Mr Justice Blackburne :
Introduction
- These are appeals by the taxpayers against two decisions of the Value Added Tax and Duties Tribunal (Sir Stephen Oliver QC, President, and Diana Wilson) released on 28 August 2007. By their decisions the Tribunal ruled that supplies by the appellants to self-employed hairdressers (or stylists) did not include "the leasing or letting of immovable property" and that, even if they did, the supplies were properly to be characterised as single supplies of (putting it shortly) hairdressers' facilities which were standard-rated for VAT purposes.
- In fact, the two appeals, which I shall refer to for short as Holland in the case of appeal 0663 and Vigdor in the case of appeal 0664, were heard together with a third (Decision 20323) called Taylor, also concerned with supplies to self-employed hair-stylists and also raising the same issue. In contrast to Holland and Vigdor, the Tribunal ruled in Taylor that the supplies by the taxpayer in that case included a leasing or letting of immovable property and were not to be regarded as a single indivisible economic supply.
- At the heart of the first issue was the scope of the exemption from VAT of "the leasing or letting of immovable property" conferred by Article 13B(b) of Council Directive 7/388/EEC (the Sixth Directive) which has since become Article 135(1)(l) of Council Directive 2006/112/EC. The relevant domestic enactment of Article 13B(b) is item 1 of Group 1 of Schedule 9 to the Value Added Tax Act 1994 ("the 1994 Act") which refers to a "licence to occupy land". At the heart of the second issue was the treatment for VAT purposes of a supply where there are several elements to the supply: did each element of the overall supply made to the stylists retain its separate VAT treatment or were they to be treated as a single or composite supply and, if the latter, how was the supply to be characterised? These are familiar issues in cases involving stylists carrying on business as self-employed hairdressers in premises and using other services connected with hairdressing supplied to them by the taxpayer. With the exception of Taylor, the taxpayer has failed in every one of the decisions to which my attention was drawn.
The facts in Holland
- What follows is taken, with some adaptation, from the Tribunal's decision in Holland. I was also taken to the underlying written form of agreement used in that case.
(a) background
- Andrew Holland, the appellant in Holland, was during the period to which the appeal related the sole proprietor of a ladies' hairdressing salon in King's Lynn. He appealed against the decision of HM Customs and Excise (as they then were), dated 27 August 2002, that the supplies of certain services to self-employed stylists working from the salon premises were standard-rated and, accordingly, that he was liable to be registered for VAT. It was common ground before the Tribunal that if the supplies to the stylists were properly standard-rated, Mr Holland should have been registered with effect from 1 June 2002.
- The Tribunal heard evidence from Mr Holland and two other stylists who had each carried on a self-employed business at the salon since the early 1990s.
- Having leased the premises from his father from the early 1990s (paying £1000 per week for two of the floors), Mr Holland had bought the premises from his father a few years before the Tribunal hearing. As I understood it two of the floors (the ground and first floors) were occupied by stylists and the third, on the second floor, was used by Mr Holland for training. During the relevant period there were at the premises seven stylists, including Mr Holland, and four "juniors" who acted as assistants to the stylists.
(b) the written agreement.
- During the relevant period each stylist entered into a written agreement with Mr Holland which was in a form produced by the National Hairdressers' Federation. In the copy of the agreement which was in evidence before the Tribunal Mr Holland was described as "the Owner" and the stylist, in this case a Ms Claire Thorpe (or Steele as she later became), was described as "the Independent Contractor" or "the Licensee" for short.
- Clause 2 of the agreement (headed "The Intent and General Principles") stated, by clause 2.1.1, that each party was to have "ultimate command and authority over all aspects of their respective business or enterprise", by clause 2.2.1, that the licensee should "enjoy, without let or hindrance, possession of the designated land and to have right of passage to that land" and, by clause 2.2.3, that each party was to have "equal rights to enter onto, and undertake lawful activity from that land which comprises the common parts in mutual harmony and compatibility and to use such common area in the furtherance of their business". Clause 2.3 stated that nothing in the agreement should be deemed to constitute a partnership between owner and licensee or a joint venture or agency between them. By clause 3.2 the licensee warranted to "occupy and use the Salon for the purpose of conducting his own independent hairdressing business, including activities normally ancillary to hairdressing, and is acting on his own behalf…".
- Clauses 4 and 5 were headed "Licence to Occupy Land". Clause 4.1 provided that the stylist "may occupy the property described in the schedule ("the Designated Area") with the benefit of the facilities and services for the purposes of conducting his own hairdressing business and activities normally ancillary thereto…" from the date of the agreement until terminated in accordance with the provisions therein contained. Clause 8 provided that the agreement was to continue until terminated by either party giving notice (either three months or not less than 21 days in the case of a breach of the agreement) or in other stated events (for example, death or the onset of an insolvency proceeding). The "Designated Area" was described in the schedule to the agreement as an eight square metre area "etched" (I think that the reference in the schedule should be to "edged") in red on an annexed plan. The Tribunal was not supplied with a plan so edged. By reference to the plan attached to Mrs Steele's agreement the designated area allocated to her is shown as including two mirrors against the wall on the left of the ground floor and two chairs. In all, three such areas were shown on the plan with Mr Holland's nearest to the entrance to the salon. It showed a broken line between his area and Mrs Steele's, stretching out from the wall bearing the mirrors towards the centre of the room, and another such line between Mrs Steele's designated area and the third such area in the room. There was no line to mark the extremities of the three areas opposite the side formed by the wall. The plan also showed a sofa for waiting clients about four feet from the end of the broken line between Mrs Steele's area and the third area. Towards the back of the ground floor the plan showed the room to narrow with a step up, at the edge of the third area, into a smaller area within which were three "backwashes" (basins for washing clients' hair) marked 1 to 3 with storage cupboards on the opposite wall.
- Each stylist agreed to pay two amounts to Mr Holland: a "licence fee" and a "service charge". In the case of the Mrs Steele's agreement, clause 4.2 of the agreement provided that she should pay a licence fee of £150 per week with six-monthly reviews to reflect changes in the Retail Prices Index.
- By clause 4.4 it was provided as follows:
"4.4.1 This Licence is granted to provide the Licensee with an area of land for the conduct of business, either in part or in total in the Salon owned and operated by the Owner and is intended to create an exempt licence to occupy as defined by VAT legislation.
4.4.2 This Licence does not give the Licensee exclusive possession of the Designated Area or the Salon and the Owner is entitled to enter and use the Designated Area at any time provided that such entry or use shall not in any way hinder or obstruct the Licensee's business activity in accordance with the terms hereinafter appearing.
4.4.3 This Licence is personal to the Licensee and it cannot be transferred or assigned. The Licensee is not entitled to permit anyone, other than those employed by or having business with the Licensee, to have access to the Designated Area."
- Clause 4.5.1 obliged the licensee to use the designated area only for the purpose of his hairdressing business including those activities normally ancillary to hairdressing. By clause 4.5.7 the licensee agreed "not to interfere in or obstruct the running of the Owner's own business from the Salon nor that of any other independent contractor permitted by the Owner to carry on business from the Salon".
- Clause 4.6.1 obliged Mr Holland, as "Owner", to pay all rates, property taxes, property maintenance, decoration and insurance (not including professional negligence insurance of the stylist). Other obligations owed to the licensee included:
"4.6.2 To allow the Licensee access to all other parts of the Salon not forming part of the Designated Area required for the purpose of providing his clients with the services of a hairdressing business, including those services normally ancillary to hairdressing, together with reasonable access to the staff room, kitchen and toilet facilities.
….
4.6.4 To allow the Licensee and his clients access to the Designated Area and to open and keep open the Salon on not less than two hundred and fifty days a year during normal shop business hours, and to open the Salon at such other times as the Owner in his absolute discretion may determine.
4.6.5 To use his best endeavours to promote his own business and the Salon and to keep the Licensee advised, as far as possible, as to his hours of business.
…
4.6.9 Not to interfere or intervene in or obstruct the running of the Licensee's independent business, nor permit any of his servants, employees, agents or other independent contractor to intervene in or obstruct the business of the Licensee."
- Clause 5 set out various agreed matters including the following:
"5.1 That section 4 of this Agreement constitutes a Licence over land and confers no tenancy whatsoever upon the Contractor [ie the stylist] and that possession of the Salon is retained by the Owner until expiration or termination of this Agreement.
5.2 The Licensee is not entitled to exclusive occupation or possession of the Designated Area and shall not at any time or in any matter do any act which may impede the Owner or any duly appointed representative of the Owner in the exercise of his rights of possession and control of the Designated Area.
5.3 The Owner is specifically authorised and permitted to use the Designated Area for his hairdressing business, including those activities normally ancillary to hairdressing, in the event that:
(i) The Licensee is absent from the Salon for a period of more than fifteen consecutive working days or
(ii) The Licensee has informed the Owner or his servant, employee or agent in advance of his absence and consented in writing to such use of the Designated Area.
5.4 Such use of the Designated Area referred to in the above clause 5.3 shall be terminated upon the return of the Licensee to the Salon, and the Owner will indemnify the Licensee against all damage arising from any acts or omissions undertaken within the Designated Area during the period in which the Owner used the Designated Area for his own purposes."
- Clauses 6 and 7 were headed "Contract for Services". By clause 6 (headed "Facilities"), Mr Holland, as owner, agreed to provide the licensee with certain services in consideration of a service charge calculated by reference to a percentage of her gross monthly turnover. (In the case of the agreement with Mrs Steele this was fixed at 7%.) The services, which were listed in the schedule to the agreement, amounted to the use of the salon facilities (eg washroom, toilets, staff room, kitchen, reception facility, heating, lighting, water, laundered towels, cleaning, maintenance and waste disposal), use of Mr Holland's staff (eg to maintain a fully-staffed reception, to wash hair, to sweep up hair and to prepare refreshments for clients) and use of salon equipment (eg hairdressing chairs, mirrors and hairdryers). Clause 7, among other matters, stated (in repetition of clause 2.3) that the licensee was self-employed for the purpose of conducting a hairdressing business, including those activities ancillary to hairdressing, and that the licensee was not an employee, servant or agent of the owner.
- The Tribunal referred to the evidence of another stylist, Melanie Brodrick, who was allocated one of four areas on the first floor of the premises (with a chair and mirror) opposite which was a sitting area. There was also a separate area on the first floor containing four basins.
(c) the Tribunal's other findings
- In a section of the decision headed "how exclusive is each stylist's designated area?" the Tribunal recorded (1) that there were no markings on the floor to show the designated area of any stylist, (2) that the chair or chairs, mirror and space for keeping the stylist's tools and equipment were for the exclusive use of the particular stylist to whom the area had been allocated and (3) that in the course of their activities at the salon other stylists and their clients would regularly walk over the areas shown on the plan as the designated areas of particular stylists. They also recorded that the agreement itself provided (as already set out earlier) that the licence did not give the licensee exclusive possession of the designated area or of the salon and that, although clause 5.3 enabled Mr Holland to use the particular stylist's designated areas if that stylist was absent for 15 consecutive working days, neither of the stylists who gave evidence could recall that having happened.
