20325

EXEMPTION – Land – Letting or leasing of immoveable property – Hairdressing salon owned by Appellant – Arrangements with stylists – Stylists granted right to occupy chair and designated area in up-and-running salon – Fixed fee charged for that right – Stylist has access to other salon facilities in return for a service charge based on stylist’s turnover – Whether grant of right to occupy an exempt supply – No – Art 13B(b) of Council Directive 77/388/EEC – Whether single standard rated supply of all facilities provided by salon owner – Yes – Appeal dismissed

LONDON TRIBUNAL CENTRE

ANDREW HOLLAND T/A THE STUDIO HAIR COMPANY	           Appellant

-	and –

THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

Tribunal:	SIR STEPHEN OLIVER QC (Chairman)
DIANA WILSON

Sitting in public in London on 26-27 June 2007

Edmund King, counsel, for the Appellant 

Sarabjit Singh, counsel, instructed by the general counsel and solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

1.	Mr Andrew Holland, the Appellant, was during the period to which this appeal relates (“the relevant period”) the sole proprietor of a ladies’ hairdressing salon in Kings Lynn trading as “The Studio Hair Company”.  Mr Holland appeals against the decision of the Customs dated 27 August 2002 that the supplies of certain services to self-employed stylists working from the business premises are standard rated; consequently Mr Holland was liable to be registered for VAT.  

2.	The parties have agreed that if the supplies to the self-employed stylists are properly standard rated, Mr Holland should have been registered with effect from 1 June 2002.  The business was incorporated on 1 July 2003 and the company was registered with effect from that date.

3.	We heard evidence from Mr Holland and from two stylists, Claire Steele and Melanie Brodrick, both of whom had carried on their self-employed businesses at the salon since the early 1990s.  

4.	During the relevant period the three floors of the salon premises were occupied by stylists (one of whom was Mr Holland).  Mr Holland had brought the premises from his father “5-6 years ago” (he said); we take that to mean before the start of the relevant period.  From the early 1990s he had leased the premises from his father.  The rent for two floors had been £1000 per month.  At the start of Mr Holland’s occupation he had admitted independent stylists to carry on their businesses on the first floor.  Later he took on the second floor and has used that for training.

5.	During the relevant period the salon was occupied by seven stylists (including Mr Holland) and four “juniors”.  

6.	Each stylist agrees to pay two amounts, a “licence fee” and a “service charge”.  
The agreement
7.	We now summarise the terms of an agreement between Claire Steele and Mr Holland. This is dated 1 February 1998 and takes the form of the National Hairdressers’ Federation “Independent Contractors Agreement (incorporating a licence to occupy land)”.  We refer to this as “the Agreement”.  Claire Steele is referred to in the Agreement as “the Licensee”.  We understand that an agreement in similar form has been used for all stylists operating at the salon in the relevant period.

8.	By Clause 4.1 Claire Steele “may occupy the property described in the Schedule (“the designated area”) with the benefit of facilities and services for the purposes of conducting [her] own hairdresser’s business and activities normally ancillary thereto” from the date of the Agreement “until terminated in accordance with the provision hereinafter contained”.  (Clause 8 provides that the agreement is to continue until terminated by either party giving notice.)  The designated area is said in the opening words of the Schedule to be shown as an eight square metre area on an annexed plan and “etched in red”.  We were not supplied with such a plan.  Clause 4.3 describes it as “subject to the terms hereafter contained … the area of 8 square metres edged red on the plan annexed”.

9.	The document put in evidence shows Claire Steele’s designated area as covering two basins/mirrors against the wall on the left of the ground floor and two chairs.  There are three such areas on the plan of the ground floor.  The first area nearest the entrance and opposite the reception desk is identified in writing as Mr Holland’s.  A broken line between Mr Holland’s area and Claire Steele’s area appears on the plan and stretches out from the wall towards the centre of the ground floor.  Another dotted line on the plan stretches out between Claire Steele’s designated area and the third area on the ground floor.  There is no line to mark the extremities of those three areas.  A sofa for waiting clientele is placed about four feet from the end of the latter dotted line.  Towards the back of the ground floor the room narrows; at the edge of the third designated area there is a step up to an area where there are three “backwashes” marked 1-3.  On the opposite wall are storage cupboards.  (When Claire Steele started working at the salon her designated area was on the first floor. The agreement with Claire Steele dated 1 February 1998 shows her designated area as area  two on the ground floor.)  

10.	By Clause 4.2 Claire Steele agrees to pay a “licence fee” of £150 per week with a six monthly review to reflect changes in the Retail Prices Index. 

11.	Clause 4.4.1 provides that:
“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 occupiers defined by VAT legislation.

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.  

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”.

12.	Other obligations assumed by Mr Holland, as owner, are in Clause 4.6.  He undertakes to pay all rates, property taxes, property maintenance, decoration and insurance (not including professional negligence insurance of the stylist).  He also undertakes in clause 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.	To allow the Licensee and his clients access to the Designated Area and to open and keep open the salon on not less than 250 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.

5.	To use his best endeavours to promote his own business and the Salon and to keep the Licensee advised, so far as possible, as to his hours of business.”

