supplies of land - yes - supplies held to be exempt from VAT - whether appellant registrable for VAT on footing that taxable supplies exceeding threshold - no - appeal allowed

LONDON TRIBUNAL CENTRE

CHRISTOPHER JAMES DENYER Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: MICHAEL JOHNSON (Chairman)

ANGELA WEST FCA

Sitting in public in Bristol on 9 March 2007

The Appellant appeared in person

Jonathan Holl, of the Solicitor's office of HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2007

DECISION

1. The Appellant is a hair stylist. His hairdressing premises are located in Castle Street, Salisbury. The Appellant had not been registered for value added tax until H M Revenue and Customs ("Customs") notified him on 2 June 2006 of his liability to be registered with effect from 1 September 1997. Customs maintain that the Appellant is liable to pay £80,547.90 of VAT calculated from then until 16 February 2006.
2. The Appellant was on 8 November 2006 notified of his liability to a belated notification penalty under s 67 of the Value Added Tax Act 1994 ("the Act") for his failure to register. The amount of the penalty assessment is £6,041.08, mitigated by 50 per cent from £12,082.18 (ie 15 per cent of £80,547.90) for his co-operation.
3. In this appeal the Appellant is contesting his liability to be registered and the civil penalty.
4. By notice dated 12 December 2006, Customs applied to amend their statement of case by substituting the words, "The right to use facilities in a hairdressing salon is not the grant of any interest or right over land or of any licence to occupy land within the meaning of Group 1, Schedule 9 'Exemptions' of [the Act]" for the words "The provision of space within the Appellant's premises is not the grant of any interest or right over land … ", etc at the beginning of paragraph 27 of the statement of case. We granted leave to make that amendment immediately before the hearing of the appeal commenced.
5. The evidence presented to the tribunal in support of the appeal consisted of a written statement from the Appellant with attachments, an unsworn statement from his wife Mrs Anna Denyer (she attended tribunal but was not required for cross-examination), some handwritten notes as to appropriate terms of agreement between hairdressing establishments and hair stylists, and the oral evidence of the Appellant himself. The Appellant was cross-examined by Jonathan Holl, representing Customs. The Appellant was assisted by his accountant, Mr Andrew Perry, who sat alongside him but did not give evidence as such.
6. On behalf of Customs, Mr Holl called Miss Nicola Anderson, an officer of Customs based at Portsmouth VAT Office. She was cross-examined by the Appellant. Mr Holl handed in a folder of relevant documents, a bundle of relevant authorities and a skeleton argument.
7. We find the following facts.
8. The Appellant has been proprietor of his own hairdressing salon since 1991. Before that he traded as a hair stylist by "renting a chair" in other hairdressing salons on a self-employed basis. He is familiar with the concept of hairdressers operating independently from the salons in which their businesses are conducted.
9. The Appellant's salon is called "Stofferson's". Initially he traded there on his own. Then, in about 1993, his then accountant discussed with him the method for "renting chairs" in his salon to other stylists. The accountant provided the Appellant with some handwritten notes containing a specimen of what the terms of agreement might be between the Appellant as salon proprietor and stylists renting chairs. A copy of those notes was produced to us.
10. The Appellant decided to invite other hair stylists to trade from his salon. He was joined in the salon by one stylist, and then by a second stylist some six months later, and later still by other stylists. There are chairs in the salon for up to four stylists at a time in addition to the Appellant himself.
11. The Appellant's accountant at the time informed him about the guidelines agreed for tax purposes with the National Federation of Hairdressers. Copies of these guidelines are helpfully contained in the bundle of documents produced to the tribunal by Customs. The bundle relates those guidelines to the three possibilities for the structuring of hairdressing businesses, viz

A hairdressing salon employs its own stylists under contracts of service. The salon therefore makes the supply of hairdressing to the customers.

A hairdressing salon engages its stylists as self-employed contractors, under contracts for services. The stylists supply their services to the salon, and the salon then makes an onward supply of hairdressing services to its customers.

The self-employed stylists supply hairdressing services direct to the customers; the salon makes charges to the stylists to cover items such as sale of shampoos, etc, or the right to use an agreed part of the salon – the so-called "chair rental".