- In paragraphs 21 and 22 the Tribunal went on to record points made by the two stylists in their evidence, namely that they each had their own clients, had their own hairdressing equipment which they usually kept behind the mirror in their own designated area, and provided their own shampoos and oils etc. Other points from their evidence which the Tribunal noted were that the two stylists made use of the reception area and computerised booking facilities, heating, lighting, hot and cold water and waste disposal facilities which Mr Holland had contracted to provide and the services of the juniors engaged by Mr Holland and that when working in the salon itself there was no other source of those facilities so that they could not carry on business unless all of those facilities were provided within the salon. The Tribunal also noted the importance given by the two stylists to having somewhere to work in the salon but equally their acceptance that their activities could be performed without a fixed designated area and that it did not matter to them precisely where the chairs were situated.
- In paragraph 23 the Tribunal went on to note that the obligation to provide the services to the stylists lay with Mr Holland alone and that he aimed to break even by recovering the cost of the services from the stylists, with each contributing to expenses by way of a pre-agreed percentage of turnover. In paragraph 24 the Tribunal discussed how the weekly licence fee came to be calculated - on which the evidence was unclear - but concluded that Mr Holland was not seeking to load on to the licensees any of the stylists' payment obligations for the services provided to them. The Tribunal also noted, in paragraph 25, that Mrs Steele "wanted somewhere to carry on her styling business", that it was not necessary to that activity that she was granted a licence and that, according to her evidence, she would have been happy if the agreement had not mentioned any licence fee but had simply charged a single amount. The Tribunal recorded that the other stylist, Ms Brodrick, was less clear on the point. At paragraph 26 the Tribunal concluded that:
"Taking all factors into account we think it inconceivable that anyone other than a stylist who wanted to carry on a business at the salon would want a licence over a Designated Area in the salon premises."
- They also noted that if the stylists did not attend and carry on business at the salon Mr Holland could take back the designated area and use it for the purposes of his business.
Vigdor
- As with Holland, what follows is taken, with minor adaptations, from the Vigdor decision.
(a) background
- Vigdor was appealing against a ruling given by HM Customs and Excise as long ago as 28 January 1997 to the effect that supplies by it to self-employed stylists were wholly taxable supplies.
- Vigdor carried on business as a hairdressing salon, open seven days a week, from premises in Queensway in west London. The premises were on two floors. The ground floor, which was open plan, consisted of a reception area, a till, a number of seats and sink units and a "mixing" room. Michael Spiegler who gave evidence to the Tribunal and was a director of Vigdor worked for Vigdor as a stylist from the ground floor which he occupied with other employed stylists. The other floor, the basement, consisted of an administrative office, four self-contained beauty rooms and a separate room in which there were chairs, two wash basins, a dye-mixing area and a client waiting area with its own chairs. The dispute concerned the supplies made by Vigdor in respect of this separate room.
- In 1996 there were three self-employed stylists. A sign on the door to this separate room in the basement stated that it was for the use of independent contractors. On each mirror there was a sign stating that each stylist's chair was for the sole use of a designated stylist. The three stylists shared the use of the wash basins and the dye-mixing room and the use of a junior assistant. They also shared, along with the rest of Vigdor's staff, the same appointment book and till. They received their respective shares of the takings from Vigdor each week.
(b) the contractual arrangements
- It was common ground before the Tribunal that the following provisions of a written form of licence agreement were in operation between Vigdor and the three stylists in 1996 (referred to in the form of agreement as the "Chairholder"). The document in evidence before the Tribunal, which was in blank form as regards the name of the chairholder and the particulars material to that chairholder, was very much briefer than the agreement used in Holland. Describing itself as "a licence to occupy area - floor space" it set out a series of agreements as follows:
"(1) …that the Chairholder will operate his/her own business within the licensed area - floor space at the Company's premises at 160 Queensway or at such other premises as the parties shall agree from time to time.
(2) …that the Chairholder named herein will have exclusive use of the area - floor space known as at the Company's premises … or at such other premises as the parties shall agree from time to time.
(3) …that service facilities (independent of and without obligation to area - floor space) shall be made available at the option of the Chairholder only.
(4) …that in respect of the licence to occupy area - floor space herein granted the Chairholder will pay the Company a rental-fee of of his/her gross turnover or such other percentage rental-fee as the parties shall agree from time to time.
(5) …notwithstanding clause 4 herein there shall be paid by the Chairholder to the Company for the exclusive occupation of the area - floor space known as a minimum annual rental-fee of £2500…or that payable under clause 4 herein if greater.
(6) …that in addition to the rental-fee payable by the Chairholder to the Company by virtue of clause 4 the Chairholder should he/she elect for the provision of service(s) shall pay a service charge of 10% of his/her gross turnover or such other percentage as a service charge as the parties shall agree from time to time.
(7) …that at the option of the Chairholder only and in consideration of the service charge that could become payable by virtue of clause 6 herein the Company will if so requested provide all or any of the undermentioned service facilities:
(a) lighting heating telephone water cleaning and general maintenance
(b) a fully staffed reception
(c) the use of stock held in the dispensary stockroom but that the Chairholder shall have complete freedom to purchase products elsewhere
(d) the services free of charge of apprentice and/or junior staff
(e) a laundered towel service free of charge."
- By clause 8 it was provided that the chairholder should alone enjoy the benefit and alone bear the cost of his/her business enterprise and, by clause 11, that he/she would provide all his/her own personal equipment. By clause 14 it was provided that the chairholder should be completely autonomous and that the company should have no control over the weekly hours of occupation of the area - floor space but that the chairholder should be responsible for arranging alternative cover in respect of anticipated protracted absence. Finally, it was provided by clause 17 that the licence should be terminated by either side giving 14 days' written notice.
(c) other findings
- In paragraph 9 of Vigdor the Tribunal recorded that at the material time the stylists paid 10% of takings as a service charge and that the clause 4 charge (for the licence to occupy) was 60% of takings. They also recorded Mr Spiegler's evidence that the 10% would cover his expenses and that the 60% provided "a profit to Vigdor on the downstairs area". In paragraph 10 the Tribunal noted that there were no floor markings to show the floor space referred to in clause 2 and that Mr Spiegler did not know what size those floor spaces were. In clause 11 they noted from Mr Spiegler's evidence that within the confines of the basement area were all the facilities a self-employed stylist could require, that the stylists were given the opportunity to work upstairs if their clients were unwilling to go downstairs and that when the downstairs flooded, which frequently occurred, upstairs chairs were made available to the affected stylists. They also noted that the stylists used each others' chairs when one or more were absent and that, according to Mr Spiegler, it was "up to them, between themselves, if they wanted to change chairs".
- In paragraph 12 the Tribunal noted that sometimes Vigdor's own clients wanted for cultural reasons to have their hair styled downstairs rather than in public view and that in that event they would be brought downstairs by a Vigdor employee and the styling done from one of the vacant chairs without prior permission from the self-employed stylist whose chair it normally was. The Tribunal quoted Mr Spiegler as saying "there will always be a vacant chair".
- In paragraph 13 the Tribunal noted that the stylist who had rented a chair could not "carry on her business from her 'floor space area' alone: and that she has, for example, to go and meet her client, has to take her client to the wash basins and has to go to the dye-mixing area". They referred to Mr Spiegler's evidence that the stylists had to move around the premises "to do their jobs" and that while Mr Spiegler could not say what area comprised the particular stylist's floor area, no stylist had ever complained that another stylist had crossed her space. They quoted him as saying that this had "never been an issue". The Tribunal went on in clause 14 to state as follows:
"We infer from the evidence that exclusive use of the area floor spaces was not part of the arrangement. The area - floor space of the stylist was not defined in the agreement that we saw. Nor were the dimensions of such space specified. The only thing that could possibly be described as exclusive use was the chair allocated to the particular stylist. But even that was available to Vigdor and to the other stylists when the particular stylist was absent."
- In paragraph 15 the Tribunal noted that there was no evidence that any stylist had chosen not to use the services listed in clause 7 and that the services were listed because all were essential to enable any stylist to carry on business. Finally, in paragraph 16, the Tribunal stated that they were not satisfied that the "so-called rental of the floor area of 60% of turnover" reflected an arms-length commercial rent for the area licensed but saw it instead as a source of profit to Vigdor.
The decision in Holland
(a) was there a "leasing or letting of immovable property" within the meaning of Article 13B(b)?
- This was dealt with by the Tribunal in paragraphs 29 to 31 of the decision. In paragraph 29, after noting that by clause 4.4.2 of the agreement the licensee was not given exclusive possession of his/her designated area or of the salon and that by clause 5.2 he/she was not entitled to exclusive occupation or possession of the designated area, the Tribunal said this:
"We have found as a fact that the other stylists and their clientele do cross a particular stylist's designated area. That stylist could not prevent the others and as a matter of fact does not do so. There are, in any event, no lines on the floor marking the territory of a particular stylist and the markings on the plan in Claire Steele's agreement are imprecise."
During argument before me there was a dispute between counsel over whether the Tribunal's observation that "that stylist could not prevent the others…" (ie from crossing a particular stylist's designated area) was a finding of fact or a conclusion of law. I am of the view that, given its context (a series of findings of fact including, in case there be any doubt, the findings in the last sentence of that paragraph), the observation was, like the others, a finding of fact: the stylist could not in practice prevent other stylists from crossing her area and as a matter of fact did not prevent others from crossing her area.
- The Tribunal went on in paragraph 30 to refer to the ruling of the ECJ in Belgian State v Temco Europe SA (Case C-284/03) [2005] STC 1451 ("Temco") on the characterisation of a "letting of immovable property" within the meaning of Article 13B(b) as "essentially the conferring by a landlord on a tenant, for an agreed period and in return for payment, of the right to occupy as if that person were the owner and to exclude any other person from enjoyment of such a right…". The Tribunal next asked the following question: "…assuming there were an acceptable delineation of the particular designated area, does the restriction of the stylist's exclusive occupation, ie the freedom given to other stylists to cross a particular stylist's designated area, displace that stylist's right of exclusive occupation of that area of property?" Then, after quoting further from the judgment in Temco, the Tribunal said this:
"This brings us as the national court back to the reality of the situation. The other people who come on to a particular stylist's designated area are not just those specifically permitted under the agreement (ie the Owner); they include anyone who is lawfully in the salon. The stylist does not enjoy a monopoly over her designated area and, as the Advocate General commented in the last sentence of paragraph 22 of his opinion in Temco:
'The decisive factor is the monopoly enjoyed by the tenants, who are seen by everyone to be in possession of the leased property…'
Unlike the three co-occupying companies in Temco the stylist has, if anything, a lesser status. She is a user of the chair and of some of the surrounding area designated to her by the agreement. We see the situation as one where, to use the words of Lord Nicholls in Sinclair Collis [2001] STC 989 in paragraph 35, 'the licence is more naturally to be regarded as a licence to use land rather than licence to occupy land.'"
- The Tribunal therefore concluded, in paragraph 31, that "for those reasons" they did not think that the purported "licence" in the agreement was an exempt supply within Article 13B(b)".
(b) was there a single supply and, if so, what was its character?
- The conclusion that there was no exempt supply within Article 13B(b) meant, as the Tribunal pointed out, that the overall matter was resolved against Mr Holland since all of his supplies to the stylists were standard-rated. But in case that conclusion should be wrong and there was indeed an exempt letting the Tribunal proceeded, in paragraphs 33 to 39, to consider (a) whether there were separate supplies of the licence and of the other services set out in the schedule to the agreement and (b) if not, and there was only a single supply, whether that supply was to be characterised as that of the licence, ie as exempt.