13.	Clause 5 provides, among other things, that:
“1.	That section 4 of this Agreement constitutes a licence over land and confers no tenancy whatsoever on the contractor and that possession of the Salon is retained by the Owner until expiration or termination of this Agreement.

2.	The Licensee is not entitled to exclusive occupation or possession of the Designated Area and shall not at any time or in any manner do any act which may impede the Owner or any duly appointed representative of the Owner in the exercise of his rights of possession or control of the Designated Area.

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 15 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.	The Licensee is specifically authorised and permitted to retain a locum tenens as the need arises and/or to employ a person to help and assist him with his business …”

14.	Clauses 4 and 5 are headed “Licence to Occupy Land”.  Clauses 6 and 7, to which we now turn, are headed “Contract for Services”.  

15.	By Clause 6.1 to 6.5 of the Agreement, Mr Holland, the owner, agrees to provide Claire Steele with certain services in consideration for a service charge calculated by reference to 7% of her gross monthly turnover.  

16.	The services provided pursuant to clause 6 are listed in a Schedule 2 of the Agreement.  They amounted to the use of the salon facilities (e.g. washroom, toilets, staff room, kitchen, reception facilities, heating, lighting, water, laundered towels, cleaning, maintenance and waste disposal), use of Mr Holland’s staff (e.g. to maintain a fully-staffed reception, to wash hair, to sweep up hair and to prepare refreshments for clients) and use of salon equipment (e.g. hairdressing chair, mirrors and hair dryers).

17.	Melanie Brodrick, the other stylist who gave evidence, was allocated an area on the L-shaped first floor containing a chair and mirror.  Each of the four designated areas on the first floor stretched from the wall of the base of the “L”. Opposite them was a sitting area.  By the wall at the outside top of the L were four basins. 

How exclusive is each stylist’s Designated Area?
18.	There are no markings on the floor to show the designated area of any stylist.  The chair or chairs, the mirror and the space for keeping the stylist’s tools and equipment are for the exclusive use of the particular stylist to whom the area has been allocated.  In the course of their activities at the salon other stylists and their clientele will regularly walk over the area shown on the plan attached as designated area of  particular stylists.

19.	The Agreement itself provides that the Licence does not give the Licensee exclusive possession of the Designated Area or the Salon (Clause 4.4.2 set out above) and Clause 5.2 (see above) provides to the same effect.

20.	Clause 5.3, as noted, enables Mr Holland to use the particular stylist’s designated area if that stylist is absent for 15 consecutive days.  Neither of the stylists who gave evidence could recall it ever happening to them.  

The use made by the Stylists of the salon and its facilities
21.	The two stylists who gave evidence said that they had their own clientele and rarely took any customer who came unannounced.  They had their own hairdressing and styling equipment which they kept, usually behind the mirror in their own area; they provided their own shampoos, oils etc.  They made use of the reception area and computerised booking facilities, the heating, lighting, hot and cold water and waste disposal facilities that Mr Holland contracted to provide. They made use of the services of the juniors engaged by Mr Holland.  When working in the salon there was no other source of any of those facilities.  Both stylists accepted that they could not carry on business unless all those facilities were provided within the salon.  

The significance to the Stylist of the right to use the Designated Area
22.	Both stylists who gave evidence emphasised the importance of having somewhere to work in the salon.  Claire Steele described it as “an area beneficial to me”.  Both agreed that their styling activities could be performed without a fixed designated area and it did not matter to them precisely where the chairs were situated.  

The service charge
23.	The obligation to provide the services to the stylists lay with Mr Holland and not with the other stylists either alone or as a group.  He aimed to break even by recovering the costs of the services from the stylists.  The arrangement was for each stylist to make a contribution to expenses.  The contribution was, as noted, a pre-agreed percentage of turnover.  Expenses and the aggregate of turnover were determined at the start of each year by reference to figures for the previous year.  Expenses included the costs of employing juniors and a cleaner to clear the common parts plus the cost of heat, light, electricity, water, laundry, waste collection and the cost of maintaining a computerised booking system.

The Licence Fee
24.	The basis on which the amount of £150 per week came to be charged as Licence Fee was unclear.  Mr Holland said it was based on what he had paid for the building and that, before then, he had paid £500 a month to his father for each floor.  There was no evidence of any professional valuation or advice as to the fee to be charged.  We cannot say that the amount was plucked out of the air; but we think instead that Mr Holland was letting things run on from the way they started when his father owned the place.  We do not infer that Mr Holland was loading the stylists’ payment obligations onto the exempt licence fee.

25.	From Claire Steele’s viewpoint, she wanted somewhere to carry on her styling business and it was not necessary to that activity that she was granted a licence.  She would, she said, have been happy if the agreement had not mentioned any licence fee and simply charged a single amount.  Melanie Brodrick was less clear on the point.  She said she paid for what she used.  She could not recall what percentage she paid for the service provided by the salon.  

26.	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.  That would be completely contrary to the spirit of the agreement between Mr Holland and the stylists; moreover, 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.  

