Kieran Mullin Ltd v The Commissioners of Customs and Excise

This is an appeal in a value added tax (VAT) case from a decision of the VAT and Duties Tribunal dated 31 May 2002. The appellant is Kieran Mullin Ltd, which I, like the Tribunal, will refer to as KML. The respondents are the Commissioners of Customs & Excise, whom I will refer to as Customs & Excise. KML owns or operates eight ladies’ hairdressing salons in the Midlands, mostly in the Derby area. Two of the salons are located in Asda superstores. KML is registered for VAT. Some of the stylists who work in the salons are employed by KML. Others are self-employed. There is no VAT issue about the proper treatment when a customer’s hair is cut or styled by an employed stylist the service to the customer is supplied by KML, and KML is accountable to Customs & Excise for VAT on the price which the customer pays.

The dispute which the case is about concerns the proper VAT treatment where a customer’s hair is treated by a self-employed stylist. Is the hairdressing service to the customer supplied by KML? Or is it supplied by the stylist? It has been recognised for some time that it is possible for the relationship to be structured either way, and that the critical question turns on the nature of the relationship between the owner of the salon (here KML) and the stylist. In this case all the self-employed stylists operated under identical written contracts between themselves and KML, contracts sometimes referred to as ‘Rent a Chair’ contracts. In the present appeal the Tribunal decided that two self-employed stylists supplied hairdressing services directly to the customers, but that in the case of all other self-employed stylists the services were supplied by KML. Customs & Excise have not appealed against the decision as respects the former two stylists, but KML has appealed against the decision so far as it concerns all the other self-employed stylists.

I am bound to say that I am unconvinced by the Tribunal’s ‘It all depends’ approach, whereby some self-employed stylists supply services to customers but others do not. I would expect it to be a recipe for problems both for Customs & Excise and for KML. Such seems already to be proving to be the case, as I shall explain later. However that may be, I respectfully disagree with the decision of the Tribunal as respects all the self-employed stylists except the two. In my judgment all of the self-employed stylists supply their hairdressing services directly to the customers, and I shall therefore allow the appeal.

I must add this. I find that I cannot view the appeal in precisely the same way as either counsel. For Customs & Excise Mr Macnab says that the decision of the Tribunal was a decision of fact which cannot effectively be challenged on an appeal limited to errors of law (see s.11 of the Tribunals and Inquiries Act 1992 for the proposition that a VAT appeal to the High Court is limited to errors of law). For KML Mr Young agrees that the question before the Tribunal was one of fact, but he submits that the Tribunal’s decision was such that no tribunal properly instructed in the law could have reached it, and was therefore liable to be reversed on appeal in accordance with Edwards v Bairstow [1956]AC 14.

In my opinion, however, there were issues of law as well as issues of fact which needed to be addressed by the Tribunal. In particular the outcome of the case is, in my view, largely dependent on the nature of the relationship between KML and the self-employed stylists, and that relationship, or at least the starting point for it, is substantially affected by the contents of the Rent a Chair Agreements. What is the meaning and effect of those agreements is to a considerable extent a question of law. As I will explain later, in my opinion the prima facie effect of the agreements was that the self-employed stylists who operated on the basis of them supplied their hairdressing services directly to the customers. There are still questions of fact to be considered, but in my opinion the facts found by the Tribunal and relied on by itdo not lead to any departure from the result which flows from the agreements by themselves. Thus I base my decision to allow the appeal, not on Edwards v Bairstow principles (which were the main thrust of Mr Young’s submissions), but rather on the propositions that the Tribunal applied tests which were not the correct tests in law, and that, ifithad applied the correct tests, itwould have allowed the appeal instead of dismissing it. I should add that, in the course of the hearing, I did say to counsel that I had misgivings about the apparent common ground that the issues before the Tribunal were wholly or mainly issues of fact. So Counsel did have the opportunity to address me on this aspect of the present appeal.

By section 1 of the Value Added Tax Act 1994 VAT is charged on a supply of goods or services in the course of a business by a person whose turnover is large enough for him (or it) to be registered for VAT. The VAT is a liability of the person who makes the supply, and, subject to a deduction for input VAT on supplies to that person from third parties, the tax is in principle payable by the supplier to Customs & Excise. By section 2(1)(a) and section 19 the VAT payable by the supplier is normally charged on the consideration for the supply. The rate of VAT is 17.5% (section 2(1)).