- The Tribunal began by summarising the consideration that Mr Holland agreed to give to the stylists in return for the payments by them:
"34. Mr Holland is the owner of the salon premises. As well as making supplies to his own clients, he provides all the facilities of his up-and-running salon to the stylists to enable them to carry on their trade. He is solely responsible for paying the business rates and for compliance with health and safety regulations etc. He contracts with the utility companies for electricity, water and drainage supplies. He hires in the telephone and computer booking connection and engages a laundry service. He owns the chairs, mirrors, basins, washroom facilities, reception desk and seats for waiting clientele. He provides access to storage space and to toilets and washrooms. He employs the juniors and engages the cleaners. The stylist who enters into the agreement with Mr Holland gets the benefit of the right to use all those features."
- In paragraph 35 the Tribunal then summarised the contentions of HMRC on how that consideration was to be regarded, ie as a single supplier, and, in paragraph 25, how, if that contention were correct, the single supply was to be characterised:
"35. The Customs say that the consideration provided by Mr Holland to the stylists is to be regarded as a collection of items that are, to use the words of the Court of Justice in paragraph 22 of the judgment in Levob Verzekeringen BV v Staatssecretaris van Financien (Case C-41/04) [2006] STC 266 'so closely linked that they form, objectively, a single indivisible economic supply, which it would be artificial to split'.
36. If the Customs were correct it would still be necessary to determine the character of that single supply. Its character may be that of one of the collection of elements; the argument for Mr Holland is that the licence to occupy the designated area characterises all the other constituent elements. Alternatively the true character of the single supply may, (as Warren J recognised in Byrom v Revenue and Customs Commissioners [2006] STC 992) and as Customs see the position here, be distinct from its constitute [sic] elements."
- The Tribunal next proceeded to set out more of the facts that they had found:
"37. Returning to the facts, we recall both Claire Steele and Melanie Brodrick accepting that they joined Mr Holland's salon to enable them to have access to more than a chair or chairs and space: they needed all the facilities listed in the schedule including shelving. Unless they had all those they could not carry on their own businesses. Claire Steele went further and admitted that even if there had been no reference to a licence she would have been happy with that; she was indifferent to how the fees payable under the agreement were described. Their evidence demonstrates that they, as recipients of Mr Holland's service, wanted a joined-up supply of the whole range of the constituent elements."
- The Tribunal then reached conclusions on the two issues identified in paragraphs 35 and 36. They did so in the following terms:
"38. Looking at the matter from the 'economic point of view' (see Card Protection Plan at paragraph 29) and Levob at paragraph 22 we see every one of the constituent elements as essential contributors to a single supply being made by Mr Holland to the stylists. That supply is access to an up-and-running hairdressing and styling salon; it comprises 'the services of a hairdressing business' (see clause 4.6.2 of the Agreement) with the right to make use of all its facilities. It is essentially an all-or-nothing supply. The chair and the mirror in the designated area will be useless to the stylists without all the other facilities; and those other facilities are pointless without access to a chair and mirror for which the stylist can carry on business.
39. Those features persuade us that Mr Holland made a 'single indivisible economic supply' (see Levob at paragraph 22) to the stylists in return for two elements of consideration, ie the licence fee and the service charge. That supply comprised all the constituent elements and was a supply to the stylist in question of the right to make use of the salon in conjunction with the other stylists for the purposes of carrying on their businesses. To the extent that there was a letting or leasing of immovable property as one of the constituent elements, the characteristic of that is displaced by the character of the single indivisible supply."
- The conclusion reached, that there was a single supply only which was not to be characterised by any element in it as a letting of immovable property, meant that the appeal failed even if there was a letting of immovable property.
The decision in Vigdor
- As with their decision in Holland the Tribunal dealt with the two issues of an exempt letting and whether there was a single supply as discrete matters.
(a) the exempt letting point
- The Tribunal set out their conclusions on whether there was an exempt letting of immovable property in paragraphs 19 to 25 of the decision. In paragraphs 17, 19 and 20 they referred to various passages of the judgment in Temco and in particular to the need, identified in Temco, for "exclusivity" as a key factor in the concept of a letting of immovable property within Article 13B(b).
- In paragraph 21 the Tribunal asked themselves whether, having regard to paragraph 19 of the judgment in Temco, it could be said of the right granted to the stylist under the licence agreement that it gave her the right to occupy an "area-floorspace" as if she were the owner and to exclude any other person from enjoyment of such a right of occupation. The Tribunal then continued:
"The answer seems to us to be - No. The consideration of all the circumstances …reveals that other stylists are free to use a particular stylist's area floorspace. There are no floor markings in the defined area. Other stylists will cross over the floor space of a particular stylist. Vigdor may use a particular self-employed stylist's floor space by allocating its own employed stylists to bring their own clients downstairs so that the styling can take place in the discrete surroundings of the basement room."
- In paragraph 22 they referred to the facts in Temco in order to state, by way of contrast, that in Vigdor "the area-floorspace could be freely accessed by anyone lawfully in the salon and not just by Vigdor as landlord". Thus, the Tribunal concluded that the licence agreement, insofar as it conferred a licence to occupy, lacked the necessary attribute of exclusivity.
- In paragraph 23 and 24 of the decision, the Tribunal considered whether the licence agreement fulfilled another requirement of a letting of immovable property, namely that it was to be distinguished from activities best understood as "the provision of a service rather than simply the making available of property". The Tribunal said this:
"23. Vigdor's functions as licensor are not performed in a 'passive manner' (see paragraphs 20, 23 and 27 of the Temco judgment). Vigdor runs an active hairdressing salon and exploits the floor space by making it available as a service for the self-employed stylists; those stylists use the facilities of the salon as well as the floorspace in conjunction with others involved in Vigdor's business.
24. Mr Edmund King went on to suggest that the wider licence given by Vigdor to the individual stylist to occupy the entire salon was an exempt supply. That cannot, we think, be right. The arrangements in relation to the entire salon were the reverse of exclusive to the individual stylists. They were shared with Vigdor and its employed stylists and clients as well as with the other self-employed stylists. Access to the salon and all its facilities was, to use the Court's words in paragraph 20 of Temco, 'the provision of a service rather than simply the making available of property'."
- In the result therefore the Tribunal determined - see paragraph 25 - that there was no exempt letting of immovable property to the stylists. This meant that the licence supply was standard-rated.
(b) was there a single supply?
- Having come to that view Vigdor's appeal failed and the Tribunal had no need to consider whether for VAT purposes the arrangements between Vigdor and the individual stylists gave rise to a single or composite supply and, if so, what its characterisation was. But it proceeded nevertheless to do so. Since the decision on this point (headed "was there a separate exempt supply?") is so short it is convenient to set out in full what the Tribunal said:
"26. The starting point is to recognise the presumptive rule in paragraph 29 of the Court's judgment in Card Protection Plan…that all supplies be regarded as distinct and independent. But, to address the question in the same paragraph, would the VAT system be distorted if what was in substance a single service from an economic point of view were artificially split? We think that the system would be distorted. The licence to occupy the area floor space…is artificial. There is no defined area, no duration and no real exclusivity. It is virtually irrelevant to the stylist's needs that an 'area-floorspace' is referred to in that agreement. What the stylist wants is a chair and mirrors, lighting, heating and water, use of the reception facilities and of stock in the dispensary and a laundered towel service. The agreement has sought artificially to split the already artificial floorspace licence from the real service of salon facilities. There would therefore be no distortion of the VAT system if Vigdor's supply to the stylist were treated as one single composite supply.
27. The reality here is that Vigdor has been exploiting its managed salon in the course of its business by making chair space available to self-employed stylists and by giving them access to the facilities required to enable them to conduct their businesses. There are two elements to the consideration given by the stylist. However, no separate negotiation on the deal took place as to the amount of rent to be paid for the floorspace area. The total amount payable was a package. The two elements are, we think, inseverable. The stylist would not be able to comply with his or her undertaking to operate his business in the salon (see clause 1 of the agreement) without the floorspace; and the licence of the floorspace would be useless to both parties unless the stylist is committed to work there. It follows that the services supplied by Vigdor in return for the payments to be made by the self-employed stylist are so closely linked from an economic perspective as to constitute a single supply for VAT purposes: see paragraph 12 of the speech of Lord Rodger in College of Estate Management v C & EC [2005] STC 1597 and paragraph 22 of the judgment of the Court of Justice in Levob …at paragraph 22."
- It will be observed that the Tribunal merely decided that there was a single supply for VAT purposes. They did not grapple, at any rate in any explicit manner, with the further question: assuming it was a single supply, how was it to be characterised? For it is only in the event that, given a single supply, the supply takes its character from the exempt letting element that the further issue has any materiality. The nearest the Tribunal got to that question is their description, in the penultimate sentence of paragraph 26, of the single supply as "the real service of salon facilities".
Exempt licence
(a) the relevant law
- It was common ground that the exemption from VAT enjoyed by the "grant of any interest in or right over or any licence to occupy land" conferred by item 1 of Group 1 of Schedule 9 to the 1994 Act is to be interpreted in accordance with the wording and purpose of Article 13B(b) which it was enacted to implement. How then is the concept of "the leasing or letting of immovable property" - which is how the exemption is worded in Article 13B - to be understood? Rather than go over the relevant authorities and explain in my own words the principles to be extracted from them, I am content to adopt the following summary - which neither side questioned - set out in the recent decision of Briggs J in Revenue and Customs Commissioners v Denyer [2007] EWHC 2750 (Ch); [2008] STC 633 ("Denyer") at [19]:
"(1) Because art 13B(b) confers an exemption from VAT, it must be strictly construed, but not so strictly as to deprive the exemption of its intended effect: see Belgium v Temco Europe SA (Case C-284/03) [2005] STC 1451, [2004] ECR 1-11237, para 17 of the judgment of the Court of Justice.
(2) In common with other exemptions in art 13, this exemption is to be given a meaning independent of the definitions used in the legal systems of any particular Member State, and it must be derived from an interpretation of the exemption in the light of its context, and of the objectives and the scheme of the Sixth Directive: see Temco at paras 16 and 18.
(3) The concept of the letting of immovable property within the meaning of art 13B(b) is essentially 'the conferring by a landlord on a tenant, for an agreed period and in return for payment, of 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 Temco at para 19 and Sinclair Collis Ltd v Comrs of Customs and Excise (Case C-275/01) [2003] STC 898, [2003] ECR 1-5965, para 25.
(4) The letting of immovable property is characteristically 'a relatively passive activity linked simply to the passage of time and not generating any significant added value', to be distinguished from other activities which are either industrial and commercial in nature, or which 'have as their subject matter something which is best understood as the provision of a service rather than simply the making available of property'. See Temco at para 20 and, as an example of the provision of a service, the right to install cigarette machines in commercial premises examined in Sinclair Collis at paras 27-31.
(5) The right to occupy an area or space for a period of time may not be a letting of immovable property if it is merely the means of effecting the supply which is the principal subject matter of the relevant agreement: see Sinclair Collis at para 30.
(6) There may be a de minimis limitation on the exemption in art 13B(b) such that, for example, the conferring of a right to the exclusive use of a table in a Dutch coffee shop, for the purpose of selling narcotics, is inherently incapable of being a letting of immovable property: see the opinion of Advocate General Fennelly in Staatssecretaris van Financien v Coffeeshop Siberie vof (Case C-158/98) [1999] STC 742, [1999] ECR I-3971, para 36, applied by Lord Slynn in Customs and Excise Comrs v Sinclair Collis Ltd [2001] UKHL 30 at [15], [2001] STC 989 at [15] in the House of Lords.
(7) An agreement may fall short of being a letting of immovable property if, on analysis, it confers merely a licence to use rather than to occupy land: see Sinclair Collis per Lord Nicholls at [35].