Contentions
27.	The argument for Mr Holland, presented by Mr Edmund King, is that he was making exempt supplies of the licences to the stylists pursuant to Article 13B(b) of the Sixth Directive.  The consideration for the supply was £150 per week.  The supply of the licence is not ancillary to any other supplies; it is an independent supply and “it cannot be subsumed into a basket of supplies”.  And even if Mr Holland were wrong on that, he would say that in each case there was only one supply, the predominant element of which is the licence; the other services do not predominate, being supplies that enable the primary right, a licence, to be better enjoyed.  (It was not part of Mr Holland’s argument that the Agreement amounted to the “grant of any interest in or over land or of any licence to occupy land” within VAT Act 1994 Schedule 9 paragraph 1 Item 1.4.)

28.	The Commissioners, represented by Mr Sarabjit Singh, contended that there was no exempt supply, i.e. no “letting or leasing of immoveable property” within Article 13B(b).  And even if the Tribunal were to find that there was a licence amounting to a letting or leasing of immoveable property in the present case, the licence (so the Customs argue) forms part of a supply which together with the other facilities amounts to a single standard rated supply; the essential nature of that supply is the right to use the facilities of the salon as a whole.

Was there a leasing or letting of immoveable property within Article 13B(b)?
29.	Clause 4.4.2 states, as already noted, that the licence does not give the licensee exclusive possession of “the designated area or the Salon”.  Clause 5.2 provides that “the Licensee is not entitled to exclusive occupation or possession of the Designated Area”. 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.  

30.	In paragraph 19 of Belgian State v Temco Europe (Case C-284/03) [2005] STC 1451 the Court ruled that the characteristics of the “letting of immoveable property” are “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 that person were the owner and to exclude any other person from enjoyment of such a right …”.  But assuming there were an acceptable delineation of the particular designated area, does the restriction of the stylist’s exclusive occupation, i.e. 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?  Paragraph 25 of the Court’s judgment in Temco states:

“The presence in the contract of such restrictions on the right to occupy the premises let does not prevent that occupation being exclusive as regards all other persons not permitted by law or by the contract to exercise a right over the property which is the subject of the contract of letting.”

The Court expressed that view without purporting to prescribe the outcome in that case.  Paragraph 26 of the Court’s judgment goes on to say that:

“As regards the transaction at issue in the main proceedings is for the national court to consider all the circumstances surrounding it in order to establish its characteristics and to assess whether it can be treated as a “letting of immoveable property” within the meaning of Article 13B(b) of the Sixth Directive.”

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 (i.e. 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 this 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.”

31.	For those reasons we do not think that the purported “licence” in the Agreement is an exempt supply within Article 13B(b).

Is there a single supply : and, if so, what is its character?
32.	The conclusion we have reached is enough to resolve the matter against Mr Holland.  There was no exempt to supply within Article 13B(b).  If we were wrong on that, we would need to address the further contentions advanced by Mr Edmund King for Mr Holland. The first of these is that there were separate supplies of the licences and of the services itemised in the Schedule to the Agreement. The second and alternative argument is that, if there is only one supply, the predominant supply is of the licence.

33.	Before dealing with those we need to summarise the nature of the consideration that Mr Holland agrees to give in return for the payments made by the stylists.  

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 own trades there. 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.  

35.	The Customs say that the consideration provided by Mr Holland to the stylists is to be regarded as a collection of elements 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 elements.

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.  

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, i.e. 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 immoveable property as one of the constituent elements, the characteristic of that is displaced by the character of the single indivisible supply.

40.	We dismiss the appeal.
Costs
41.	The Customs asked for their costs.  It is not an easy issue.  Ordinarily an appeal of this sort would be covered by the Parliamentary Answer.  It is, however, one of a very long line of tribunal cases relating to similar circumstances.  All those cases, with only one exception to which we now refer, have been decided against the taxpayer.  Shortly before the hearing date the Customs asked for this appeal to be stood over pending the decision of the High Court in that other case dealing with a salon’s rental of chairs to self-employed stylists (Denyer v R&CC (2007) VAT Dec 20121).  In Denyer the tribunal had decided that the supply was exempt.  We refused the application.  We were not satisfied that the facts in Denyer covered this case (and the two other appeals listed to be heard at much the same times as this case).  In any event the facts of those two other appeals had to be found.  The law in this area is constantly evolving.  Temco is new jurisprudence.  The impact of cases such as Levob and College of Estate Management are throwing new light on the “single or multiple supply” issues.  Finally, we noted, the Denyer appeal had been argued by a litigant in person.  We therefore refused the application made by Customs.  This meant that the parties had, in our view, to go ahead.  Furthermore, we were not aware until the conclusion of the Customs’ case that they were going to ask for costs.  There was no mention of such an application in either the Statement of Case or in the Respondents’ Skeleton Argument.

42.	Our conclusion, based on those considerations, (of which the implications of the Parliamentary Answer are one) is that this would not be a proper case in which to direct that Mr Holland should pay the Customs’ costs.

SIR STEPHEN OLIVER QC
CHAIRMAN

RELEASED: 28 August 2007

LON 2003/0173