Byrom, Kane & Kane (t/a Salon 24) v Revenue & Customs

Judgment

Mr Justice Warren :

Introduction

1. This is an appeal by Mrs Kane, Mr Kane (her former husband) and a Mr Byrom (trading in partnership as Salon 24) from a decision dated 26 July 2005 (“the Decision”) of the VAT & Duties Tribunal (David Demack and Alban Holden) sitting in the Manchester Tribunal Centre. The Tribunal dismissed the appellants’ appeal, holding that the supplies by them were not of licences to occupy land (which would be exempt) but were supplies of the various facilities which they provided in the course of their business and to which the occupation licences were merely incidental.

2. Salon 24 own or lease what has been referred to as a massage parlour from which self-employed ladies, according to the Tribunal “e uphemistically described as masseuses”, offer their services to their clients. The primary findings of the Tribunal are not lengthy and are to be found firstly in paragraphs 3 to 13 of the Decision. So far as they are material, I set them out in the following paragraphs.

The facts

3. Salon 24 trade as a massage parlour. The services their masseuses provide are of a different nature from pure massage. The services, if not those of prostitution, are akin to it.

4. The premises include on the ground floor: toilet facilities, a kitchen, a day room or lounge for use by masseuses awaiting customers, a changing room for masseuses, a shower room (containing a washing machine and dryer) and a seating area for customers awaiting masseuses’ services; and on the first floor: four (until June 2002 three) rooms in which masseuses entertain their customers, a toilet and an additional room for use by masseuses and their clients (referred to as the “fetish room”) about which the Tribunal received no further information and found it unnecessary to enquire about its use.

5. Each of the four (three) first floor rooms is sparsely furnished by Salon 24 with a double bed, a chair and a television set for playing video recordings. Salon 24 provide the basic bed linen and towels. Any other items provided to or for use by customers are supplied by the individual masseuses.

6. Studio 24 entered into a written contract with masseuses wishing to offer massage services. The Tribunal set out the terms of the contract which provided in essence for the following:

a. The rent to the masseuse of a room on the day or days chosen by her.

b. The current rate was stated to be £110 per day which had to be paid in advance on the day of hire of the room.

c. The rent paid included costs “towards the use of our laundry facilities, charges to ourselves from Roynet for credit card payment by your clients and advertising”.

d. Upon payment of the rent, the masseuse was to be allocated a room solely for her use during the day, opening hours being 10am to 10pm 7 days per week with possible closure on bank holidays”.

7. The Tribunal held that such services were indeed provided on the terms mentioned but that the list of services provided was not comprehensive. The salon’s opening hours were determined by Salon 24. The masseuses are self-employed, as large notices found throughout the premises confirm which notices included advice that “..enquiries with regard to quality of service or price should be directed to your masseuse” and “Any enquiries regarding the premises, should be directed to Salon 24”. I observe that this does not necessarily reflect precisely the respective provisions which Salon 24 and the masseuses make for the satisfaction of customers. For instance, a complaint about a bed or bed linen might be seen by a customer as properly directed at the masseuse rather than Salon 24 notwithstanding that it is the latter who have provided them.

8. If not all the rooms are occupied on a particular day, Mrs Kane, as receptionist, or another receptionist, will contact regular masseuses to see whether they are prepared to fill any vacancy. If so, they may be offered a reduced daily rental.

9. Salon 24 advertise the service of the masseuses in the Manchester Evening News. The advertisement indicates that private parking is available and that all major credit cards are welcome. The Tribunal found that Salon 24 did in fact provide parking facilities. It also found that the services of the masseuses were also advertised on the salon’s website which the masseuses established and which they continue to operate.

10. Salon 24 does not operate an appointments system, customers being expected to accept any masseuse who is available on arrival at the salon. It is not explained how the telephone number in the advertisement in the Manchester Evening News is used by customers in the absence of an appointments system, but one can speculate that a caller would be able to find out rates and availability; and a regular customer could no doubt discover whether a particular masseuse would be available if he were to visit at a particular time.

11. On a customer entering the salon, he is introduced to a masseuse. He then pays £40 to Salon 24, which may be paid in cash or by credit card. Some 50% of customers pay by credit card. It will be remembered that the contract between Salon 24 and the masseuse provides that her daily charge of £110 includes charges to Salon 24 by Roynet for the provision of credit card facilities.

12. The customer then negotiates a separate fee with his masseuse for whatever services he requires. This is over and above the £40 which I have referred to which is itself a fee to the masseuse and is not kept by Salon 24. The fee is collected by the masseuse and is placed in a security box which each masseuse has and which is held by Salon 24 for security purposes.

13. If the customer wishes to use the fetish room, he is required to pay an additional fee to Salon 24 of £20. The Tribunal said nothing about payment by the customer to the masseuse for services provided in the fetish room but that, no doubt, was a matter between the masseuse and the customer pursuant to the negotiations mentioned at paragraph 12 above.