(8) An agreement is not disabled from being a letting of immovable property merely because the grantee's exclusive use is subject to conditions (such as a landlord's right to enter and inspect), or because it includes the right to use parts of the landlord's property in common with other occupiers: see Temco at para 24."
Denyer was, like the present cases, concerned with stylists trading as self-employed hairdressers from premises provided by the taxpayer. I shall have occasion to return to that decision later in this judgment. It will be observed from that summary that the decision of the ECJ in Temco sets out, in the paragraphs to which Briggs J referred, most of the relevant principles by which the national court is to be guided in deciding whether there is an exempt letting.
- Mr Edmund King, appearing for the appellant taxpayers, pointed out, by reference to an observation of Lord Millett in Customs and Excise Commissioners v Sinclair Collis Ltd [2001] UKHL 30, [2001] STC 989 at [49] ("Sinclair Collis"), that an exempt licence can consist of a very small space such as a kiosk or shop counter (although not, as in that case, a movable cigarette machine which the licensor was entitled within certain limits to move around). He also submitted that it does not follow that there is no exempt supply merely because other services are provided together with the licence to occupy. In this respect he referred me to the opinion of Advocate General Jacobs in Swedish State v Lindopark AB (Case C-150/99) [2001] STC 103 ("Lindopark"). That case was concerned with the running of a commercial golf course by Lindopark which offered its customers who were exclusively business undertakings wishing to provide their staff and clients with rounds of golf at the golf course, the right in return for a membership fee to book rounds on the golf course for persons selected by them. One of the questions was whether Lindopark's business fell within the exemption provided by Article 13B(b). The Advocate General considered that it did not. In paragraphs 31 to 35 of his opinion, he said this:
"31. First, there is the general question whether the transaction should be regarded as the occupation of the immovable property or as the supply of services for which the property is an incidental, albeit essential, prerequisite.
32. An example of that distinction might be provided by comparing the provision of accommodation in a hotel - which could be considered to fall within the Community definition of leasing and letting for these purposes on the ground that otherwise there would have been no need to exclude it from the exemption - with the provision of a meal in the hotel restaurant. Whereas the occupation of a hotel bedroom for one or more nights (or even for a shorter period) may well be classified as a let in various legal systems, this is unlikely ever to be the case for the consumption of a meal in the public dining room in the same hotel. In the case of the occupation of a bedroom, the dominant feature of the contract is the use of the premises, whereas in the case of the restaurant meal the dominant feature is the provision of the meal, no matter how important the decor or other facilities may be in the customer's choice of venue.
33. Into which of those categories did Lindopark's transactions fall?
34. It is clear that some transactions making sports facilities available may constitute leasing or letting of immovable property, while others do not. If a sports field belonging to a private owner is placed at the exclusive disposal of a club or other sporting entity for a lengthy period in exchange for payment, that clearly falls within the definition. Where, however, an individual pays an entrance fee to gain transient access, amongst other individuals, to a public swimming pool, it would be stretching the concept beyond any reasonable limit to regard such a transaction as leasing or letting.
35. A similar contrast may be drawn with specific regard to a golf course. If a person or entity were to pay for the exclusive use of a course for a specified period - say, in order to organise a tournament or championship - with a concomitant right to charge entrance fees for players and/or spectators, that would appear to partake fairly clearly of the nature of a lease or let. The same would not apply, however, to the casual golfer or group of golfers coming to play a round. Whilst it is obviously difficult to play golf without a course to play it on, the service provided in that case is the opportunity to play the game and not the opportunity to occupy the course. Indeed, a golfer may be thought of not as occupying the course in any sense but as traversing it…"
- Mr King's purpose in referring to Lindopark was to draw attention to the Advocate General's observation that, but for its inclusion as one of the exceptions to the exemption provided by Article 13B(b), the hire of a hotel room would fall within the scope of that exemption because otherwise there would have been no need to exclude it from the exemption and that this is so notwithstanding that a large number of other services are invariably provided along with the accommodation itself.
- I am not concerned with the provision of hotel accommodation but, in any event, I am far from persuaded that the point with Mr King sought to draw from the citation in Lindopark is valid. In a footnote to the opinion (to be found at [2001] STC 112) it is stated that:
"…the fact that art 13B(b)(1) excludes the provision of hotel or similar accommodation from the exemption does not necessarily imply that the provision of all such accommodation would necessarily have fallen within the exemption; it may be that the Community legislator merely sought to ensure that such accommodation was always treated in the same way, regardless of whether it fell within the definition of 'leasing and letting' or not."
See also paragraph 66 of the judgment of the ECJ in EC Commission v United Kingdom (C-359/97) [2000] STC 777 at 805. Moreover, in its judgment in Lindopark, after emphasising that the exemptions provided by Article 13 are to be interpreted strictly, the ECJ went on to state:
"26. Second, services linked to the practice of sport or physical education must, so far as is possible, be considered as a whole. According to the case law of the Court of Justice, in order to determine the nature of a taxable transaction, regard must be had to all the circumstances in which the transaction in question takes place in order to identify its characteristic features (see Faaborg-Gelting…). As the Commission has rightly pointed out, the activity of running a golf course generally entails not only the passive activity of making the course available but also a large number of commercial activities, such as supervision, management and continuing maintenance by the service provider, provision of other facilities and so forth. In the absence of quite exceptional circumstances, letting out a golf course cannot therefore constitute the main service supplied."
In other words, the provision of a range of other activities along with the activity of making the course available would ordinarily mean that the supply was not to be treated as an exempt supply within Article 13B(b) since it was necessary to have regard to all of the circumstances of the transaction in order to determine its essential nature. This is a matter to which I will return later in this judgment.
(c) the Tribunal's findings and the appellant's criticisms
- The question debated before me was not whether the Tribunal misstated the applicable law but whether, in reaching their conclusions in each of the two appeals that there was no exempt licence, they misapplied those principles to the facts as found by them.
- Mr King submitted that the Tribunal's findings relevant to whether there was a exempt licence within Article 13B(b) set out in paragraphs 29 and 30 in Holland (and summarised and commented upon at paragraphs 32 to 34 above) and in paragraphs 21 to 24 in Vigdor (and summarised at paragraphs 43 to 45 above), insofar as they are findings of fact, did not justify the conclusion reached. Reduced to their essentials, Mr King made the following points. First, given the terms of the written agreement in Holland and of the equivalent agreement in Vigdor, there was no justification for the conclusion that a stylist did not have and was not entitled to exercise the right to exclusive occupation of the area allocated to her by the agreement (including a right, if necessary, to exclude anyone else from using the chair or chairs allocated to her) because it might be difficult to identify on the ground precisely what the area was that had been allocated to that stylist. Second, the fact that it could not be said with certainty what the boundaries on the ground were of the stylist's allocated area did not mean that that stylist did not have an allocated area at all: there would be an irreducible minimum, for example the chair or chairs, that was unquestionably within the area allocated to that stylist. Third, insofar as the Tribunal found that the stylist could not exclude anyone else from using her area, that was a conclusion of law which had no justification in fact. Fourth, the fact that other stylists and their clientele, including Mr Holland when acting as a stylist, might be entitled to and did cross a particular stylist's area did not detract from such exclusivity of occupation since, as paragraphs 24 and 25 of the ECJ judgment in Temco showed (referred to in paragraph [19] of Denyer at point (8) of Briggs J's summary), a licence was not prevented from being an exempt licence merely because the licensee's use is subject to restrictions or because part of the area let might be used in common with others. In Denyer Briggs J had observed (at paragraph [24]) that "Proof of occupation of demised premises is not undermined merely by evidence that persons other than the tenant had a right of way over the locus in quo or a right to inspect." Fifth, there was no finding that indicated that such joint use by other stylists and their clientele extended to the irreducible minimum part of the area allocated to the stylist. Sixth, the fact that in Holland, in the circumstances defined by clauses 5.3 and 5.4 of the agreement, Mr Holland (as licensor) was specifically authorised to use the area allocated to the stylist and that, in Vigdor, the self-employed stylists used each other's chairs while those others were absent and that Vigdor's own employees used such chairs if vacant, did not mean that the stylists did not have exclusive occupation of their respective areas. See again Temco at paragraphs 24 and 25. In this regard, Mr King compared Marselisborg (Case C-428/02) (3 March 2005) with Walderdorff v Finanzamt Waldviertel (Case C-451/06) (6 December 2007). In Marselisborg, but for the application by analogy of one of the exceptions to the exemption conferred by Article 13B(b), the ECJ considered that a water-based mooring berth in a harbour would fulfil the definition of immovable property within the meaning of that article notwithstanding that the licensor was entitled to allocate the mooring berth to a third party during the temporary absence of the berth's licensee. The limited right of temporary use by the licensor of the mooring berth did not detract from the necessary need for exclusivity. In Walderdorff by contrast, because the grantor of fishing rights to an angling club in specified waters reserved to herself and one guest per day the right to fish in the same waters, the ECJ held that the necessary requirement of exclusivity of occupation was missing. The fact that the angling club had to allow the grantor (and the person authorised by her) to enjoy the same access, enjoyment and use of the fishing waters was inconsistent with the need for exclusivity. He submitted that the limited right of use by Mr Holland of the allocated area pursuant to clauses 5.3 and 4 of the agreement was on the Marselisborg side of the line.
- He submitted that Temco showed that the sharing of premises by three companies, without any allocation of the property as between the three (which was the situation in Temco), did not have the consequence that each licence lacked the necessary requirement of exclusivity. The facts in Holland and Vigdor were, he submitted, to that extent a fortiori in that each stylist had an allocated area even if the boundaries of each area could not be determined with precision and another stylist and her clientele could cross that area.
(d) conclusions
- The Tribunal's decision whether in each case there was an exempt licence involved a mixed question of fact and law. An appellate court must therefore proceed with caution before finding, in the absence of some misdirection of law, that it was one that the Tribunal should not have reached. I bear in mind the warning, repeatedly made in the authorities, that sitting in an appellate capacity I should not interfere if the decision was one which the Tribunal, properly directed, could have reached merely because I might have reached a contrary conclusion on the Tribunal's findings. I also bear in mind, as applicable to the question which the Tribunal had to answer, the observations of Lord Walker of Gestingthorpe in College of Estate Management v Customs and Excise Commissioners [2005] UKHL 62, [2005] STC 1597 ("College of Estate Management") at [36] that:
"The Tribunal saw and heard the witnesses giving their oral evidence. Not every nuance of a first-instance tribunal's assessment of the evidence can be conveyed in its written reasons, however carefully prepared …: characterisation of supplies for VAT purposes, like question of obviousness in patent law, involves applying an abstract categorisation to a sometimes disparate aggregation of primary fact…"
It is all too easy to analyse and then criticise as inadequate or irrelevant every finding of fact made by the Tribunal with a view to submitting that the overall conclusion is wrong. Where, as here, there is no material misdirection of law, it is necessary, I think, to step back and consider the Tribunal's findings of fact as a whole when asking the broad question whether the Tribunal were entitled to conclude that the arrangements gave rise to an exempt licence.
- Adopting that approach I am of the view that the overall conclusion in each appeal - that there was no exempt licence - was one which the Tribunal were fully entitled to reach.