12. When the Appellant took in other stylists to work in his salon, his object was to achieve the third of these situations. To that end, his agreement with each stylist has been to allocate the stylist an area of the salon to be used exclusively by him or her, containing a hairdressing chair.
13. Whilst the exact extent of these areas is not marked on any plan, or apparent from inspection, the extent of the areas is nevertheless ascertainable, because the respective stylists themselves are aware if and when their exclusive areas have been encroached upon. Whilst there might conceivably be room for debate as to the precise extent of the areas, there is no doubt that the chair and the area immediately surrounding it are exclusively enjoyed. That has not been challenged in this case.
14. We find that no stylist has ever had the right to use the facilities of the salon generally. They have only ever had the right to use their allocated area. Obviously, the right to use the area includes by necessity a right of access to it, for the stylists and their customers. The stylists also enjoy the provision of clean towels, and shampoo and other consumables as and when supplied. However, we find that these are made available only as adjuncts to the use of the allocated areas. They are not otherwise made available.
15. If the stylists make use of any facilities in the salon outside their allocated areas – for example the waiting area for customers or one of the washbasins – this is not because they have any distinct right to do so. They do not pay for such use. Such use is either by toleration or because it is impliedly regarded as a consequence of the existence of their right to trade from the allocated areas.
16. Each stylist has brought their own customers with them, has developed their own goodwill by acquiring new customers personally, and has operated their own business independently of the salon and of each other. Accordingly they each record the details of their own customers and have their own bookings. Each customer pays the stylist directly for the services provided. Stylists keep their own tax records and account for their own tax. They employ their own accountants. All stylists have their own tools which they use. They buy their own stock of products used in their trade independently. They are not dependent upon the provision of consumables by the salon.
17. Stylists have their own keys to the premises and keep their own working hours. They decide on their own holidays. They themselves arrange for a "locum" to operate their chair if they are away.
18. Stylists have their own scale of charges for customers which they set independently.
19. Stylists are held out to the outside world as being independent traders in their own right. The appearance is not given that they all work for "Stofferson's". Each stylist displays in the premises a notice stating their name and the address at which documents may be served on him or her. They have their own separate stationery and are individually responsible for their own acts and omissions. They maintain their own public liability insurance and display notices that they are insured as required by law. They and they alone decide who sits in their chairs.
20. The Appellant conducts his business separately from those of the other stylists. He charges them a sum for their allocated area, known as a "chair rent", a sum by way of contribution towards rates, heat, light, water, use of the telephone and laundry of towels, at the rate of 75p per customer, and he charges them in addition for any consumables that he may supply them with – they have an absolute choice to source consumables elsewhere if they wish.
21. It appears to us that each independent stylist is, to all intents and purposes, a business tenant of his or her part of the premises. The position from the point of view of land law seems not dissimilar from (for example) that of a craft centre in a deconsecrated church building, where each trader has exclusive possession of his or her unit or stall and pays a rent to the owner of the building for the right to trade. The salon itself is held by the Appellant on a lease for a short term of years from a landlord who is fully aware of the arrangements in place with the stylists and who has, as we find, consented to them. We do not see why, if the Appellant's lease were to terminate, the stylists could not assert security of tenure as sub-tenants under Part II of the Landlord and Tenant Act 1954 against the landlord, subject to s 43(3) of that Act (we have no information as to how long individual stylists have enjoyed their interests).
22. The Appellant has had no written agreement with any of the stylists governing their relationship. The relationships have been entirely on the basis of mutually agreed conduct and verbal understanding. When Customs asked the Appellant's present accountant, Andrew Perry of Rawlence & Browne Small Business Centres Ltd, for a copy of any written stylists' "chair rental" agreement in existence, the Appellant supplied a "Stylists Licence Agreement" which, we are satisfied, was not in practice used between any of the stylists and the Appellant. This document is not in legal form, does not mention the name of any stylist, is unsigned and undated, and does not provide the degree of detail as to the arrangements which we have found to have existed between the Appellant and the stylists respectively.
23. When asked why the Appellant had no agreement in writing with any of his stylists, he replied that he had understood that a written agreement would have no standing. He told the tribunal that he was aware that the guidelines agreed with the National Federation of Hairdressers recommend written agreements, but that he had taken the advice of a citizens' advice bureau, and had been told that a verbal agreement would be preferable.
24. We can see some sense in that. If a written agreement is entered into, and it is then found that the parties have in practice varied what they have agreed at the outset by their conduct from time to time, either by disregarding agreed terms or by acting differently from what has been agreed, then the written document has limited value. Ultimately it is how the parties have in practice conducted themselves, rather than what they may have written at the onset of their relationship, that reflects the true relationship.