14. Salon 24 are responsible for security of the premises and have CCTV as part of their security system. They are also responsible for cleaning and maintaining the premises and for their heating and lighting. The Tribunal also held that Salon 24 “provide telephone services, pay the business rates for the premises, and presumably have the usual form of insurance cover of business premises”. It is entirely unclear what is meant by “telephone services”. There is, as already mentioned, no appointments system; nor is it suggested that masseuses could make lengthy long-distance calls at the expense of Salon 24.

15. Salon 24 does not provide a laundry service, although, as already stated, it is responsible for providing basic linen and towels. It is not of relevance, I consider, whether the laundry relevant to that provision is carried out on the premises or not. Salon 24 does, however, allow the masseuse to use the washing machine and drier on the ground floor. On occasions, the receptionist may load and switch on the machines for a masseuse, but that is not part of the contract between Salon 24 and a masseuse. Salon 24 provides 6 lockers which 6 regular masseuses use for storage purposes.

16. Following on from those findings of fact (and up to paragraph 13 of the Decision there are no other relevant findings of fact), the Tribunal went on to identify the relevant legislation. Then, at paragraph 16, commences a section of the Decision headed “Submission and conclusion”. The authorities are considered in paragraphs 16 to 18. In paragraph 20, the Tribunal say this:

“20. The Appellants’ case depends on our accepting that, even with an exclusive licence to occupy a room, a masseuse could realistically be regarded as carrying on her business within that room. In our judgment, she could not reasonably be so regarded. Mrs Kane’s evidence made it plain to us that a masseuse does not carry on a business solely with the room allocated to her. For instance, the licence makes no provision for a masseuse or her customers to gain access to her room from the street, but, even it if did, or it were to be implied, it is clear that she carries out only a small part of her business within the room. And whilst it might be possible for her to dispense with the Appellants’ security services and cash handling facilities, for safety reasons they, too are essential. We accept that use of lockers, and the day room may not be absolutely necessary, but they are ancillary matters that form part of the total package.”

17. For completeness I set out at this point paragraphs 21 to 24 of the Decision:

“21. Further, whilst the licence does provide for laundry facilities, Roynets’ card handling arrangements and advertising, it does not include any facility for telephone answering, reception or customers, the waiting and other arrangement for customers both before and after receipt of a masseuse’s services, and car parking, all of which are essential elements of a masseuse’s business. (For the sake of clarity, we should say that we do not accept that the supplies of laundry facilities, card handling and advertising are subsumed in the supply of room rental).

22. Mr Gibbon’s [for Salon 24] claim that the various supplies above listed are merely a means the better to enjoy the licence to occupy a room cannot, in our judgment, be accepted. For it to succeed, the Appellants would have to show that the licence would be sufficient for a masseuse to carry out her business, even if the services in question were not provided. Clearly that is not so. In our judgment, the Appellants are, and at all material times were, supplying to masseuses a package including the provision of various services.

23. We then turn to consider which, if any of those supplies is the principal one. In our judgment it is the supply of the various facilities in the salon including in particular the use of the telephone and reception system, the use of the waiting areas, the advertising and the card handling facilities.

24. Applying the Card Protection test, the only conclusion we can reach is that the Appellants make a single supply of a package of which the dominant part is the taxable supply of services to which an incidental part is the supply of a room. We therefore held that the Appellants’ entire supplies are standard rated. We dismiss the appeal.”

18. I shall return to the conclusions which the Tribunal draws in those paragraphs 20 to 24 later, but a question arises whether, in paragraph 20, the Tribunal is simply analysing the primary facts which it has found earlier in the Decision (and which I have set out above) or whether it is making further findings of fact. I think that they must be taken as finding further facts. The earlier findings make no reference to Mrs Kane’s evidence about how the masseuses carry on business; but it is clear that, in this paragraph, the Tribunal is indeed relying on these aspects of Mrs Kane’s evidence and must therefore be taken as making findings in relation to it.

19. It is, however, unhelpful that the Decision should contain a section headed “The facts”, and which is introduced by words “…we make the following findings of fact”, if that is not intended to be the exclusive part of the Decision in which factual findings are made.

The law

20. In order to deal with the Tribunal’s reasoning and its conclusions, it is necessary to understand the relevant law to which I now turn.

21. The statutory provisions are well-known.

a. Sections 1 and 4 Value Added Tax Act 1994 (“VATA”) charge VAT on a supply of goods or services in the UK. There is a supply for VAT purposes only where it is made for a consideration. VAT is charged on a taxable supply in the course of business; a taxable supply is a supply other than an exempt supply.

b. Section 31 provides, so far as relevant, that a supply is an exempt supply if it is of a description for the time being specified in Schedule 9.

c. Schedule 9 is divided into Groups. Group 1 specifies, so far as relevant, in Item 1 the “grant of any interest in or right over land or licence to occupy land”,

d. Section 31 and Schedule 9 reflect (and insofar as possible is to be interpreted in the light of) Article 13 of EC Council Directive 77/388 (“the Sixth Directive”). Exemption is to be provided from VAT for “the leasing or letting of immovable property…”.