- The Tribunal were entitled, indeed bound, to consider how the agreements between the owners and stylists operated in practice. In Vigdor, the Tribunal noted that the stylist's area-floorspace was not defined in the agreement and inferred that exclusive use of the floorspace was not part of the arrangement between Vigdor and the stylists. On a fair reading of the decision in that case, the Tribunal, in my view, were entitled to consider that the only area that could possibly be identified as exclusive to a given stylist was the chair itself. They found that the stylists were free in practice to use the empty chair of another stylist if that other stylist was absent. They also found that it was a matter between the stylists whether and to what extent they swapped their chairs and that Vigdor itself was in the habit of using an empty chair without consulting the self-employed stylist whose chair it was. They noted that when the salon was flooded "which was frequent" chairs upstairs would be made available to the affected stylists. Overall the state of affairs described by the Tribunal was one which, in my view, amply justified the conclusion that, looking simply at the Article 13B(b) issue, there was in reality no exempt licence.
- The position in Holland was less clear cut. Insofar as the agreement in that case sought to set out the area allocated to the stylist, the area was incompletely defined. It was also undifferentiated on the ground. It was quite different from a specified room, or a clearly defined kiosk or even a particular shop counter. The Tribunal considered that the licence each stylist enjoyed was, in the words of Lord Nicholls in Sinclair Collis [2001] STC 989 at paragraph [35], "more naturally to be regarded as a licence to use land rather than a licence to occupy land". The key finding leading to that conclusion was the freedom in practice of anyone in the salon to cross over a stylist's allocated area, insofar as that area could be identified on the ground. In evaluating that conclusion it is necessary to consider the position as a matter of common sense. From the floor plan attached to the agreement in evidence the chairs were in close proximity to one another in what was an open-plan arrangement which was shared with a reception and waiting area and which possessed, at the narrower end of the room, a small space set aside for hair washing etc. The salon was for the use of the stylists, their clientele and support staff. In my view, the Tribunal were entitled to conclude that what each stylist received was no more than a licence to use the chair allocated to that particular stylist and find, echoing paragraph 22 of the Advocate General's opinion Temco, that the stylist did not enjoy a monopoly over the area, so far as ascertained, which had been allocated to her by her agreement. I certainly do not consider that any misgivings that I feel about the ampleness of the findings of fact or the sufficiency of the reasoning should lead me to upset their conclusion on this issue.
- I am also of the view, for what the point is worth, that the Tribunal were entitled to consider that the stylists had, if anything, a lesser status than the three co-occupying companies in Temco. The point which Mr Singh emphasised about the decision in Temco was that, although the three companies shared the property in question without having some part of it allocated exclusively to any one company (as distinct from the other two) that state of affairs was one which arose by virtue of the agreements entered into by the lessor company with the occupying companies which, moreover, were companies sharing the same management. Here, by contrast, the freedom of other stylists and their clientele to cross a particular stylist's allocated area happened as a matter of routine practice without the stylist preventing or feeling able to prevent it; it did not occur by virtue of any restriction in the particular stylist's agreement or by virtue of some general right in law. Given the layout of the salon, it was bound to happen.
Single supply: was there one and, if so, how was it to be characterised?
(a) the relevant law: analysis and submissions
- A convenient starting point is, once more, a judgment of Briggs J, this time in Tumble Tots (UK) Ltd v Revenue and Customs Commissioners [2007] EWHC 103 (Ch); [2007] STC 1171 ("Tumble Tots") where he summarised the applicable principles. I can do no better than set out what he said (at [11]):
"(1) the identification of the taxable supply or supplies made by the taxpayer pursuant to a particular transaction is, at least where the transaction consists of a contract, limited to the goods and or services provided by the taxpayer for which the payment is consideration. This is because art 2 of EC Council Directive 77/388 (the Sixth Directive) subjects the supply of goods and services to VAT only if made for a consideration; (2) prima facie every supply of a good or of a service must normally be regarded as distinct and independent: see Card Protection Plan v Customs and Excise Comrs (Case C-349/96) [1999] STC 270, [1999] 2 AC 601, para 29 of the judgment; (3) none the less the functioning of the VAT system would be distorted if what is in substance a single service from an economic point of view were artificially split (Card Protection Plan, para 29); (4) the relevant transaction must be analysed with due regard to all the circumstances in which it takes place: Card Protection Plan [1999] STC 270, [1999] 2 AC 601, para 28 of the judgment. Over-zealous dissection and analysis of particular clauses should be avoided: see Card Protection Plan on its return to the House of Lords (see [2001] UKHL 4 at [22], [2001] STC 174 at [22], [2002] 1 AC 202 at [22]); (5) the essential features of the relevant transaction must be ascertained in order to determine whether the taxable person is supplying the customer, being a typical customer, with several distinct principal services or with a single service: see Card Protection Plan v Customs and Excise Comrs (Case C-349/96) [1999] STC 270, [1999] 2 AC 601, para 29 of the judgment; (6) the fact that the goods and/or services are supplied in consideration of a single price may suggest that for VAT purposes there is a single supply, but this is not decisive: see Card Protection Plan v Customs and Excise Comrs (Case C-349/96) [1999] STC 270, [1999] 2 AC 601, para 31 of the judgment, and see also the Levob case where the component parts of a single VAT supply were split into separately priced items; (7) where elements of the consideration are ancillary to another element or elements which is or are identified as the principal service, then there will be a single VAT supply of the principal service, and the ancillary elements will be treated as part of that principal supply. A service will 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 Card Protection Plan v Customs and Excise Comrs (Case C-349196) [1999] STC 270, [1999] 2 AC 601, para 30 of the judgment; (8) it does not follow that every distinct part of the goods or services provided pursuant to a transaction is a separate supply for VAT purposes unless it is 'ancillary'. Separate non-ancillary parts of the consideration provided pursuant to a transaction may be so closely linked from an economic perspective as to constitute a single supply for VAT purposes: see College of Estate Management v Customs and Excise Comrs [2005] STC 1597 at [12] and [30]-[33] per Lord Rodger and Lord Walker respectively; and Levob Verzekeringen BV v Staatssecretaris van Financien (Case C-41/04) [2006] STC 766, paras 21-22. Paragraph 22 is worth quoting in full. Following the reference to the distinction between principal and ancillary supplies established in Card Protection Plan, the ECJ continued:
'22. The same is true where two or more elements or acts supplied by the taxable person to the customer, being a typical customer, are so closely linked that they form, objectively, a single, indivisible economic supply, which it would be artificial to split.'
(9) in circumstances where the application of the principle in sub-para (8) above leads to the identification of a single supply, its character for VAT purposes may be that of one or other of the constituent elements, if predominant. Alternatively it may have a unique character enjoyed by neither of the constituent elements: see Byrom (t/a Salon 24) v Revenue and Customs Comrs [2006] EWHC 111 (Ch) at [46]-[48] and [51], [2006] STC 992 at [46]-[48] and [51], per Warren J; (l0) where it is necessary for the application of the above principles to identify the essential features of the consideration for a payment which consists of the right or opportunity to participate in a scheme conferring a range of benefits, it is 'perhaps' useful to ask 'why objectively people are likely to want to join it': per Lord Slynn in Card Protection Plan, on its return to the House of Lords (see [2001] STC 174 at [25], [2002] 1 AC 202 at [25]."
- Mr King questioned the accuracy of that summary in two respects. The first was Briggs J's seventh point. There is, said Mr King, a further requirement for a service to be regarded as ancillary to a principal service. That is that the ancillary service should not take up more than a marginal part of the consideration. He relied for this on Madgett and Baldwin (Cases C-308/96 and C-94/97) [1998] STC 1189 and on the reference to that decision in the judgment of the ECJ in Finanzamt Heidelberg v Ist (Case C-200/04) [2006] STC 52 ("Heidelberg") at paragraphs [26] to [28]. I see force in the submission but I do not need to decide the point since neither side has suggested that, if there is a single supply, it is because there is a principal element to which the other elements are no more that ancillary, ie are a means of better enjoying the principal element of the supply.
- The second of Mr King's challenges was to Briggs J's ninth point, in particular his statement made in reliance on what was said by Warren J in Byrom (t/a Salon 24) v Revenue and Customs Commissioners [2006] EWHC 111(Ch); [2006] STC 992 ("Salon 24") at [46] - [48] and [51] that where there is a single supply that supply may for VAT purposes have a unique character enjoyed by neither (or none) of its constituent elements. Mr King submitted that that proposition has no support in Community Law jurisprudence and indeed was contrary to what was said in Levob Verzekeringen BV Staatssecretaris van Financien (Case C-41/04) [2006] STC 766 ("Levob"). What Briggs J should have stated in the ninth point of his summary was that the character for VAT purposes of a single supply made up of more than one element must (not may) be that of its predominant element.
- Mr King's challenge was not simply to the formulation by Briggs J of his ninth point which, as I have mentioned, was based on what Warren J had concluded in Salon 24 but also, and more particularly, to the reasoning which had led Warren J to that conclusion.
- In Salon 24 the taxpayers controlled a massage parlour from which self-employed women offered their services to clients. The building comprised toilet facilities, a day room or lounge for use by the masseuses awaiting their clients, a changing room, a shower room (which contained a washing machine and drier), a seating area for clients awaiting masseuses' services, three or four rooms in which masseuses entertained clients, and an additional room for masseuses to entertain their clients. The taxpayers provided basic bed linen and towels. They entered into written contracts with masseuses wishing to offer massage services under which the masseuse paid "rent" for a room on days chosen by her. The taxpayers advertised the services of the masseuse. They also offered parking for customers and employed a receptionist and were responsible for the security of the premises and for cleaning and maintaining them and for heating and lighting. The tribunal below dismissed the taxpayers' appeal against the Commissioners' decision that the taxpayers made standard-rated supplies for the purposes of VAT. The tribunal held that the supply by the taxpayers was not of an exempt licence to occupy land but was a single supply of a package of elements of which the dominant part was the taxable supply of services to which an incidental part was the supply of a room. The taxpayers' supplies were therefore standard-rated. The taxpayers appealed but their appeal was dismissed by Warren J.
- It was common ground between the parties in Salon 24 that there was only one supply, not a series of separate supplies. The question therefore was how that single supply was to be classified for VAT purposes. It also appears to have been common ground between the parties that, at any rate viewed separately from the rest of what the taxpayers supplied, the grant to the masseuses of the right to use a room in which to entertain their clients was capable of amounting to an exempt licence to occupy land under item 1 of Group 1 of Schedule 9 to the 1994 Act. The taxpayers contended before Warren J, as they had before the tribunal below, that the various services were ancillary to the licence given to each masseuse to occupy a room in which to entertain her clients.
- In the course of his judgment, Warren J reviewed the relevant law on the categorisation for VAT purposes of a package of services. I can conveniently take up the review at the point where Warren J referred to the decision in Levob. He explained that that case concerned the importation of software which Levob had obtained from an American supplier, that the software concerned was basic software for use in the management of insurance contracts which Levob sold and that the software had been imported by Levob into Holland where, in accordance with the contract, it was customised and installed and Levob personnel trained in its use. He then explained the question which the national court in that case sought to have answered. That was "whether the provision of standard software developed, put on the market and recorded on a carrier by the supplier and its subsequent customisation by the supplier to the purchaser's requirements, in consideration of the payment of separate prices …are to be regarded as two distinct supplies or as one single supply and, in the latter case, whether that single supply is to be classified as a supply of services". This is what Warren J then said:
"[38] After referring to its decisions in Faaborg-Gelting Linien and Card Protection Plan Ltd, the Court of Justice in Levob noted (see para 21 of the judgment) that there is a single supply in particular cases where one or more elements are to be regarded as constituting the principal supply, whilst one or more elements are to be regarded, by contrast, as ancillary supplies which share the tax treatment of the principal supply. The same is true (see para 22) where two or more elements or acts supplied by the taxable person to the customer, being a typical consumer, are so closely linked that they form, objectively, a single indivisible economic supply, which it would be artificial to split.