Cutting or styling a customer’s hair is a supply of services. KML is a person carrying on a business, so if it is KML which supplies the service to the customer it is KML which is liable to pay VAT to Customs & Excise on the price paid by the customer. If the stylist who does the work in one of KML’s salons is an employee of KML the supply of hairdressing services is made by KML, and there is no dispute about the VAT treatment. But what if the stylist is self-employed? In that case there is a critical distinction to be drawn between two different structures within which a self-employed stylist may be acting. I will describe them as ‘the services to the salon structure’ and ‘the services to the customer structure.’

A general comment on the two structures is that the customer may not know which applies in a particular case. If a customer goes into a salon and has her hair treated by a stylist the customer is unlikely to know whether the stylist is employed or self-employed, and, if the latter, whether the self-employed stylist is operating under the services to the salon structure or the services to the customer structure. However, a self-employed stylist and the salon know, or ought to know, which structure operates between the two of them, and there does not appear to me to be any particular reason why the customer needs to know. The VAT consequences of the two structures differ, as I will explain in the next paragraph, but one of the points decided in the MacHenrys case, [1993] STC 170 (to which I refer below) was that the different VAT consequences follow whether the customer knows the details of the structure or not. Another general point is that the two structures can have similar, or even identical, ultimate financial results. If the customer pays a price of 100 for her hair treatment it could be the case that the salon is entitled to the 100 and pays (say) 40 to the stylist for his or her services, or it could be the case that the stylist is entitled to the 100 and pays (say) 60 to the salon for the use of its facilities. Either way the end result is that the salon finishes with 60 and the stylist with 40, but the contractual routes by which those identical end results are reached are clearly different from each other.

As I have said in the preceding paragraph, the VAT consequences of the two structures differ. Under the services to the salon structure the salon (assuming that it is registered for VAT, as it is likely to be) is accountable to Customs & Excise for VAT on the full price paid by the customer for her hair treatment. In practice the stylists, even though self-employed, are unlikely to be registered for VAT (because their personal business turnovers are unlikely to be large enough), so there are unlikely to be any VAT consequences of the fees paid by the salon to the stylists. (If a self-employed stylist was registered for VAT and was operating under the services to the salon structure, the stylist would invoice the salon for his or her fee plus VAT; the VAT included in the invoice would be input tax of the salon; and the salon would be entitled to credit the input tax so suffered by it against the amounts of output tax for which it is accountable to Customs & Excise.)

Under the services to the customer structure the hairdressing service is supplied by the stylist, not by the salon. Therefore the salon is not accountable to Customs & Excise for VAT on the price paid by the customer. The stylist would be so accountable if he or she was registered for VAT, but if, as is likely to be the case, his or her turnover is below the registration threshhold, VAT is not payable on the price from the customer. The salon is, however, accountable to Customs & Excise for VAT on the charge which itmakes to the stylist for the use of the salon’s facilities. Nevertheless, on the assumption that the self-employed stylists are not registered for VAT, the VAT cost of the services to the customer structure will be lower than the VAT cost of the services to the salon structure.

That the VAT consequences of the services to the customer structure are as I have just described is confirmed by authority In Commissioners of Customs & Excise v MacHenrys (Hairdressers) Ltd, [1993] STC 170 the company had agreements with its stylists which are not described in detail in the report but which are summarised in the headnote as follows: ‘the stylists agreed to operate each of his or her own business within the company s premises as a self-employed person and to pay a percentage of the turnover from that business to the company for salon rental and service charges.’ Customs & Excise assessed the company on the basis that itwas accountable for VAT on the prices paid by customers for their hair treatments. The company’s appeal succeeded, both in the Tribunal and in the High Court, on the grounds that the stylists were truly self-employed rather than being employees of the company, and (particularly relevantly for this case) that the stylists were supplying their services to the customers and not to the company. It does not, of course, follow that, because in that case the stylists were held to be supplying their services to the customers, therefore in this case the self-employed stylists in KML’s salons were supplying their services to the customers. However, the case is important in demonstrating that in principle the use of a services to the customer structure does change the VAT treatment from that which would have applied in the case of a services to the salon structure.

I should mention before I leave the MacHenrys case that the judge in the High Court (Potts J) based his decision (at least in part) on Edwards v Bairstow grounds, that the Tribunal’s decision on the second point (that the stylists, being self-employed, supplied their services directly to the customers and not to the company) was one which it was entitled to reach on the evidence before it. Mr Macnab submitted to me that in the circumstances the case supported him: in the present case the Tribunal decided that, with two exceptions, the self-employed stylists supplied their services to KML, not to the customers, and, just as Potts J would not interfere with the Tribunal’s decision in the MacHenrys case, so I ought not to interfere with the Tribunal’s decision in this case. I do not agree, but I will explain my reasons later.