22. The correct categorisation for VAT purposes of the provision of goods or services by one person to another is a matter of some difficulty and has been subject to a number of decisions of both the English court and the ECJ. As the Advocate General (Fennelly) said in his opinion in Card Protection Plan Ltd v Customs & Excise Commissioners [1999] STC 270 (see paragraph 1 at p 273) “Special difficulties arise, in the mystic twilight of VAT legislation, where there is what in modern jargon is called “a package” of services, some of which may, and others of which may not, be within a VAT exemption…”. The ECJ itself addressed at paragraphs 26 to 32 of its judgment, the question what the appropriate criteria are for deciding, for VAT purposes, whether a transaction which comprises several elements is to be regarded as a single supply or as two or more distinct supplies to be assessed separately. I add that, having answered that question in a particular case, it may not be clear whether the supply or supplies thus identified are exempt supplies or not and a further exercise will need to be carried out to identify the status of the supply or supplies.

23. In paragr aph 28 of the judgment in that case, the ECJ referred to its decision in Faaborg-Gelting Linien A/S v Finansamt Flensburg (Case C-231/94) [1996] STC 774 at 783, [1996] ECR I-2395 at 2411-2 paras 12 to 14. That case concerned the classification of restaurant transactions where the transaction in question comprised a bundle of features and acts. It was held that regard must first be had to all the circumstances in which that transaction takes place. The essential features of the transaction must be ascertained in order to determine whether the taxable person is supplying a customer with several distinct principal services or with a single service, taking account of two principles of VAT which may be in tension viz (i) that every supply of a service must be regarded as distinct and independent and (ii) that a supply which comprises a single service from an economic point of view should not be artificially split so as not to distort the functioning of the VAT system: see paragraph 29.

24. There is a single supply in particular in cases where one or more elements are to be regarded as constituting the principal service, whilst one or more elements are to be regarded, by contrast, as ancillary services which share the tax treatment of the principal service. A service must be regarded as ancillary to a principal service if it does not constitute for customers an aim in itself, but is a means of better enjoying the principal service supplied. The charging of a single price is not decisive: see paragraphs 30 and 31.

25. It is to be noted that this decision is concerned with the criteria for ascertaining whether there is one supply or more than one supply. It does not address the question of the status (ie taxable or exempt) of each supply thus identified.

26. When the case returned to the House of Lords (see [2001] STC 174, [2002] 1 AC 202), Lord Slynn, who delivered the only speech, observed (see paragraph 22 of his speech) that the effect of the ECJ decision is that the national court is to have regard to the “essential features of the transaction” to see whether it is “several distinct principal services” or a single service and that what from an economic point of view is in reality a single service should not be “artificially split” into separate supplies. It seems, he said, that an overall view should be taken and over- zealous dissecting and analysis of particular clauses [of the agreement for the service provision] should be avoided. He then went on (see paragraph 25) to ask what was the essential feature of the scheme or its dominant purpose – perhaps why objectively people are likely to want to join it - and concluded that without doubt it was to obtain insurance cover against loss arising from misuse of cards of other documents. He was able to interfere with the decision of the Tribunal because (see paragraph 21) everything turned on the interpretation of the written arrangements and that it was therefore open as a matter of law to review the scheme afresh. This was accordingly a case where there was a principal supply to which the other elements were truly ancillary: the entirety of the transaction took its VAT treatment from the principal supply.

27. The question of how to categorise a package of services for VAT purposes came before the House of Lords again in Dr Beynon & Partners v Customs & Excise Commissioners [2005] STC 53. This case concerned the administering of drugs by a medical practice in the course of treatment of a patient. The supply of drugs to relevant patients (referred to as Regulation 20 patients) was said by the doctors to be a separate supply (in which case it would be zero rated) from the supply of medical care (which is an exempt supply). The Commissioners took the view that the provision of the drugs was merely ancillary to a single exempt supply of medical services, with the result that the doctors were not entitled to deduct or seek repayment of the input tax on drugs supplied to the practice. The tribunal upheld the Commissioners’ ruling. The doctors appealed to the High Court and the Court of Appeal, succeeding in the Court of Appeal which noted that at a particular level of generality it could be said that there was one transaction but held that, in reality, consultation and medical diagnosis were a supply of a service dissociable from the supply of a drug for the purposes of treatment and its administration. The single speech in the House of Lords was delivered by Lord Hoffmann with whom the other members of the panel agreed. The conclusion was that there was a single supply of medical services.

28. Lord Hoffmann made the point, in paragraph 19 of his speech, that the decision of the ECJ in Card Protection Plan Ltd was a restatement of principle and said that it should not be necessary to go back any further: “…there is no advantage in referring to…earlier cases and their citation should be discouraged”.