[39] The economic purposes of the transaction had been identified by the national court as the supply of functional software specifically customised to that consumer's requirements (see para 24). It was not possible, without entering into the realms of the artificial, to take the view that such a consumer had purchased, from the same supplier, first the pre-existing software which as it stood was of no use for the purposes of its economic activity, and only subsequently the customisation, which alone made that software useful to it. Accordingly, there was a single supply (see para 26).
[40] In identifying whether the single complex supply was one of services (it was important to know whether there was a supply of goods or a supply of services) it is vital to determine the predominant elements of the supply (see para 27)."
So Warren J had very much in mind the importance of identifying the predominant element of a single complex supply in determining whether the supply is of goods or services. He continued:
"The national court had correctly concluded that there was a supply of services since, far from being minor or ancillary, such customisation predominated because of its decisive importance in enabling the purchaser to use the software customised. I remark that clearly if there was a single supply, it was either of goods or of services. The European VAT legislation does not contemplate a single supply which is a supply of both goods and services. The choice therefore has to be determined in some way and predominate purpose has been adopted as the touchstone. It is a very different question from the question which was not addressed by the ECJ in Levob or indeed in Card Protection Plan Ltd of how to ascertain the VAT treatment of a single supply which comprises several elements and in particular whether a single supply falls within an exemption; the fact that a single supply has a predominate element which, by itself, would attract an exemption does not necessarily mean that the overall single supply does so."
In other words, Warren J was making a distinction between determining whether a single complex supply is of goods or services and, having resolved that issue, determining what the tax treatment should be of the composite supply. He turned next to consider that issue:
"[41] That question was considered by Laws LJ in Customs and Excise Comrs v FDR Ltd [2000] STC 672, para 55 (in a passage which did not form part of his actual decision):
'But there is, I think, one further complication. Where the core supply is on the table-top model - a congeries of supplies which are integral to each other or "indissociable" - it may not be self-evident from the description of the core supply at which the court or tribunal arrives what its tax treatment should be. In that case, it will be necessary to look again at the elements which comprise the core, and arrive at a decision on the facts whether, numerically if nothing else, the taxable or exempt elements predominate. Necessarily no such difficulty arises where the core supply is] I would add that the logic of that approach applies, it seems to me, equally to a classification of a supply as between zero- on the apex model.'
[42] I would add that the logic of that approach applies, it seems to me, equally to a classification of a supply as between zero-rated and exempt as it does as between exempt and taxable.
[43] Lord Rodger, in College of Estate Management, used the phrase an 'over-arching single supply' to describe the single supply resulting from several elements. Those words suggest that there may (and indeed I think often will) be a generic description of the supply which is distinct from the individual elements. In many cases the tax treatment of that over-arching single supply according to that description will be self-evident.
[44] Thus, in Dr Beynon and Partners, the single supply was of medical services (exempt) and there was no separate supply of drugs (zero-rated); the House of Lords may have considered that the tax treatment of the supply was self-evident but what is clear is that that decision says nothing about the sort of complication which Laws LJ addressed in para 55 of his judgment in Customs and Excise Comrs v FDR Ltd [2000] STC 672.
[45] Again, in College of Estate Management the House of Lords held that there was a single supply of education (exempt) and not a separate supply of printed materials (zero-rated). The House of Lords also held, of course, that the provision of the printed material was not ancillary to the provision of educational services, but formed a main part of that provision.
[46] It seems, therefore, that a single supply is capable, in some cases at least, of attracting a different tax treatment from that which would be attracted by even the main element within that supply. Where the nature of the over-arching supply is obvious, it is a straightforward exercise to look at Sch 9 to VATA and ascertain whether it attracts any of the exemptions, that is to say whether the description of the over-arching supply falls within the description of an exemption. That, surely, is one of the points which Laws LJ was making in para 55 of his judgment in Customs and Excise Comrs v FDR Ltd.
[47] What presents slightly more difficulty is the approach he advocates where the tax treatment is not self-evident. It is not easy to see how the second step - returning to the various elements to see what dominates - arises in practice (particularly where the single supply includes both services and goods: see para 40 above). Ordinarily, one would expect that the rejection of a predominant element as the supply to which all other elements are ancillary would entail the rejection of the description of that main element as the description of the overall supply; see again College of Estate Management where the rejection of the provision of books (the main element) as the supply resulted in the over-arching description of education being applied.
[48] It is possible to imagine a case where the single supply comprises several elements of which in isolation some would be exempt and some would be taxable. It might then be necessary to decide whether overall what was being purchased was exempt or not. But that, it seems to me, would be an exercise in applying the statutory provisions (ie Sch 9 to VATA) to the over-arching supply and does not really involve the second step which Laws LJ suggests. Certainly, a two-stage process was not hinted at by the House of Lords. The problem is that the approach of Laws LJ runs the risk of being circular since it could lead one back to identifying the supply with its main element, a conclusion which would already have been rejected. Further, it would clearly be wrong always to look at the main element of the supply as dictating its treatment since that would be inconsistent with the result in College of Estate Management. And yet, if the touchstone in difficult cases is to be the main or predominate element, why should that not be so in all cases?
[49] This issue is of significance in the present case. If Salon 24 are incorrect in their principal case that their supplies to the masseuses comprised an (exempt) supply of a licence to occupy land to which all the other elements identified by the tribunal were ancillary (in the sense established in the authorities), then it seeks to argue in the alternative that there is a single supply, call it if you will massage parlour services, to a masseuse in relation to which the predominate element is the supply of the room: and that the supply then takes its character, on the approach of Laws LJ, from the supply of the licence, ie it is exempt.
[50] It is submitted on behalf of Salon 24 that what Laws LJ meant, and was correct in saying, is that the main element does govern in cases of doubt. In the present case, it is said that if there is a single supply (and assuming that the elements other than the licence are not truly 'ancillary') then that is because the licence to occupy is the core of that supply, and the rest of the elements are 'merely integral' to that core; accordingly, the correct description of the single supply that has then been identified is a licence to occupy land. That, it seems to me, is really another, albeit attractive, way of saying what Laws LJ appears to be saying. But it does not meet the problems which I have discussed.
[51] Then it is said that to describe the supply by a composite phrase which does not appear in the legislation and then to seek that description in the schedules (ie to identify an exemption) is to make the same mistake as the tribunal made in Appleby Bowers (a firm) v Customs and Excise Comrs [2001] STC 185. I disagree. Whatever the reasons Neuberger J gave in allowing the appeal from the decision of the tribunal, it is now clear that it does not necessarily follow that there cannot be a single supply just because that supply comprises elements, none of which is ancillary to another, and each of which, if taken in isolation, would constitute a separate supply. This is the tension I have referred to in para 23 above. However, once having identified a number of elements as constituting a single supply, it is then necessary to see whether that supply - whether or not it is given a name but let us call it Supply X - falls within any of the exemptions in Sch 9. Thus, if one asks in College of Estate Management whether Supply X is a supply of books the answer is that it is not; for VAT purposes it is categorised as a supply of education. Supply X does not even include a 'supply' for VAT purposes of books; it includes an element which, if taken in isolation, would be a supply for VAT purposes of books, but the analysis which has produced the result that there is a single supply is one which has rejected the proposition that there is simply a 'supply' of books. Rather, the provision of books is a part of a 'supply' of education."
Warren J proceeded to consider the reasoning of the tribunal below and concluded that the tribunal had been correct to find that the supply by the taxpayers was not of exempt licences to occupy land but a single supply of a package of services. He then went on to consider the appropriate tax treatment of the supply.
"[70] In the light of that conclusion, it is then necessary to categorise the resulting single supply viewed as a complex of elements (the provision of the licence and of the various services). In my judgment, the over-arching single supply is not to be treated as a supply of a licence to occupy land. The description which reflects economic and social reality is a supply of massage parlour services one element of which is the provision of the room. That, in my judgment, is the correct conclusion even if, which for my part I think probably is the case, the provision of the room was, to the masseuse, the single most important element of the overall supply and, indeed, one predominating over the other elements taken together. This is a case where the tax treatment of the supply is self-evident once it is established that the other service elements are not ancillary to the provision of the licence."
So, the predominant element in the composite supply did not determine the tax treatment of the supply.
- Mr King prefaced his criticisms of Warren J's conclusions by submitting that cases of single supplies comprising several elements, are, at any rate on mainland Europe, extremely rare. As I have already mentioned, one of his challenges to each of the two decisions under appeal is that the Tribunal had been wrong to conclude that there was a single supply. He gave as an instance - indeed as the paradigm example - of a single supply comprising more than one element the case of a restaurant meal: notwithstanding that there is a supply of goods - the food itself - as well as the other services which go to make up a restaurant meal, the ECJ has ruled that there is in fact a single supply rather than separate supplies of the food and of the various services (for example, the supply of somewhere to sit, clean table linen, the services of the chef and of the waiter and so on) and that the single supply is of services. See Faaborg-Gelting Linien A/S v Finanzamt Flensburg (Case C231/94) [1996] STC 774 ("Faaborg-Gelting"). Restaurant meals apart, he submitted, there are very few reported cases in Europe of a single indivisible supply which it would be artificial to split and those that there are are encountered most frequently in the context of tax avoidance. Levob, he said, was such a case.
- Mr King drew my attention to Heidelberg (which I have already mentioned in connection with its reference to Madgett and Baldwin). In Heidelberg the taxpayer organised programmes for students to be placed in a high school or college abroad for a period of months. When the programme took place in the USA the high school student was provided with a package comprising accommodation with a host family, return flights with a guide, board and lodging with the host family, classes at a selected high school, support from the partner organisation and its local representative during the visit, preparatory meetings and materials, and travel cancellation insurance. The arrangements for college students were slightly different. Mr King's purpose in referring to the decision was to demonstrate that although supplied by the taxpayer as a package, in fact the travel element was accepted as a separate supply from the educational supply. One of the issues was whether the travel supply should be treated as ancillary in relation to the education service which the taxpayer supplied. The ECJ ruled that the travel to and stay in the host state did not represent a marginal share in relation to the educational service which the taxpayer supplied. There was no suggestion in that case, said Mr King, that the taxpayer made a single, indivisible supply which it would be artificial to split. The decision shows the seriousness with which the ECJ takes the principle (emphasised in Card Protection Plan) that each supply must be treated as an independent supply.
- But, he said, if having considered the various elements of the supply, the court decides that there is a single indivisible economic supply which it would be artificial to split (for example, the restaurant meal) the court, in determining its VAT status, looks afresh at all the elements to identify which is predominant. He submitted that this critical stage in the process was made clear in paragraph 27 of the ECJ's judgment in Levob where it was stated:
"27. …with regard to the question whether such a single complex supply is to be classified as a supply of services, it is vital to identify the predominant elements of that supply (see, inter alia, Faaborg-Gelting Linien [1996] STC 74…"
He referred also to the conclusions of the ECJ in Levob on that issue at paragraph 29 of the judgment, namely that the national court had correctly concluded that there was a single supply of services and that:
"Far from being minor or ancillary, such customisation predominates because of its decisive importance in enabling the purchaser to use the software customised to its specific requirements which it is purchasing."