25. Mrs Anna Denyer keeps the Appellant's books. She is also one of the self-employed stylists in her own right. She came to the salon to rent a chair and she and the Appellant were subsequently married. Mrs Denyer helps the stylists by taking bookings on their behalf; the customers, however, request a booking with a particular stylist and not with "Stofferson's". Stylists help one another by answering the telephone.
26. The layout of the premises is not such as to confuse the operation of one stylist's business with that of another. Although the chairs are not in separate booths, each stylist has their own space surrounding their chair. When Miss Anderson made an unannounced visit to the premises on 26 October 2006, she noted that the Appellant stated that his junior would very rarely assist the other stylists with hair washing. In tribunal, the Appellant said that this was incorrect. He said that his junior did not assist the other stylists.
27. The Appellant is in the best position to know the truth of that matter. He presented his evidence convincingly, and we see no reason to disbelieve his evidence as to the role of the junior or as to any other matter. He was commendably frank as to his deliberate failure to have written agreements with his stylists, although he recognized that that might weaken his case.
28. We accordingly find that there are no facilities contractually provided by the salon to the independent stylists in addition to those covered by the "chair rentals" and the 75p charge mentioned. We are satisfied that on the facts of this case – in contrast with the facts of many other tribunal cases of which we are aware, some of which are referred to in the folder of authorities left with us by Mr Holl – the Appellant and the stylists have been truly "at arm's length".
29. The Appellant was said by Miss Anderson to have been "extremely helpful" in co-operating with Customs, which had led to the civil penalty being mitigated by 50 per cent. Apart from the matter of the junior, her evidence as to the operation of the salon corresponded with that received by us from the Appellant. Her perception of the conclusions to be drawn from what she observed however differs from ours.
30. For Customs, Mr Holl submitted that the lack of written agreements as to the use of chairs by stylists, as recommended by the Federation guidelines, should be regarded as fatal to the Appellant's case. The salon had made composite supplies to the stylists, who were dependent upon the facilities and services provided by the salon in which they traded. Those supplies were standard-rated and payment for them fell to be included in the taxable receipts of the Appellant. Customs did not dispute that the stylists were self-employed; however it would be wrong, he said, to dissociate their businesses from those supplies.
31. Mr Holl submitted that the charging of "chair rent" was itself in consideration of the provision of the salon facilities. There existed no "grant of a right over land or of any licence to occupy land" as mentioned in Schedule 9, group 1(land), item 1 of the Act. He cited Sinclair Collis Ltd v The Commissioners of Customs and Excise [2003] STC 898, in which the European Court of Justice considered the provision of cigarette machines in public houses, hotels and clubs as not being pursuant to licences but merely the means of effecting the service supplied, ie the exclusive right to sell cigarettes at the premises.
32. Mr Holl further cited the tribunal decision of Simon Harris Hair Design Ltd v The Commissioners of Customs and Excise (VAT Decision No 13939), in which a tribunal chaired by Mr Wallace concluded that the consideration for the supplies of chairs in a hairdressing salon and the facilities provided by the salon indicated that there were single taxable supplies in each case.
33. The tribunal in that case attached weight to the decision of the Court of Appeal in the case of Card Protection Plan Ltd v The Commissioners of Customs and Excise, which had not at that point reached the House of Lords. On subsequent appeal to the Lords, the House referred to the European Court of Justice a number of questions which included a question as to what test was to be applied in deciding whether a transaction consisted for VAT purposes of a single composite supply or two or more distinct supplies. The ECJ held that there was a single supply where one or more elements were to be regarded as constituting the principal service, while one or more elements were to be regarded as an ancillary service, ie a service which did not constitute for customers an aim in itself, but a means of better enjoying the principal service supplied: see [1999] STC 270 at [29] – [32].
34. Mr Holl also cited College of Estate Management v The Commissioners of Customs and Excise [2005] STC 1597, in which the House of Lords was of opinion that the tribunal had erred in regarding supplies of distance-learning materials as ancillary to the provision of education. Rather, it was held, the facts found by the tribunal justified the conclusion that there had been a single supply of education.
35. The Appellant submitted that the payments in dispute should not properly be regarded as standard-rated, but rather as exempt, so that the value of his taxable supplies remained below the threshold for compulsory registration for VAT. He submitted that the Sinclair Collis case was irrelevant to the nature of the interests of the stylists in the premises. He said that the key point in his appeal was the matter of control. He said that he had no relationship with the customers of his stylists. The stylists were in control, not him.