29. Lord Hoffmann then proceeded to review the principles established in Card Protection Plan Ltd, and, having done so, took as an example the transaction in Faaborg-Gelting Linien A/S which concerned the classification of restaurant meals; and he set out paragraphs 13 and 14 of the judgment of the ECJ in that case. Paragraph 13 described the functions involved in supplying a meal, ranging from cooking to serving, from helping customers choose to clearing the table after a meal. Consequently, the ECJ said in paragraph 14, “restaurant transactions are characterised by a cluster of features and acts, of which the provision of food is only one component and in which services largely predominate. They must therefore be regarded as supplies of services within art 6(1) of the Sixth Directive……”.

30. There had been debate in the lower courts as to whether the application of the Card Protection Plan Ltd principles involved a question of law or a question of fact. Lord Hoffmann dealt with that at p 62, paragraphs [26] and [27]:

“[26] In the Court of Appeal ([2003] STC 169), Aldous LJ said that the classification of the transaction as a supply of services or of goods and services was a question of law. He cited in support the decision of this House in Customs and Excise Comrs v British Telecommunications plc [1999] STC 758 at 763, [1999] 1 WLR 1376 at 1381 in which Lord Slynn of Hadley said that the ‘characterisation of the supply as provided for here in the contractual documents is a matter of law’. Aldous LJ pointed out that the facts found by the tribunal were not in dispute. The issue was as to their legal consequences.

[27] In my opinion the weight of authority supports the view of the Court of Appeal on this point. The courts have not treated VAT classification in the same way as some questions of classification (for example, whether a contract is of service or for services) which, notwithstanding that there are no facts in dispute, are deemed to be questions of fact so as to exclude on appeal on a question of law: see the discussion in Moyna v Secretary of State for Work and Pensions [2003] UKHL 44 at [22]–[25], [2003] 1 WLR 1929 at [22]–[25]. On the other hand, as Lord Hope of Craighead said in the British Telecommunications case ([1999] STC 758 at 768, [1999] 1 WLR 1376 at 1386) the question is one of fact and degree, taking account of all the circumstances. In such cases it is customary for an appellate court to show some circumspection before interfering with the decision of the tribunal merely because it would have put the case on the other side of the line.”

This need for circumspection was emphasised by Lord Walker at paragraph 36 of his speech in College of Estate Management v Customs & Excise Commissioners which I come to later.

31. Returning to the question of categorisation, Lord Hoffmann (in Dr Beynon & Partners) then says this:

“[30] Aldous LJ acknowledged that ‘at a particular level of generality’ it could be said that there was one transaction. But he said that when a doctor administered a drug to a patient he was ‘in reality dispensing the drug to the patient and then administering it’. Chadwick LJ likewise divided the transaction into three elements: first, the consultation and diagnosis, secondly the supply of the drug for the purposes of treatment and thirdly its administration. The first stage, he said, was ‘dissociable’ from the second and third and constituted a separate supply. Although there might be some medical skill involved at the third stage, the dominant element was the supply of the drug and it was therefore to be classified as a supply of goods.

[31] Besides raising the question of what authority a doctor would have to dispense drugs to patients who were not reg 20 patients, this approach seems to me to involve the kind of artificial dissection of the transaction which the Court of Justice warned against in its judgment in the Card Protection case para 29. In my opinion the level of generality which corresponds with social and economic reality is to regard the transaction as the patient’s visit to the doctor for treatment and not to split it into smaller units. If one takes this view, then in my opinion the correct classification is that which the NHS has always taken of the personal administration of drugs to non-reg 20 patients, namely that there is a single supply of services.”

32. The case of College of Estate Management v Customs & Excise Commissioners [2005] STC 1597 came before the House of Lords in October 2005. The College provided distance-taught educational courses and training to the property and construction professions with over 2,300 students worldwide. It offered a range of qualification; indeed it was a main objective of students to obtain such qualifications. The main elements by which the College provided teaching were: study at home or in the workplace by material provided by the College; preparation and submission of assignments; face-to- face teaching sessions; and access to the College’s website. An average of 94% of student’s time was spent using the study material provided. For VAT purposes, the supply of education and examination services was an exempt supply, as was the supply of goods and services closely related to such supply. The supply of books was zero-rated. The Commissioners decided that the College made a single supply of exempt educational services. The College contended that it made separate supplies of goods (the written materials) and services (the remainder of the educational package). The tribunal held that there was a single supply of educational services, finding on the evidence that the written materials were not an end in themselves for the students and that although students relied principally on the written materials for their education, that did not detract from the College providing overall a supply of education. They also decided that the supply of printed material was an ancillary element and a means of better enjoying the provision of education. Lightman J agreed with the tribunal’s decision. The Court of Appeal allowed the College’s appeal, holding that there were two distinct supplies and holding also that the tribunal’s conclusion (with which the Court of Appeal disagreed) that the printed materials were not an end in themselves for the students was an inference to be drawn from the primary facts and that ultimately it was a question of law what the essential object of character of the contract was. The House of Lords restored the decision of the tribunal.