The proposition that the services to the customer structure may be effective to change the VAT treatment of prices paid by customers for hairdressing services is supported not just by the MacHenrys case. There are, I believe, other Tribunal decisions to a similar effect. Further, the proposition is in principle accepted by Customs & Excise. At some time guidelines were agreed between them and the National Hairdressing Federation describing how matters could be organised so that stylists operating in a salon owned by a business could be self-employed and could provide their hairdressing services direct to the customers. In the present case the Rent a Chair contracts and the associated arrangements were not precisely within the guidelines, but the existence of the guidelines demonstrates that there is no dispute that, as a matter of law, the VAT consequences for which KML contends in this case can be achieved. So Customs & Excise’s case, upheld before the Tribunal, was not to the effect that KML and the stylists could not do what they had tried to do; rather it was that they could have done it, but had not succeeded in doing it.

Under the next sub-heading I shall explain how the present case arose and how it progressed before the Tribunal, but since the contents of the Rent a Chair contracts which KML concluded with its self-employed stylists are in my opinion of some importance, it is convenient for me to set out the contract at this point It reads as follows.

“HAIRDRESSING RENT A CHAIR CONTACT

An agreement made on [date] between the Salon Owner – Mr Thomas Kieran Mullin of [address] and the Hairdresser [name and address]

Whereby the Salon Owner agrees to provide a chair to rent and the Hairdresser agrees to rent the chair on the following terms and conditions.

There are several points which I wish to make about the contract.

The evidence showed that records were kept of all treatments of customers by self-employed stylists and of the amount paid by the customer. Receipts from customers were in the first instance paid into the tills in the shops, but at frequent intervals there were calculated the receipts attributable to the self-employed stylists and the amounts payable by them to KML by way of chair rentals and service charges. The balances of the receipts belonged to the stylists, and they were paid to them A similar arrangement operated in the MacHenrys case ‘… for convenience of accounting [the company and the partnership] collect the payments and account therefor to the Senior Stylists deducting therefrom the moneys payable by the Senior Stylists to [the company and the partnership] under the agreements.’ (From the decision of the Tribunal, quoted by Potts J at [1993] STC 176.) Each week KML provided forms of receipts to the self-employed stylists which showed the amounts payable by them to KML for ‘Provision of Services and Supply of Materials’ and for ‘Chair Rent’. VAT at 17.5%was added.

The decision of the Tribunal does not record when KML (or its predecessor, which I suspect may have been a business owned directly by Mr Mullin or by him and his wife) introduced the Rent a Chair contracts. It is, however, clear that at some time Mr Mullin took the decision to introduce them, and that the more senior stylists, if they wished to continue to work in KML’s salons, had to become self-employed, to enter into the contracts, and to operate in accordance with them. Questionnaires sent by Customs & Excise to several self-employed stylists (of which more later) indicate that some stylists were content to become self-employed; others were less happy about it, but acquiesced in what Mr Mullin required. It appears that initially it was thought that the payments by the self-employed stylists to KML for chair rentals were not liable to VAT when received by KML (because they were exempt receipts for rights over land), but in 1996 Customs & Excise issued VAT Notes to the effect that the receipts were liable to VAT. Before me no-one questioned this change of view, and it appears to me to be correct. It imposed an additional VAT cost on KML, and it seems that KML varied the amounts of the chair rentals and service charges to cover it. This reduced the profits of the self-employed stylists, and the decision of the Tribunal records that some stylists made complaints to Customs & Excise. It all led to an investigation by the local office of Customs & Excise of the way in which KML was accounting for VAT.

The investigation culminated in a formal decision letter, against which KML brought the appeal which failed before the Tribunal and which is now before me, The letter is dated 13 April 1999, and is as follows:

“In April 1998 I had occasion to examine your contracts and procedures with regard to Chair Rentals in your salons. From the information supplied at that visit I assessed for standard rated tax on the rental income received from the scheme.

The Commissioners have subsequently received information which clearly indicates that the self-employed stylists do not exercise control over their own actions and have ultimate authority over all aspects of their business.

The degree of control exercised over the self employed stylists is coterminous with that of sub-contractors making their supply to the salons and as such the onward supply to the public is standard rated.

The information which led to the reconsideration is detailed as follows:

• Holidays have to be applied for in writing and are often not approved.

• Self employed stylists are told to make up the lost day during weeks which include Bank Holidays.