36. The Appellant cited Kieran Mullin Ltd v The Commissioners for Customs and Excise [2003] STC 274. That case concerned the relationship between self-employed stylists working in a chain of hair salons and the proprietor of the salons, and whether, in particular cases, the relationship was as indicated in the second bullet point in paragraph 11 above or the third bullet point. Some stylists were found to be self-employed in one sense and some in the other. The Appellant urged upon us that all his stylists had been self-employed in accordance with the third bullet point.
37. We agree. In our view the facts that we have found tend inevitably to the conclusion that the situation in this case equates to the third of the bulleted situations referred to in paragraph 11 above. The stylists are not employed by the salon, nor are they supplying their services to the salon which then makes onward supplies of hairdressing services to its customers. Rather, the stylists are self-contained businesses making their own individual and separate supplies to their customers.
38. What is the nature of the supplies made by the Appellant to the stylists? There are at least two distinct kinds of supply made in this instance, viz firstly the exclusive right to use a part of the premises, including the exclusive use of a particular chair and the provision of heat, light, water and use of the telephone, and secondly the right to have towels laundered and consumables provided, periodically as and when required.
39. Of these two kinds of supply, the first kind of supply appears to us to predominate, because the stylists' businesses cannot be carried on without the grant of the right to use the premises – at least, not without relocating the businesses – whereas it would always be open to the stylists to have their towels laundered independently, and to source their consumables separately, whether or not in practice that ever happened.
40. In this case there is not, we think, the difficulty confronted by the tribunal in the College of Estate Management case, where one kind of supply was found not to be ancillary to another. It seems to us that all the elements here, including the provision of laundering services and consumables, were directed towards facilitating the carrying on of the stylists' businesses in the allocated areas.
41. We note that the 75p per customer payment includes rates, heat, light and water as well as use of the telephone and the laundering of towels. To attempt an artificial split of these components would be contrary to the guidance given by the ECJ in the Card Protection case. However, in contrast to the single consideration identified in the Simon Harris Hair Design case, in the present case the "chair rents" are distinct from the 75p payments. As we say above, in effect they have given rise to the equivalent of sub-tenancies. There does not appear to be anything commercially inexplicable about the relative amounts charged for "chair rents" and the services received by stylists in the present case, as there was in the Simon Harris Hair Design case.
42. What is the principal supply? In the first place, it seems to us that the Sinclair Collis case, cited by Mr Holl, is clearly distinguishable. In that case, the sites of the cigarette machines were incidental to the supplies. In the present case, the right to use the allocated areas, and in particular the chairs, is paramount, not incidental. All else flows from that right and is parasitical upon it. Considering the analogy of a hotel room on the one hand and a meal in a restaurant on the other, the principal service in this case is equivalent to the supply of the right to use the hotel room, not the restaurant meal – except that here, as we see it, the potential security of tenure is greater than that of the right to occupy a hotel room.
43. In our view, we have in the present case examples of "conferring on the person concerned, for an agreed period and for payment the right to occupy property as if that person were the owner, and to exclude any other person from enjoyment of such a right" (see the Sinclair Collis case at [25]). For the period covered by his or her rental, the stylist has the exclusive use of the chair and the area surrounding it, and can exercise the rights of an owner, not only for purposes of deriving an earned income from the chair, but also to prevent anyone else from using the chair at any time. The rights are more than mere contractual rights; they are contractual rights coupled with an interest in land.
44. That is therefore the principal element in the composite supply. The other elements are, as we see it, subservient to that. In other words, they are not an aim in themselves, but a means of better enjoying the principal element. Alternatively, it may be correct to regard the elements as comprised in an over-arching single supply of land. Either way, exemption from VAT is attracted.
45. It follows that we do not agree with Mr Holl that the "chair rents" are ancillary to the provision of salon facilities. Once it is established that there has taken place in this case the creation of exempt interests in land within Schedule 9, group 1, item 1 of the Act, which we find to be the case, then the services provided in this case must either be ancillary to or be comprised within that principal supply.
46. As we understand that it is accepted by Customs that the Appellant was not registrable for VAT unless the supplies in issue were correctly standard-rated, we therefore allow this appeal. We decide that the back-dated registration was wrong, that the Appellant is not liable for the tax alleged, and that the assessment to the civil penalty should be discharged as being inappropriate in the circumstances.
47. We make no ruling with regard to costs at this stage. However the appeal may be restored by either party for the limited purpose of argument as to costs if desired. As we presently see matters we think that the Appellant should have his reasonable costs, save that it appears to us from authority that the Appellant, having acted in person, will only be entitled to out-of-pocket expenses with no allowance for time spent: see Nader v The Commissioners of Customs and Excise [1993] STC 806. The parties should seek to agree costs before restoring the appeal before us.

MICHAEL JOHNSON

CHAIRMAN

RELEASED: 26 April 2007

LON/2006/758