33. Having considered Card Protection Plan Ltd in the ECJ, Lord Rodger makes a number of important points in the subsequent passages of his short speech. In particular:

a. Although, normally, every supply of a service is to be regarded as distinct and independent, nonetheless there are cases where the taxpayer is to be regarded as making a single supply even though it comprises more than one element. The ECJ in Card Protection Plan Ltd had highlighted the case where there is a principal supply and an ancillary, or accessory, supply. But there can be cases where a taxpayer is involved in a transaction in which he performs several services, none of which can be singled out as the dominant or principal supply and where it may be necessary to consider, for VAT purposes, whether those services are to be regarded as elements of a single supply (for example the restaurant services in Faaborg-Gelting Linien A/S).

b. That point would scarcely be worth re-emphasising, he considered, were it not for the position adopted by the Commissioners that the printed material supplied by the College was ancillary to the principal supply of education. He considered that the supply of that material was by far the main method by which the College provided students with an education. In contrast, the ECJ in Card Protection Plan Ltd explained that an element is properly to be regarded as ancillary where it is not the principal supply but is accessory to it and so shares the tax treatment of the principal supply. He says “…it would be highly artificial, to say the least, to describe the printed materials as nothing more than a means for the students the better to enjoy the education supplied by the College. In reality, those materials were the means by which the students obtained most of their education”.

c. “But the mere fact that the supply of the printed materials cannot be described as ancillary does not mean that it is to be regarded as a separate supply for tax purposes…..One still has to decide…. whether the College should properly be regarded as making a separate supply of the printed materials or, rather, a single supply of education, of which the provision of the printed material is simply one element”. To answer that, one does not simply look at what the taxable person actually did since he will, in point of fact, actually have made a number of supplies. The criterion to be applied is whether there is a single supply “from an economic point of view”; and, if so, that supply should not be artificially split, so as not to distort the functioning of the VAT system. The answer will, accordingly, “be found by ascertaining the essential features of the transaction under which the taxable person is operating when supplying the consumer, regarded as a typical consumer”. The key lies in analysing the transaction.

34. Lord Walker delivered a rather longer speech. He reiterated what was said in Dr Beynon & Partners about the citation of earlier authority; and referred to the analysis of Lord Hoffmann in that case of Card Protection Plan Ltd. Then, in a passage dealing with the meaning of “ancillary” he says, reaching the same conclusion as Lord Rodger, this:

“[30] In the course of this appeal there has been much discussion of para 30 of the ECJ’s judgment. In my opinion it is clear that this paragraph (which uses the introductory words ‘in particular’) is dealing with a particular case exemplified by Madgett and Baldwin. It is not asserting that every distinct element of a supply must be a separate supply for VAT purposes unless it is ‘ancillary’. ‘Ancillary’ means (as Ward LJ rightly observed ([2004] STC 1471 at [39]) subservient, subordinate and ministering to something else. It was an entirely apposite term in the discussion in British Telecommunications (where the delivery of the car was subordinate to its sale) and in Card Protection Plan itself (where some peripheral parts of a package of services, and some goods of trivial value such as labels, key tabs and a medical card, were subordinate to the main package of insurance services). But there are other cases (including Faaborg, Beynon and the present case) in which it is inappropriate to analyse the transaction in terms of what is ‘principal’ and ‘ancillary’, and it is unhelpful to strain the natural meaning of ‘ancillary’ in an attempt to do so. Food is not ancillary to restaurant services; it is of central and indispensable importance to them; nevertheless there is a single supply of services (Faaborg). Pharmaceuticals are not ancillary to medical care which requires the use of medication; again, they are of central and indispensable importance; nevertheless there is a single supply of services (Beynon).”

35. The clear statement of approach in College of Estate Management is foreshadowed in Customs & Excise Commissioners v FDR Ltd [2000] STC 672, where the Court of Appeal addressed the treatment of some or all of FDR’s activities as a core or principal supply. At paragraph 50 of his judgment, Laws LJ says this:

“The notion of a core or principal supply, and indeed the conception of a dichotomy between single and multiple supplies, are not I think themselves creatures of the Sixth Directive (or the national legislation). They have been developed by the courts as a technique for use in the task of ensuring the fair and proper tax treatment, in light of the VAT legislation properly construed, of a taxpayer’s activities in cases where that would not be achieved if the activities were viewed singly and in isolation…..”.