• Self-employed stylists are not able to appoint a locum should they require time away from work.

• Self-employed stylists taking more than one week sick leave have to produce a sick note.

As a consequence the Commissioners require you to account for tax on the total value of the supplies to the public with effect from 1 May 1999.

Please address any queries with regard to this matter to myself at the above address.

Yours sincerely.”

Paraphrasing the letter in terms which I am using in this judgment, it was to the effect that KML and its self-employed stylists were not operating a services to the customer structure at all, but rather were operating a services to the salon structure. On that basis the supplies of hairdressing services to the customers were not made by the stylists, but rather were made by KML, through the stylists as its agents or sub-contractors. Therefore KML was accountable for VAT on the full prices paid by the customers.

Later in 1999, after a meeting between representatives of KML and Customs & Excise, Customs & Excise sent out questionnaires to a random sample of KML’s self-employed stylists. Fifteen replies were received. (There were 45 self-employed stylists at the time.) These were part of the evidence before the Tribunal. I will say more about them later, but they were concentrated on such matters as whether the self-employed stylists could take holidays, and if so how they went about arranging them with KML, on how the prices charged to the clients of the self-employed stylists were fixed, and whether the stylists could choose the hairdressing products which they used.

At the Tribunal oral evidence was given on behalf of KML by Mr Mullin and by two self-employed stylists, Mrs Wheatley and Mr Dawkins. (There is a special reason for the choice of Mr Dawkins as a witness, which I explain later in this paragraph.) Evidence was given for Customs & Excise by three officers of the Department, Mrs Leakie (formerly Miss Greeran), Mr Cook and Mrs Turner, and by a former self-employed stylist of KML, Miss Hutton. Mrs Leakie (Miss Greeran) had made a witness statement in which she said that she regularly used one of KML’s salons in Derby for the purpose of having her hair treated. She gave an account of several things which she said had been told to her by a male stylist at the salon. They supported the general thrust of Customs & Excise’s case that the self-employed stylists were subject to quite tight controls by KML as to how they conducted their professional activities KML was able to identify the stylist concerned as Mr Dawkins. In his evidence he said that he had said some of things which Miss Greeran attributed to him, but had not said others. The more general thrust of his evidence was that he exercised considerable freedom in carrying on his own business in his own way Miss Hutton gave contrasting evidence. She said that, while a self-employed stylist working at one of the salons (in fact one of the two in an Asda superstore), she had had very little freedom as respects how and when she worked.

As well as the oral evidence there was a quantity of documentary evidence before the Tribunal. It included the 15 questionnaires which had been returned to Customs & Excise. Customs & Excise tendered them as part of its case. They and their contents were admissible under rule 28(1) of the VAT Tribunals Rules 1986: ‘…a Tribunal may direct or allow evidence of any fact to be given in any manner itmay think fit and shall not refuse evidence tendered to itonly on grounds that such evidence would be inadmissible in a court of law.’ In the event the Tribunal appears in its written decision to have attached some significance to the questionnaires. Mr Young, who appeared before the Tribunal as he has appeared before me, feels somewhat aggrieved by this. He first points out that rule 21 of the Tribunals Rules lays down quite detailed provisions for witness statements to be served and for the other party to be able to require the witness to attend to give oral evidence if the witness statement is not admitted. Mr Young’s point is that it subverts the scheme of rule 21 if Customs & Excise can simply tender questionnaires as evidence of the facts recorded or implied in the answers which they contain.

Mr Young next drew attention to an exchange which took place in the hearing. In the course of Mr Mullin’s evidence counsel for Customs & Excise (Mr Macnab at that stage) began to question Mr Mullin in cross-examination upon answers given by self-employed stylists in the questionnaires. Mr Young invited the Tribunal to consider whether Mr Mullin could properly be asked questions of that nature, and after some discussion the Tribunal accepted Mr Young’s point. A note of the hearing prepared by someone from KML (or from its professional advisers), the accuracy of which has not been questioned before me, records that no further questionnaires were looked at (presumably this meant that they were not looked at in the course of Mr Mullin’s evidence). The note goes on to record a comment by the Chairman of the Tribunal that ‘the Commissioners would have to live with the fact that their decision was issued on 13 April 1999 prior to any questionnaires having been sent out.’ That was on 4 December 2000. Then for reasons which I need not go into there was an adjournment of over a year before the evidence was completed on 10 December 2001. Closing arguments were thereafter submitted in writing. The Tribunal released its written decision on 31 May 2002. Mr Young says that it is unsatisfactory that, in those circumstances, the Tribunal should place any significant weight on the questionnaires. I have some sympathy with him, and I hope that questionnaires will not start to develop into regular substitutes for witness statements. But I do not think that I could allow KML’s appeal if this was the only basis for it. Nor has Mr Young really suggested that I should.