He pointed to that as an example of the identification of the predominant element of the supply as the determining factor in the categorisation of the overall supply.
- He submitted that the guidance provided by the ECJ in paragraph 27 of Levob, although directed to the question whether the supply is to be classified as a supply of services or as a supply of goods, applies no less to the question how the supply is to be treated for tax purposes, ie, whether it is to be standard-rated or exempt or, for that matter, zero-rated. He submitted that it could not be correct, taking a hypothetical example, to give to a single indivisible supply made up of several elements all of which, individually, are exempt (for example, a supply made up of a land element and of insurance introduction and financial intermediary services) a label or description which does not attract any kind of exemption. He submitted that, insofar as Salon 24, Tumble Tots and Denyer suggest that such a supply may attract a "description which reflects economic and social reality" (the phrase used by Warren J in Salon 24) or that, in the words of Briggs J in Tumble Tots, "it may have a unique character enjoyed by neither of the constituent elements" of the supply, they are incorrect.
- He submitted that it was incorrect to approach the question of categorisation by asking the question: how can the overall supply be best described or labelled and, having answered that question, see whether the description or label is to be found in any list of exemptions. There was, he submitted, no warrant in ECJ jurisprudence for such an approach. Indeed to do so is to repeat the error identified by Nolan LJ in BNCC v Customs and Excise Commissioners [1993] STC 702. In that case, BNCC was set up and funded by the government of Bophuthatswana (established by the then regime in South Africa) to carry on such activities as might have been carried on by a diplomatic mission if the government had been recognised internationally. The Commissioners assessed BNCC to VAT on the basis that it had made a single standard-rated supply of diplomatic services. BNCC appealed unsuccessfully to the Tribunal contending that it had supplied a number of separate services to the government, some or all of which were zero-rated. The Tribunal dismissed the appeal holding that there was a single commercial relationship between BNCC and the government and that BNCC had provided a single supply of services of the sort that would be supplied by an accredited diplomatic mission. BNCC successfully challenged that decision on appeal to Rose J. The Commissioners in turn appealed his decision. The Court of Appeal dismissed the further appeal. In the course of his judgment, Nolan LJ, with whom the two other members of the court agreed, said this (at page 708):
"It cannot be right in my judgment to cast over them [the individual supplies of goods and services made by BNCC to the government in the course of their relationship] a blanket label 'services of the sort ordinarily provided by a diplomatic mission' and to conclude that, since this label does not appear in the relieving provisions, the whole of the services must be charged at the standard rate. It is essential, to my mind, to analyse the individual supplies of goods and services by reference to the specific taxing and relieving provisions of the 1983 Act [the then relevant domestic enactment] as a preliminary to deciding whether any of them are no more than ancillary or incidental to another or others, and to determining whether and if so how the money made by the Bophuthatswanan government should appropriately and fairly be apportioned between them."
Mr King also referred me to the restatement of that approach by the Court of Appeal in Customs and Excise Commissioners v Wellington Private Hospital Ltd [1997] STC 445.
- He accepted that the test for determining what precisely is meant by "predominant" was not something that ECJ jurisprudence had spelt out although he submitted that the matter was to be looked at from the point of view of the consumer, the recipient of the supply.
- Mr Singh's submission, in a nutshell, was that, having correctly directed themselves in law as to the circumstances in which it is open to reach a finding of a single indivisible supply involving several elements, namely to look at the essential features of the transaction with a view to determining whether the constituent elements of what is supplied are so closely linked that they constitute a single economic supply which it would be artificial to split, the Tribunal were entitled in each case to conclude that there was a single supply. That being the correct approach in identifying whether there is a single (as distinct from a multiple) supply, it would, he said, be artificial when having to characterise that supply nevertheless to split out one of the elements and identify it as the predominant element. Ex hypothesi, such an approach would not accord with the economic reality of what were the essential features of the transaction. There was, he said, no misstatement of the law in Salon 24 or in the adoption of the position in Tumble Tots and Denyer. The Tribunal were therefore entitled to approach the question of characterisation of the single supply in Holland as they did. They did not undertake the same exercise in Vigdor although it is evident that they regarded the supply as of salon facilities. In any event, the Tribunal did not identify any element of the supply as predominant.
- Mr Singh went on to submit, by way of alternative argument, that if, assuming the Tribunal correctly identified the supplies made in each case as a single invisible supply but incorrectly characterised that supply otherwise than by reference to its predominant element, the effective choice in each case was between a supply of land and a supply of services. In both Levob and Faaborg-Gelting the single supply was identified as a supply of services. The whole thrust of the Tribunal's decision on each appeal was that there was a supply of services. It would therefore be open to this court to find that that was the nature of the supply even if it was not correct to characterise it as the supply of "access to an up-and-running hairdressing and styling salon" or, more simply, "the services of a hairdressing business" (as the Tribunal characterised the supply in Holland).
(c) the relevant law: conclusions
- I am quite willing to accept, as Mr King submitted, that instances of a single supply comprising a number of elements which it would be artificial to split may be extremely rare in mainland Europe. But that does not mean that I should approach a supply containing several elements with a predisposition to conclude that it is a series of separate supplies. It is simply a question of applying the test laid down by the ECJ in Levob (at [22]) and asking myself whether the elements or acts supplied "are so closely linked that they form, objectively, a single indivisible economic supply which it would be artificial to split". Faaborg-Gelting (the provision of a restaurant meal) was such a case. So also was the administration of a drug to a patient in Beynon (Dr) and Partners v Customs and Excise Commissioners [2004] UKHL 53, [2005] STC 55. That was analysed as a single supply of medical services and not the supply of a drug and the separate supply of medical services. Likewise the decision in College of Estate Management where it was held that the provision of distance-learning courses where the college provided education and training through printed materials, preparation and submission of assignments, and personal face-to-face teaching services constituted a single supply of educational services and not separate supplies of educational services and goods (the printed materials).
- What then of Mr King's criticisms of Warren J's analysis of the law in Salon 24?
- Having carefully considered that analysis I am not willing to say that Warren J was wrong to conclude (in paragraph [46]) that a supply comprising two or more elements which are so closely linked that they form objectively a single indivisible economic supply may attract a different tax treatment from that which would be attracted by even the main element within the supply and that (see paragraph [70]) it is open to the court to characterise it by a description which reflects its "economic and social reality". As Warren J's analysis has demonstrated (at paragraphs [44] to [46]) courts at the highest level, at any rate in this country, have been willing to characterise a single supply made up of several elements by an element which either is not, or may not, be the principal element within the overall supply.
- That said, I certainly do not consider that the question is one which is altogether "acte clair". On the contrary, I am troubled by it. That does not mean that I should direct a reference to the ECJ for a ruling on the point, as Mr King sought to persuade me to do if I did not accept his core submission that the treatment of the supply has to be determined by it predominant element or if I entertained any doubt as to the correctness of Warren J's approach to the matter in Salon 24. I do not consider it is appropriate to direct a reference for several reasons. First, having upheld the Tribunal's decision in each case that there was no exempt licence element in what was supplied, the question does not arise and therefore it is not necessary to resolve it. Second, given Warren J's careful analysis of the relevant law and Briggs J's acceptance of it in Tumble Tots and subsequently in Denyer, it would I think be for a higher court to direct a reference in any event. Third, unless there is a finding by the Tribunal that the licence element was the predominant element of the overall supply, assuming it was a single supply, and, as I shall explain, there was no such finding in either Holland or Vigdor, it does not seem to me to matter how the supply is described. For unless it takes the character of an exempt licence and, on Mr King's argument, it can only do so (assuming the package constituted a single supply) if the licence is the predominant element, it is not suggested that there is any other exemption that applies, or that the overall supply is for some reason to be treated as zero-rated. The fact therefore that the Tribunal described the supply in Holland as "the services of a hairdressing business" rather than in some other way does not matter.
(d) single supply: the taxpayers' criticisms
- Mr King's criticism of the Tribunal's decisions in both Holland and Vigdor was that they failed to list explicitly the features which led to the conclusion in each case that there was such a supply. "Indivisible", said Mr King, cannot simply mean indivisible under the contract in question, otherwise the question would be self-answering since nearly all packages of supplies offered as a single package would have that character; the question rather is whether the supplies are in principle divisible. He submitted that the Tribunal gave no weight to the fact that the two separate elements, licence and services, were charged separately. Holland and Vigdor, he said, were not so much cases of a "supply which it would be artificial to split" as cases where two or more supplies were aggregated by the Tribunal.
- He went on to point out that the matters which, in paragraphs 37 and 38 of their decision in Holland, the Tribunal had identified (for example, that the stylists had joined the salon to have access to more than a chair and space, that they needed the facilities listed in the schedule to the written agreement and could not have carried on their business without all of the facilities listed in that schedule, that they stated that they were indifferent to how the fees payable under the agreement were described, and that they wanted "a joined-up supply of the whole range of the constituent elements" supplied under the agreement) could equally be said on the vast majority of occasions that a customer purchased a package of supplies. The fact that a customer needs, or is likely to need, the supplies which are provided does not mean that they are in law a single indivisible supply. Equally irrelevant is the fact that without the range of facilities made available under the agreement the stylist could not carry on her business: it would be a very a rare business which needs only one supply. The fact that lots of different things which a stylist needs are supplied within a single package does not mean that they become an indivisible package. The same, he submitted, could be said of a person renting serviced premises: he or she is likely to need the services for which the service charge is paid; that fact, or the fact that they are supplied together with the accommodation itself, does not make them a single indivisible supply. The fact that the stylists are indifferent to how the charges under their agreements are structured is likewise irrelevant: the same could be said of any package of supplies where the package consists of several separate payments. Equally, he said, the fact that the stylists wanted a "joined-up supply of the whole range of services" could be said of most persons buying several services as a single package. Indeed, whenever several supplies are sold as a package, the overall supply is likely to be all or nothing. The letting of a shop is useless without heat, light and perhaps water and, equally, having them is likely to be useless without the accommodation in which to use them. But it does not follow, he said, that in supplying heat, light and water together with the shop premises, a single indivisible supply is made which it would be artificial to split.
- Coming to Vigdor, Mr King pointed to the particular matters referred to by the Tribunal in paragraphs 26 and 27 of their decision which, he said, appeared to have influenced the Tribunal in reaching their decision. They were the enumeration in paragraph 26 of the various facilities which the stylists wanted and were supplied under the licence agreement, the Tribunal's reference to Vigdor "exploiting its managed salon by making chair space available to self-employed stylists and by giving them the facilities required to enable them to conduct their businesses", the fact that the total amount payable under the agreement was a package, the absence of any separate negotiation of the two elements of the package, and the fact that the stylists would not be able to comply with their undertaking to operate their businesses in the salon without the floorspace, while the licence of the floorspace would be useless to both sides unless the stylist was committed to work there. Mr King submitted that these matters were all irrelevant to the finding of a single indivisible supply which it would be artificial to split; they did not entail the conclusion that the supply was indivisible since the same could be said of many a package of services made available for a consideration to enable someone to carry on a business. Mr King also submitted that, in paragraph 26 of Vigdor, the Tribunal were wrong to state that "the VAT system would be distorted if what was in substance a single service from an economic point of view were artificially split". He submitted that that was the wrong test.