36. Then, after addressing at paragraph 51 of his judgment a passage from the judgment of Millett LJ in Customs and Excise Commissioners v Wellington Private Hospital Ltd [1997] STC 445 at 462 he says this in paragraph 53:

“53. I should with diffidence like to make one or two observations about this learning. I am sure with very great respect that Millett LJ did not intend, in the first four sentences of the passage I have just cited, to indicate that in every case where multiple supplies properly fall to be treated as a single supply for fiscal purposes there is always a single or unitary dominant supply to which all the other supplies in question are then regarded as ancillary. That, certainly, is one case; but there may be others where the single supply that is arrived at for VAT purposes consists, not in one supply to which others are ancillary, but in a bundle of supplies none of which predominates over the others; the single supply may, as it were, be an apex or a table-top. There is thus a difference between what is ‘ancillary’ and what is ‘integral’: several supplies may be ‘integral’ to one another, with none predominating….The services of a hotelier (compare the facts of the Madgett case) are perhaps an example……”

I would add to that that several elements – Laws LJ uses the word “supplies” but he does so, I think, using that word in its ordinary sense rather than its technical VAT sense – can constitute a single supply even where one element is dominant: dominance does not necessary identify the overall supply: see for instance the decision of the House of Lords in Dr Beynon & Partners.

37. Shortly after the House of Lords delivered judgment in College of Estate Management, the ECJ gave its decision in Levob Verzekeringen BV & OV Bank NV v Staatssecretaris van Financiën Case C-41/04. This case shows the ECJ adopting a similar approach to the House of Lords. It concerned the importation of software which Levob had obtained from an American supplier. The software concerned was basic software which had been customised for Levob for use in the management of insurance contracts which it sold. The basic software was imported into Holland by Levob where, in accordance with the contract, the software was customised and installed, and Levob personnel trained in its use. According to the report, “the national court sought to ascertain whether the provision of standard software developed, put on the market and recorded on a carrier by the supplier and the subsequent customisation thereof by the supplier to the customer’s requirements, in consideration of the payment of separate prices….are to be regarded as two distinct supplies or as one supply and, in the latter case, whether that single supply is to be classified as a supply of services”.

38. After referring to its decisions in Faaborg-Gelting Linien and Card Protection Plan Ltd the Court noted (see paragraph 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 paragraph 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 paragraph 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 paragraph 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 paragraph 27). 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.

41. That question was considered by Laws LJ in Customs & Excise Commissioners v FDR Ltd at paragraph 55 (in a passage which did not form part of his actual decision):

“55. 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 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 selfevident.

44. Thus in Dr Beynon & 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 paragraph 55 of his judgment.

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 Schedule 9 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 paragraph 55 of his judgment.

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 paragraph 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 Schedule 9 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 v Customs & Excise Commissioners [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 paragraph 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 Schedule 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.

52. There is one further aspect of the law which I need to consider and on which the Commissioners rely. The exemption with which the case is concerned is, as I have said, found in Item 1 Group 1 Schedule 9 VATA, reflecting Article 13 of the Sixth Directive. There is case- law of the ECJ on the scope of the exemption for the letting and leasing of immovable property. This exemption reflects the fact that letting is normally a comparatively passive activity, not entailing significant added value. Transactions (or some at least) which entail more active exploitation of property are specifically excluded from the exemption, such as hotel services: see for instance the opinion of the Advocate General (Jacobs) in Blasi v Finanzamt München I Case C- 346/95 [1998] STC 336 at paragraphs 15 to 20 and the decision of the ECJ in Belgian State v Temco Europe SA Case C-284/03 [2005] STC 151 at paragraphs 19, 20 and 27.

53. In paragraph 20 of Temco, a distinction was drawn between letting of immovable property from other activities which are either industrial or commercial in nature or have as the ir subject-matter something which is best understood as the provision of a service rather than simply the making available of property. Or, as it was put in paragraph 27, it is a matter for the national court “to establish whether the contracts, as performed, have as their 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 they give rise to provisions of a service capable of being categorised in a different way”.

54. Further, as the Advocate General (Jacobs) points out in Blasi at paragraph 12 of his opinion, the exemption is to be construed strictly (because exemptions constitute exceptions to the general principle that turnover tax is levied on all supplies for consideration made by a taxable person). The same point is made by the Advocate General (Fennelly) in paragraph 22 of his opinion in Card Protection Plan Ltd, although he does point out at paragraph 24 that this does not mean that a particula rly narrow interpretation will be given to the terms of an exemption which have been unambiguously laid down. The court itself says the same thing, for instance in Swedish State v Stockholm Lindöpark AB Case C-150/99 [2001] STC 103 at paragraph 25. The case, which concerned the provision of a golf-course, is interesting for the guidance contained in paragraph 27:

“Finally, account should be taken of the fact that permission to use a golf course will normally be restricted as regards the purpose for which it is used and the period of its use. According to the case law of the court, the period of enjoyment of immovable property is an essential element of a lease….”.

55. The Commissioners say that the strict approach to the exemption, as well as all the circumstance surrounding the grant of the licence including its length, should inform the attitude of the Tribunal (and now of myself) to the overall transaction, and that the categorisation should be one, not of the supply of a licence to occupy land, but of a different, and taxable, activity.