I turn now to the decision of the Tribunal. At an early stage the Tribunal records that KML called evidence of two self-employed stylists, Mrs Wheatley and Mr Dawkins. It decided (in paragraph 17 of a 76 paragraph decision) that they supplied their hairdressing services directly to the members of the public. It then continued and concluded that all of the other self-employed stylists supplied their services to KML and not to the public. This is a surprising conclusion given that all of the stylists operated under identical contracts. I think that the perceived difference between Mrs Wheatley and Mr Dawkins on the one hand and all the other stylists on the other is that KML exercised a considerable degree of control over the work of the other stylists but much less control over the work of Mrs Wheatley and Mr Dawkins. Mrs Wheatley was the only person located at the salon where she worked, so there was no-one to tell her what to do and she organised her working patterns herself. Mr Dawkins was one of several stylists at his salon, but his evidence left the Tribunal with the impression that he was something of a free spirit who would carry on his work as he wanted without paying too much attention to any apparent rights of control which KML might be entitled to exercise. I will comment more on this aspect of the decision later. For the present I move on to the greater part of the decision where the Tribunal considers the position of all of the self-employed stylists other than Mrs Wheatley and Mr Dawkins.

The Tribunal summarised the evidence of Miss Hutton, and discussed some aspects of the evidence of Mr Mullin. It then set out the terms of the Rent a Chair contract, and added the finding which I have quoted earlier that the ‘self-employed stylists of KML operate their businesses in accordance with the terms of the [contracts]’. It considered some of the provisions of the company’s instructions and rules which applied to employed stylists and, ‘as and where appropriate’ (words taken from the company’s form of contract of employment for employed stylists), applied to self-employed stylists as well. The Tribunal described the arguments of the counsel for the two parties and then gave its conclusions.

I quote a few extracts from the paragraphs of the decision under the heading Conclusions.

“... KML’s self-employed stylists cannot be given the freedom to operate as truly self-employed persons for, if they were, KML’s business simply could not operate. ... If the latter [the self-employed stylists at one of the salons] were allowed to come and go as they pleased – as self-employed stylists should be allowed to do – we fail to see how the salon could provide any sort of service acceptable to the public.” (Decision paragraph 67.)

“... We are quite satisfied that KML exercises a degree of control over its self-employed stylists that is incompatible with their being independent contractors.” (Paragraph 69.)

“It is quite plain, and we find, that the self-employed stylists have no possibility of operating as independent contractors within KML’s salons: they do not have complete freedom to establish their own price structures and times of opening (including closure for holidays); they are unable to compete openly for clients within the salons, and to accept or reject them at will; and they are unable to make their own insurance arrangements. (Paragraph 74.)”

The Tribunal made other detailed points, mainly about things which KML required self-employed stylists to do or other things which it precluded them from doing – being things which in a looser contractual relationship a self-employed person might have been expected to be able to decide upon for himself or herself – but I think that the above quotations encapsulate the essence of the Tribunal’s reasoning. The Tribunal added a concluding observation that KML’s operating methods were not within the guidelines established between Customs & Excise and the National Hairdressing Federation.

I would like first to comment on the feature that the Tribunal came to one decision as respects Mrs Wheatley and Mr Dawkins, but to a different decision as respects all the other self-employed stylists The result is that KML does not have to pay VAT on the receipts from the customers of two self-employed stylists but does have to pay VAT on the receipts from the customers of all other self-employed stylists. Mr Macnab and those instructing him consider that that result is satisfactory I consider that it is unsatisfactory. KML has to retain amounts from the receipts of all the other stylists to enable it to pay the VAT, but it does not retain comparable amounts from the receipts of Mrs Wheatley and Mr Dawkins. That puts Mrs Wheatley and Mr Dawkins in a better financial position than their colleagues. It is plainly divisive, and, even if Customs & Excise can shrug their shoulders and say that it is KML’s problem, not theirs, I would hope to be able to take a broader view myself.