(e) single supply: conclusions
- In my judgment, the various findings of fact made by the Tribunal in each of the two decisions, not limited to the matters identified in the particular paragraphs to which Mr King referred me, amply justified the Tribunal's conclusion, in each case, that there was a single indivisible economic supply which it would be artificial to split. The essence of the matter is that the facilities supplied by the taxpayer in each case, including the licence to use a chair and space in the salon, all combined to enable the stylists to carry on business as self-employed hairdressers. The various facilities were closely interdependent in that the provision of one (for example the chair) was of little or no practical utility without the provision of the others. All were supplied pursuant to a single agreement. I detect no mistake in law in the Tribunal's approach to the question. In particular, I do not consider that the Tribunal misstated the appropriate test in Vigdor.
(f) characterisation of the single indivisible supply: conclusions
- I have already concluded that, although I am troubled by the point, I am not willing to differ from Warren J's approach to this question in Salon 24 and therefore to differ from the willingness of Briggs J in Tumble Tots and in Denyer to adopt and follow that approach. I have noted, and repeat, that there is in any event no finding in either Holland or Vigdor that the licence to occupy was the predominant element of the overall supply. I should also add that there is no basis in their findings for me to conclude that the Tribunal should have concluded that that was the predominant element of the supply in each case. If the licence to occupy was not in any event the predominant element, the Tribunal cannot be criticised for failing to find that the single supply should have taken its character from that element. I therefore see no reason to criticise the Tribunal's characterisation of the supply in Holland as that of an "up-and-running hairdressing and styling salon" or "the services of a hairdressing business" or, insofar as they did in Vigdor, as that of "salon facilities".
A wider aspect of the identification of an exempt licence
- There is another reason why, in my judgment, the Tribunal came to the correct conclusion in both appeals on this issue. It concerns a wider aspect of the correct identification of an exempt licence within Article 13B(b).
- In Temco the ECJ had emphasised, in paragraph 26 of its judgment, the need for the national court to consider all the circumstances of the transaction in question when assessing whether the transaction can be treated as a letting of immovable property within the meaning of Article 13B(b). In paragraph 27 it also emphasised the need for the national court to establish whether the contract giving rise to the transaction has as its essential object the making available, in a passive manner, of premises or parts of buildings in exchange for a payment linked to the passage of time or whether it gives rise to the provision of a service capable of being categorised in a different way. This was a reference back to paragraph 20 of the judgment where the ECJ distinguished between "a transaction comprising the letting of immovable property which is usually a relatively passive activity linked simply to the passage of time and not generating any significant added value" and "other activities which are either industrial or commercial in nature, such as the exemptions referred to in Article 13B(b)(1) to (4) of the Sixth Directive, or have as their subject matter something which is best understood as the provision of a service rather than simply the making available of property…". The former would qualify as a letting of immovable property; the latter would not.
- This distinction was relied on by the Commissioners before Warren J in Salon 24 when seeking to uphold the ruling of the tribunal below. See paragraphs [52] to [55] of Warren J's judgment. At paragraph [72] of his judgment Warren J stated that if there were serious doubt about the correct categorisation of the supply he would have adopted the submissions made on behalf of the Commissioners summarised in those paragraphs.
- This was also a matter which, as I read what they said, the Tribunal had in mind in paragraph 23 of their decision in Vigdor (set out above) and, not least, in their conclusion in paragraph 24 where they stated:
"Access to the salon and all its facilities was, to use the Court's words in paragraph 20 of Temco, 'the provision of a service rather than simply the making available of property'."
- I am of the view that, on the findings of fact in Vigdor, this was a conclusion which the Tribunal could justifiably reach. The decision in Holland contains no similar reference since the Tribunal felt able to conclude that the necessary attribute of exclusivity of occupation (if there was to be an exempt letting) was absent. But it is abundantly plain from the Tribunal's conclusions set out in paragraphs 38 to 39 of Holland that, looking at the matter from the "economic point of view", the Tribunal saw "every one of the constituent elements as essential contributors to a single supply being made by Mr Holland to the stylist", being the supply of "the service of a hairdressing business". In my judgment, this is a finding that, considering all of the circumstances of the arrangements between Mr Holland and the self-employed stylists, the essential object of those arrangements was not simply to make available, in a passive manner, a part of the salon - the so-called "designated area" - to the stylist in exchange for a payment linked to the passage of time but a more general activity best understood as the provision of a service capable of being categorised in a different way.
- The essence of the matter, as it seems to me, is that, as the relevant jurisprudence has made clear, the exemption (which is to be strictly interpreted) does not extend to a licence to occupy land which is but one element of a package of supplies made by the taxpayer/lessor to his customer in consideration of a payment or payments by that customer where the supplies in question are commercial in nature or are best understood as the provision of a service and not simply as the making available of property. If that is the nature of the supply - a service rather simply the making available of property - there is no exempt licence: the licence element in the supply is standard-rated. Whether the resulting supply is properly to be regarded as a single indivisible economic supply which it would be artificial to split and, if so, how that supply is to be characterised for VAT purposes are issues that do not matter if all of its constituent elements are in any event standard-rated.
Denyer
- As I have mentioned, Denyer was, in a number of material respects, similar to the circumstances in the two appeals before me. It concerned the grant by the taxpayer to hair stylists, trading as self-employed hairdressers from the taxpayer's salon, of facilities to enable them to carry on their business, including the allocation to the stylists of an area in the salon to be used exclusively by that stylist containing a hairdressing chair, and also the provision of clean towels, shampoos and other consumables. For all of this the salon owner made three charges: (1) a "chair rent", (2) a small sum per customer by way of contribution towards rates, heat, light, water, use of the telephone and laundering towels, and (3) separate charges for such consumables as the stylist chose to purchase from him. The stylists provided their own tools. The layout of the salon was in substance no different from the layout in the two appeals before me. The tribunal from whose decision the appeal to Briggs J had come had concluded, first, that among the services supplied to each self-employed stylist was a licence to occupy land within the meaning of item 1 of Group 1 of Schedule 9 to the 1994 Act (ie an exempt letting within the meaning of Article 13b(b)) and, second, that the supply to the stylists of other services by the taxpayer was only made available as "adjuncts to the use of the allocated areas" so that the resulting supply followed that of the exempt letting. There was no dispute between the parties to that appeal that the chair and the area immediately surrounding it were exclusively enjoyed by the stylist to whom they were provided. There was no issue over the applicable law, either as to the principles for the correct classification of a supply comprising more than one element as a single supply or, as I read the judgment, as to the principles applicable to determining whether there was an exempt letting within the meaning of Article 13B(b).
- Because there was no issue over the tribunal's finding that each stylist had exclusive enjoyment of the chair and area immediately surrounding it allocated to that stylist (although there was a last minute challenge to that finding which Briggs J described as too late to make), the sole question was the correct classification of the package of services supplied to each stylist. The grant of the exclusive right to use a particular chair and the area immediately surrounding it formed what Briggs J described as "an important part" of that supply. The tribunal below had concluded that the supply to the stylist of the right to have towels laundered and consumables provided was ancillary to the principal supply of the right to exclusive use of the chair, coupled with the provision of heat, light, water and the use of a telephone. Alternatively, it concluded that there was "an over-arching single supply of land".
- Briggs J disagreed with those conclusions. His view was that the tribunal had taken what he described as "an overly narrow view" of the package as a whole with the result that they "over-rated the provision of the exclusive use of the chair and allocated area as being predominant". Accepting that the package was, as he put it, "at the minimalist end of the spectrum, so far as concerns the provision of shared facilities" he nevertheless concluded, having referred to an analysis of the position in another self-employed hairdressers' tribunal decision (Mallinson and Woodridge v Revenue and Customs Commissioners and Mould v Revenue and Customs Commissioners (2005) VAT Decision 1987), that the package supplied could not properly be categorised as the letting of immovable property. It is instructive to set out exactly what Briggs J said:
"[45] While I would not criticise the Tribunal's view in the present case that the provision of the exclusive use of a chair and its immediately surrounding area was the main element in the package supplied to each stylist, that is not decisive of the classification outcome, and it is apparent that stylists at this salon can no more conduct substantially the whole of their business within their allocated areas than could the stylists in the Mallinson case.
[46] The point is not that a business letting can only qualify under art 13B(b) if the whole of the tenant's business is conducted on the demised premises. Plainly that could not be so. Nor is it that the existence of shared facilities, however minimal, is fatal to the classification of the package as a letting of immovable property. The point is that the business of the stylists in the present case, as in Mallinson and all the other cases, needed to be conducted not merely on the exclusively allocated part of the premises, but within the salon as a whole, in particular by use of the wash basins and the waiting area. Looked at in the round, the package in this case was the supply to the stylist of all the facilities requisite for the carrying on by him or her of the business of a hairdresser, including importantly the provision of an exclusive chair and allocated area, but including significantly also the facilities shared in common within the salon as a whole. It is one of those cases, expressly contemplated by Warren J in Salon 24 where the correct VAT classification of the package as a whole is not to be derived from the identification of one, or even the most important, of its elements.
[47] In my judgment the classification identified in the broad consensus of hairdressers'' cases is therefore correct, and the present case is no exception, despite lying at the minimalist end of the spectrum of shared services."
- Mr King strongly criticised that reasoning of Briggs J. In my respectful view, however, the underlying point which Briggs J was making was simply that the stylists needed the use of the salon as a whole, and not just their respective chairs and allocated areas, within which to conduct their businesses as self-employed hairdressers and that, as the penultimate sentence of paragraph 46 states, the services supplied by the taxpayer comprised a package of the facilities required by the stylist to carry on his/her business of which the provision of an exclusive chair and allocated area formed a part such that it was not appropriate to characterise the resulting supply - ie the package as a whole - by reference to just one, or even the most important, of its elements.
- Mr King invited me to distinguish Denyer on the basis that the arguments which he has addressed to me were not put to Briggs J. I am not at all sure that they were not. I was told, and accept, that Briggs J had the Tribunal's decisions in Holland and Vigdor before him in which, albeit very briefly, the principal submissions of Mr King on this appeal are summarised. In paragraph [39] of his judgment in Denyer Briggs J referred to other tribunal decisions relating to hairdressing salons including, as paragraph [40] made clear, the decision in Taylor. But, whether I am right or wrong in thinking that Briggs J was aware of the arguments put before the Tribunal in Holland and Vigdor, I am not persuaded that Briggs J misdirected himself in law. On the contrary, his decision seems to me, with respect, to be entirely correct. His judgment demonstrates why hairdressers' arrangements such as those arising on these appeals cannot property be characterised as the letting of immovable property.
- I should add the following. In that case Briggs J accepted that the package was to be regarded as a single supply of the range of facilities requisite for the stylist to carry on business as a hairdresser, accepted that the facilities supplied were not to be regarded as a separate supply for VAT purposes and accepted that the overall package was not to take its identity for classification purposes from any one of its constituent elements, even its most important element. His analysis is consistent with the alternative approach to which I have referred whereby, viewing the transaction as a whole, what the taxpayer supplies is best understood not as simply the making available of property but as the provision of a service capable of being categorised in a different way.
- I should also add that (other than Denyer until the appeal was allowed by Briggs J) Taylor is the only tribunal decision which, so far as I am aware, went the other way. But the position in that case was significantly different. There, the only supply made by the taxpayer was of the entire salon in question (along with hot and cold water and the like) to the two stylists who themselves provided all of the remainder of the facilities which they needed to carry on their business as self-employed hairdressers (with the possible exception of laundered towels). There was no sharing of the salon except by the two stylists. Although they were not in partnership with each other but were, as I understand it, each self-employed, the arrangements, as described in the decision, suggest a close degree of co-operation between them.
Result
- The appeals fail.