56. I have dealt at considerable length above with the question whether a complex of elements of supply result in one or more supplies for VAT purposes. Notwithstanding that both parties are agreed that there is only supply in the present case, I have thought it important to do so in order to establish clearly why there is only one supply since an understanding of that is important to an understanding of when and why some elements can be said to be ancillary and also to the categorisation of a single supply which is identified as a result of combining a number of elements.

The reasoning of the Tribunal

57. Returning to the above Decision, I pick it up again at paragraph 20 which I have set out at paragraph 16. The Tribunal says that a masseuse could not reasonably be regarded as “realistically carrying on her business with that room”. I take the Tribunal, in that finding, to be saying that a masseuse cannot have been carrying on her business exclusively from the room, a proposition which is supported by the reference to Mrs Kane’s evidence “making plain to us that a masseuse does not carry on her business solely within the room allocated to her”. The Tribunal cannot be read literally as saying that the masseuse does not carry on business in the room at all: manifestly, I would have thought, the masseuse was carrying on business in the room since it is hard to think what else she might have been doing there.

58. However, there is no indication of what evidence Mrs Kane gave to establish that that was plain. The example given is that the licence makes no provision for a masseuse or her customer to gain access to her room from the street, but why that goes any way to establishing whether or not the masseuse carried on her business solely within her room I do not understand. It is said that “it is clear that she carries out only a small part of her business within the room”. True it is that she may carry on part of her business in the fetish room, but it must surely be that the majority of her work is carried on in private in the room which she hires. The nature of the work requires privacy and, in the absence of the clearest finding of fact that this salon caters for persons who prefer the services provided for them to be provided in public, there is no proper basis for the finding of fact that only a small part of the business is carried on within the room.

59. The only explanation which can be given for the finding that only a small part of the business is carried on in the room is tha t the masseuses each spend a considerable time waiting for customers and that they do so, not in the room, but in the day room or lounge provided for them on the ground floor and that the Tribunal includes waiting within the concept of carrying on business. I proceed on the basis of that explanation of what the Tribunal meant, although for my part, I do not think it is an accurate use of language to describe a self-employed masseuse as carrying on business when she is simply waiting, unpaid, in the day room in the hope, or even expectation, of the arrival of a customer. There is no evidence that any masseuse carried on in the day room any activity which she needs to carry out to service her customers or manage her business (for instance carrying out administration activities such as filling in VAT returns or preparing her income tax accounts) and one might surmise that it is highly unlikely that she would have done so.

60. The Tribunal, in the first sentence of paragraph 20, assert that Salon 24’s case depended on the Tribunal accepting that, even with an exclusive licence to occupy a room, a masseuse could realistically be regarded as carrying on her business within the room (by which I shall take the Tribunal to mean all or most of her business). Given that the Tribunal are to be taken as regarding waiting in the day room as part of the business, I do not understand why that starting position should be correct. If Salon 24 are correct in their submission that the services provided by Salon 24 other than the licence to occupy the room were all ancillary to that licence or were provided the better to enjoy the room, then waiting (viewed as part of the business) is ancillary to the use of the room so that the provision of the day room takes its treatment, for VAT purposes, from the principal supply, namely the provision of the upstairs room itself. The real question for determination is whether or not those other services were or were not ancillary to the provision of the room.

61. A further difficulty arises from the statement in paragraph 20 that the security services and cash handling were essential in contrast with desirable; there is no hint of any evidence which the Tribunal received to establish that conclusion. It seems to be an inference from the mere fact of these services being provided for security reasons. Finally in relation to paragraph 20, the Tribunal refer to the use of lockers and the day room, which it was accepted may not be absolutely necessary, the Tribunal then saying that “they are ancillary matters that form part of the total package”. Unfortunately, the Tribunal does not identify to what these elements of the package are ancillary and one is left with the feeling that perhaps what they meant by “ancillary” was simply “inessential to the business of the masseuses” which is rather different from “ancillary” in the sense established in the cases.

62. As well as mentioning the services identified in the licence (laundry facilities, Roynets’ card handling arrangements and advertising), the Tribunal itself identified in paragraph 21 of the Decision other facilities provided which are not mentioned in the licence (telephone answering – although it is not identified for what purposes calls are received - the waiting and other arrangements for customers both before and after receipt of a masseuse’s services, and car parking) all of which are stated by the Tribunal to be essential elements of a masseuse’s business again focussing on the business of the masseuses.

63. The conclusions about the essential nature of these services are ones which the Tribunal may have drawn either from the facts which they heard or as a matter of obviousness or common sense. There is no record of any facts found other than the facts which I have already recited; but none of those findings justify the conclusion that the elements referred to (whether in paragraph 20 or 21) were essential, whether for the profession of masseuse generally or for these masseuses in particular. The conclusion must, therefore, be based on common sense. As to the general proposition, one might, for instance, question whether car-parking facilities for a masseuse operating in the middle of Soho are even helpful, let alone essential. Whether car-parking facilities were essential (rather than merely convenient) for a massage parlour in Park Street Manchester is a matter of fact which the Tribunal does not appear to have addressed.