I was told (and was shown letters to bear it out) that many of the other self-employed stylists are already complaining, and are complaining to Customs & Excise as much as to KML. Apparently a few stylists have attempted to lodge formal appeals against the actions of Customs & Excise in requiring KML to apply VAT to receipts from their customers while not applying it to receipts from the customers of Mrs Wheatley and Mr Dawkins. Customs & Excise’s position is that the other stylists have no right of appeal to a VAT Tribunal. Customs & Excise may be correct, but I seriously wonder whether they are right in their view that the Tribunal’s present decision creates no problems for them.

Further, the criteria which the Tribunal gives for distinguishing between different self-employed stylists are vague and likely to give rise to intractable problems. The Tribunal says: ‘... he too [i.e. Mr Dawkins as well as Mrs Wheatley] clearly has a totally different relationship with KML from those stylists who responded to the Commissioners’ questionnaires.’ (Decision paragraph 17.) The questionnaires are far from unanimous in their answers to the questions, and in the absence of explanations from the 15 stylists about what they meant by some of their brief responses I think that it is dangerous for the Tribunal to have drawn conclusions, as it appears to have done, from what some or most of them said. In any case, other self-employed stylists could say that they have exactly the same relationship with KML as do Mrs Wheatley and Mr Dawkins, namely the relationship created by the Rent a Chair contracts. Indeed, it seems that that is exactly what some of the other stylists are saying already.

It is tempting to speculate that the really important difference between Mrs Wheatley and Mr Dawkins on the one hand and the other self-employed stylists on the other is that the Tribunal heard evidence from Mrs Wheatley and Mr Dawkins but did not hear evidence from the others. At the relevant time there were 45 self-employed stylists. I am sure that the Tribunal would not have expected KML to call all 45 stylists to give evidence, in order that the Tribunal could assess on a one by one basis how far they were independently minded like Mr Dawkins or, by way of contrast, inclined simply to go along with KML’s requirements and preferences like Miss Hutton. Mr Young told me that his client and its professional advisers took the view (reasonably and realistically in my opinion) that two sample self-employed stylists should be presented to the Tribunal to give evidence, and that the Tribunal, having heard the evidence of the two stylists and of Mr Mullin, would be likely to regard the decision which it reached as governing the self-employed stylists as a whole. I suggest that if the Tribunal had been asked to give directions in advance it would have directed something along those lines I believe I am right in saying that there was no reason to suppose in advance of the hearing that the Tribunal would split the decision as it did.

Suppose that a deputation of other self-employed stylists now approaches KML or Customs & Excise or both and says that there ought to be a new appeal hearing at which they should all have the opportunity to give evidence to the Tribunal and explain how they are all in their own ways far more like Mrs Wheatley and Mr Dawkins than Miss Hutton. Suppose that some of the stylists say that they completed questionnaires, and they never intended their answers to be understood as showing that they had ‘a totally different relationship’ with KML from the relationship which Mrs Wheatley and Mr Dawkins had. Indeed, at least one self-employed stylist has already said precisely that. Even in the absence of a further appeal, what is KML to do if a large number of stylists say to it that they have read the note of the evidence given by Mr Dawkins, and intend in future to operate the Rent a Chair contracts in the way that he described to the Tribunal, even if they had not operated them in that way in the past?

The point here is that a decision has been given which is financially harmful to 43 out of 45 self-employed stylists. The decision has been reached without hearing evidence from any of the 43, and I do not think that it can fairly be said that that is their fault, or KML’s fault, for not arranging the appeal so that they all gave evidence. The decision has been reached partly on the basis of the evidence of one former self-employed stylist who left KML in April 1998, and partly on the basis of short and not always consistent answers to questionnaires from 15 stylists who did not know that their answers would be relied on to their detriment in the VAT Tribunal, and some of whom are saying that their answers have been misunderstood. I do not think that that is fair or that it provides an acceptable basis for operating the VAT system in future in relation to KML and its self-employed stylists. I have to accept that, if that was the only aspect of the decision which caused me disquiet, I am not clear that I could do anything about it at this stage. However, there are other aspects of the decision which persuade me that I should allow this appeal, and I will continue and consider those aspects.

Accordingly, I now proceed as if the decision had concerned only the self-employed stylists other than Mrs Wheatley and Mr Dawkins, and had not included the short part of the decision which related to those two. I will first say how I myself believe that the issue should have been approached. Later I will review how the Tribunal approached it. I first remind myself of what the precise question is. It is this. Assume that a customer goes into a KML salon and has her hair cut or styled by a self-employed stylist. Who, for the purposes of section 1 of the VAT Act 1994, makes to the customer the supply of the service of hairdressing? Is it KML, acting by the stylist as its agent? Or is it the stylist, acting as principal? In my opinion the answer depends on the relationship between KML and the stylist. Further, the answer does not depend on what the customer knows about that relationship. Usually the customer will not know about it. This is a matter of common experience in all sorts of contexts, and is in no way special to hairdressing salons. If someone books a car from a local business to drive him somewhere a driver will turn up in a car and he will drive the customer to where he wants to go. The customer will pay the fare to the driver. He will have no idea whether the driver is an employee of the business, or a self-employed sub-contractor of the business, or whether he is a freelance driver who uses the services of the business to obtain customers for his own driving services. It is the same when a customer goes into a hairdressing salon and has his or her hair treated by one of the individuals who is in the salon and available to provide customers with the services which they require. The customer is most unlikely to know the nature of the contractual arrangement between the individual stylist and the proprietor of the salon, and it is in that contractual relationship that the answer to the question lies.

That was also the view of Potts J in the MacHenrys case. In [1993] STC at p. 175f he said:

“The answer to the question, to whom were the services being supplied depended largely on the relationship between the stylists and the company … How the public or a customer perceived this situation was and is not a crucial or determinative factor in the resolution of that issue given the provisions of section 2 of the 1983 Act [now section 1 of the VAT Act 1994]. I accept [counsel’s] submission on behalf of the company in this regard.”

So the critical question is: what was the relationship between the self-employed stylists and KML? In my view the starting point, and sometimes the finishing point as well, in answering a question of that nature is to analyse the contractual terms which operate between the parties. In Customs & Excise Commissioners v Music and Video Exchange Ltd [1992] STC 220 (not a case about hairdressing, but nevertheless a case about analysing for VAT purposes the relationship between two parties), McCullough J put it as follows (at pp 222-3):

“What then did A and B agree? One looks first in any case of contract to see what the parties said to one another. First, what did they put into writing? If they did not record their entire agreement in writing, was what was written supplemented orally? If this does not provide the answer one looks next to see what implications, if any, should be drawn from statute, custom, usage, their previous dealings, etc and how they conducted their relations with one another after the contract had been made.”

So I begin with the Rent a Chair contract, which on the face of things provides the contractual relationship between KML and the self-employed stylists I have described the contract earlier (see paragraphs 14 and 15 above), and I will not repeat what I said there. The critical provision of the contract is the one which provides that KML is to provide a chair to rent and that the self-employed stylist is to rent the chair. That provision is supplemented by the conduct of the parties, whereby the stylists make payments to KML by way of chair rentals and service charges, and KML provides receipts to the stylists for the payments so made. In my judgment that contractual position is consistent with it being the stylists, not KML, who supply the hairdressing services to the customers. To put the same point the other way round, it would be in conflict with the Rent a Chair contracts for the self-employed stylists to be providing personal services, analogous to the services of sub-contractors, to KML in return for fees from KML, and for KML to be supplying hairdressing services to the customers whose hair is dressed by the stylists.

I accept that the matter is not automatically concluded just by considering the apparent contractual position. It is necessary to examine what the evidence shows, and to ask whether the evidence requires a departure from what would otherwise be the result of the apparent contractual position. The first question in this connection is whether the evidence shows that the parties contracted to do one thing, but in fact did something else, and did not act in accordance with the contracts. In my opinion the evidence shows no such thing. Indeed, any analysis of that nature would be contrary to the express findings of the Tribunal. I refer again to the finding in paragraph 35 of the decision: ‘We find that self-employed stylists of KML operate their businesses in accordance with the terms of the Hairdressing Rent a Chair contracts.’ When I first read that paragraph I had difficulty in seeing how the conclusion to which I knew the Tribunal was going to come could be consistent with it. The remainder of the decision did not resolve my difficulty. In my opinion the Tribunal’s conclusion that the hairdressing services to customers treated by self-employed stylists were supplied by KML, not by the stylists, is contrary to the terms and effect of the Rent a Chair contracts, taken together with the finding that the self-employed stylists did in fact operate in accordance with the terms of the contracts.

There may be another question of fact to be considered. Given that the provisions of the Rent a Chair contracts and of KML’s instructions and rules for stylists (employed and self-employed) enable KML to exercise quite tight control over many aspects of the work of self-employed stylists, does that mean that, whatever the contracts may have attempted to say and however hard the parties tried to operate in accordance with them, it was just not possible for the stylists (rather than KML) to be the persons who supplied hairdressing services to the customers? The Tribunal may have thought that that was the position, although it does not specifically say so. In my judgment, however, there is nothing in the features on which the Tribunal places reliance which means that, despite what the contracts said, the self-employed stylists could not or did not supply hairdressing services to the customers.