64. Having made those somewhat critical observations, I do not think it matters, in the present case, whether the services were essential elements of the businesses of the masseuses. The fact is that they were services which were provided and made use of; and there can be no doubt that they were a convenience, probably a great convenience, and in some cases (eg receptionist facilities) services which it would have been practically very difficult to operate without.

65. The Tribunal was clearly correct in saying, as they did, in paragraph 22, that Salon 24 were supplying a package to the masseuse including the provision of the various services which they identified. They rejected, in effect, the argument that the various services were simply ancillary (in the sense discussed in the cases) to the licence to occupy the room when they said that the services were not merely a means the better to enjoy the licence to occupy the room. And they rejected, in particular, the proposition that the services identified in the licence (laundry facilities, credit-card services and advertising) were subsumed in the supply of the room.

66. They appear to have rejected that argument because they considered that, for it to succeed, Salon 24 would have to show that the licence would be sufficient for a masseuse to carry on her business which, they said, was clearly not so. I have already made some observations on the evidence to support a conclusion that these services were essential; but whether or not they were essential, some of them were clearly, as a matter of common sense, very important practically and all of them a real convenience.

67. Salon 24 criticise the reasoning of the Tribunal in paragraph 24. They submit that it is irrelevant whether or not the licence would be sufficient for a masseuse to carry out her business even if the services in question were not provided; the question is whether the other services are provided to enable her the better to use the room. It is true that that is the question, but as I see it the ability or inability of a masseuse to use the room without the other services is a relevant factor in the categorisation of the overall provision of services. In any case where supply A is used in conjunction with supply B, it would clearly be a factor in determining whether there is a single supply, or separate supplies, whether supply A can be used without supply B. If it cannot be so used, the case is stronger that there is one supply. It seems to me that the criticism which might be made of the Tribunal is not so much that it took into account an irrelevant consideration, but that its premise is wrong viz that in order to succeed, Salon 24 would have to show that the licence alone would be sufficient to enable the masseuse to carry on a business. What the Tribunal has not stated is why it started with that proposition. It does not necessarily follow, as a matter of law or logic, that, if the supply of the other services was not necessary, then they could not be ancillary to the licence to occupy the room. The Tribunal did not explain what they said on the basis of law or logic; they simply made a statement. The explanation must, I think, be that they regarded it is as obvious on the facts that, absent an ability to carry on business without these services, the services would clearly not be ancillary to the licence.

68. In my judgment, the Tribunal was entitled to reach the conclusion which they did, albeit that their reasoning may be somewhat opaque and possibly open to criticism. Although it can be said the relevant services were provided as a means to enable the masseuse to operate her business, it does not follow that they were provided as a means to enable her the better to enjoy the licence to use the room, notwithstanding that the business may be carried on (whether wholly or partly) in the room. The services identified are to be contrasted with cleaning and lighting which can properly be regarded as ancillary to the use of the room, as can the use of common parts for access to the rooms. The provision of laundry services (ie the use of the washing machine and dryer), the use of the day room and the provision of receptionist services are all services which assist the masseuse in the conduct of her business in the room, but they are not, I consider, provided the better to enjoy the room itself. Similarly, the services are not “subservient, subordinate and ministering” (see paragraph 30 in College of Estate Management) to the licence to occupy the room. In the light of the circumspection which I should show before interfering with the decision of the Tribunal, I would hesitate to do so unless I were sure they were wrong which I am certainly not.

69. However, I should go further. In case it is said that there is a defect in the Tribunal’s reasoning in paragraph 22 of the Decision which obliges me to rule that their conclusion cannot stand, I should say that, on the totality of the evidence which I have seen, I would reach the same conclusion as the Tribunal, applying the appropriate tests which I have identified, and hold that the other services are not ancillary to the licence to use the room.

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.

71. I cannot, however, accept the finding of the Tribunal in paragraph 24 that the dominant part of the taxable supply is the supply of services to which an incidental part is the supply of a room. The conclusion that the provision of the room is incidental to the other service is one which flies in the face of reason and is simply not a conclusion which can, in my judgment, properly be drawn from the evidence. Even if it was not the main element (which I think it probably was) it was certainly not an element incidental to the other services in the overall package. The Tribunal might have thought, given their decision that the other services were not ancillary to the grant of the licence, that they needed to decide this issue in the belief that the taxable treatment of the single supply which they had identified required the identification of the predominate element, a proposition which I do not think is correct. Nothing, in the event, turns on this finding by the Tribunal.

72. If there were serious doubt about the correct categorisation of the supply, which I do not think there is, I would then adopt the submissions made on behalf of the Commissioners in relation to Blasi and Temco (see paragraphs 52 to 55 above): that approach might then have an impact on the eventual decision. I do not think I need to say anything more about that aspect.

Conclusion

73. This appeal is dismissed.