There is no reason, either of law or inherent in the nature of the business, to prevent KML making and operating arrangements with a stylist to the following effect. (1) KML will permit the stylist to have a chair in one of its salons and to use the general facilities of the salon. (2) Customers treated by the stylist will be the stylist’s customers, not KML’s, so that (3) the stylist will be entitled to the prices paid by the customers whom he or she treats. (4) KML will charge the stylist for the use of its (KML’s) chair and salon facilities; the charges will be fixed from time to time and will contain an element geared to the stylist’s receipts from his or her customers. (5)Further, if the stylist wishes to take advantage of this structure proposed to him by KML, KML will expect him or her to comply with a number of conditions, including the following: he or she should be in attendance at the salon at normal business hours and should be available to treat all members of the public who come into the salon for haircuts or stylings, he or she should not take more that a specified period of holidays a year, and the particular times to be taken as holidays should be arranged with KML a reasonable time in advance, he or she should have regard to KML’s pricing guides in charging the customers, he or she should normally use hairdressing products recommended by KML. With reference to conditions of the kinds which I have described in (5),one can well imagine that other salons might not require them to be observed by other self-employed stylists But if a particular salon does require them to be observed, as KML did, does that in some way invalidate the earlier provisions of the package whereby the stylist, not the salon, provides the hairdressing services to his or her customers.In my opinion the answer is: clearly no.

I therefore believe that in the circumstances which existed in the present case the structure within which KML’s self-employed stylists operated was a true ‘services to the customer structure’, not a ‘services to the salon structure’, and that Customs & Excise’s direction to KML that it was to account for VAT on the prices paid by the customers treated by the self-employed stylists was not justified in law. I respectfully disagree with the conclusion of the Tribunal.

Further, I do not think that this is the sort of case in which the Tribunal came to a conclusion of fact, and the question for me on appeal is whether it was a conclusion within the ‘no man’s land of fact and degree’ as respects which an appellate court cannot interfere on an appeal limited to errors of law (the quoted words are from Lord Simon’s speech in the income tax case of Ransom v Higgs (1974) 50 Tax Cases at 96) or whether it was a decision such that no reasonable Tribunal properly instructed in the law could have reached it, in which case an appeal will succeed in accordance with the principles explained in Edwards v Bairstow [1956]AC 14. In my opinion I can intervene because the Tribunal applied the wrong tests, and thereby erred in law. There are three specific points which I will make.

Finally I wish to say something about the guidelines agreed between Customs & Excise and the National Federation of Hairdressers. These, as I understand it, are guidelines to show circumstances in which Customs & Excise will accept that a salon is operating a ‘services to the customer structure’ rather than a ‘services to the salon structure’. It is certainly the case that the guidelines lay a lot of stress on factors which show that the stylist has a fully independent business which he or she can conduct in his or her own way largely untrammelled by requirements insisted upon by the salon. I would accept that there are several respects in which the relationship between KML and its self-employed stylists is a much more closely controlled one than the relationship contemplated by the guidelines. Nevertheless the question is not whether KML’s structure came within the guidelines or not. The question is whether under KML’s structure the self-employed stylists supply hairdressing services to KML or to the customers. In my judgment they supply them to the customers, and I do not accept that it is only possible for them to do that if the relationship between them and KML matches up in all substantial respects to the relationship described in the guidelines.

I can understand that the officers of Customs & Excise who reviewed KML’s arrangements to determine whether they were a ‘services to the customer structure’ or a ‘services to the salon structure’ would be heavily influenced by the guidelines which had been agreed by the Department. But when the matter comes before the Tribunal and the courts it becomes necessary to look beyond the guidelines to the underlying legal principles. Looking at those principles I consider that, although KML’s structure does not correspond to the guidelines, it does have the effect that the self-employed stylists, not KML, supply hairdressing services to the customers who come into the salons. Therefore the consideration for those supplies (the prices paid by the customers) is not consideration for supplies made by KML. It follows that KML is not required by the VAT Act 1994 to account for VAT on that consideration.

For the reasons which I have explained I respectfully disagree with the conclusion reached by the Tribunal. In my judgment the direction in Customs & Excise’s letter of 13 April 1999 requiring KML to account for VAT on the total value of supplies of hairdressing services to the public, in so far as the services were provided by self-employed stylists in KML’s salons, was incorrect. Therefore I allow this appeal. I reverse the decision of the Tribunal and I set aside the direction of 13 April 1999.