Revenue and Customs v Denyer

This is an appeal by the Commissioners for Her Majesty’s Revenue and Customs (HMRC) from a decision of the VAT & Duties Tribunal (Michael Johnson (deceased) and Angela West FCA) released on 26 April 2007. The case concerns the correct VAT treatment of the supply by the Respondent, Christopher James Denyer, of a service or services to self-employed hair stylists at his salon, called “Stofferson’s” at 79 Castle Street, Salisbury, Wiltshire SP1 3SP.

The main issue which I have to decide is whether the Tribunal’s decision that the proper VAT classification of the supply was the grant of an interest in or right over land or of any licence to occupy land, within the meaning of item 1 in Group 1, Part 2 of Schedule 9 to the Value Added Tax Act 1994 was correct. The consequence of the Tribunal’s conclusion was that, contrary to HMRC’s case, the supply was exempt from VAT, so that Mr Denyer had been liable neither to register for VAT, nor to pay a belated notification penalty under s.67 of the Act.

Subject to one partial exception, HMRC takes no issue as to the facts found by the Tribunal, set out at paragraphs 7-30 of the Decision. For present purposes, the relevant facts may be summarised as follows.

Having traded on his own at Stofferson’s since 1991, Mr Denyer decided in about 1993 to invite other hair stylists to trade as self-employed hairdressers from his salon, supplying their services direct to customers, on the basis that they would “rent chairs” in his salon.

At all relevant times his salon was laid out in the following way. The entrance from the street opened into a small reception and waiting area in which there was a sofa and table for the use of customers while waiting, separated by a reception table and till on one side, and by another structure which I was informed contained a music centre, from the central part of the premises which contained five hairdressing stations, one of which was used exclusively by him, and the remainder of which were each to be used exclusively by a single self-employed stylist. Each station included a chair and (so I was informed) a mirror. Beyond the five hairdressing stations (three on one side and two on the other) there were two wash basins used in common by him and all the self-employed stylists for washing customers’ hair. The layout of the premises is apparent from a plan produced by Mr Denyer, who appeared in person before the Tribunal, to which, after inspection of the premises, HMRC raised no objection.

Mr Denyer made oral agreements with each stylist, which included the allocation to that stylist of an area in the salon to be used exclusively by him or her, containing a hairdressing chair. Because of the importance which they have assumed in the argument before me, the next findings of the Tribunal are worth quoting:

“13.

Whilst the exact extent of these areas is not marked on any plan, or apparent from inspection, the extent of the areas is nevertheless ascertainable, because the respective stylists themselves are aware if and when their exclusive areas have been encroached upon. Whilst there might conceivably be room for debate as to the precise extent of the areas, there is no doubt that the chair and the area immediately surrounding it are exclusively enjoyed. That has not been challenged in this case.

14.

We find that no stylist has ever had the right to use the facilities of the salon generally. They have only ever had the right to use their allocated area. Obviously, the right to use the area includes by necessity a right of access to it, for the stylists and their customers. The stylists also enjoy the provision of clean towels, and shampoo and other consumables as and when supplied. However, we find that these are only made available as adjuncts to the use of the allocated areas. They are not otherwise made available.

15.

If the stylists make use of any facilities in the salon outside their designated areas – for example the waiting area for customers or one of the wash basins – this is not because they have any distinct right to do so. They do not pay for such use. Such use is either by toleration or because it is impliedly regarded as a consequence of the existence of their right to trade from the allocated areas.”

The Tribunal found that each stylist brought their own customers, developed their own goodwill and operated their own business independently of the salon and of each other. They kept their own customer details, had their own booking records, received payment from their customers directly, kept their own tax records and accounted for their own tax. All stylists used their own tools and, although they could buy their consumable products from Mr Denyer, they were free to buy them independently if they wished to do so. They were given their own keys to the premises, kept their own working hours, decided on their own holidays and made their own arrangements for a “locum” to operate their chair in their absence. Each stylist imposed his or her own scale of charges, independently from the others, maintained their own public liability insurance and held themselves out as being independent traders, rather than employees of, or partners in, Stofferson’s.

Mr Denyer continued to carry on a business as a stylist in his own right. For the facilities which he provided to each independent stylist, he made three types of charge. First, a “chair rent”; secondly, a sum levied at the rate of 75p per customer by way of contribution from each stylist towards rates, heat, light, water, use of the telephone and laundry of towels; and thirdly, separate charges for such consumables (i.e. shampoo etc) as each stylist chose to purchase from him.

There was a single telephone on the premises, used by customers to make bookings with particular stylists. In practice, the stylists present at any time on the premises, including Mr Denyer’s wife, tended to help each other by answering the telephone.

Finally, although Mr Denyer employed what is described in the trade as a “junior”, he persuaded the Tribunal that his junior did not assist any of the other stylists.

The one aspect of the facts which has not been free from controversy arises from the decision of the Tribunal (in paragraph 15 of the Decision) not to resolve the question whether use by stylists of the customers’ waiting area and the wash basins, was by toleration or because it was an implied consequence of the conferral of the right to trade from the allocated areas. At paragraph 28 of the Decision the Tribunal said this:

“We accordingly find that there are no facilities contractually provided by the salon to the independent stylists in addition to those covered by the ‘chair rentals’ and the 75p charge mentioned. We are satisfied that on the facts of this case – in contrast with the facts of many other Tribunal cases of which we are aware, some of which are referred to in the folder of Authorities left with us by Mr Holl – the Appellant and the stylists have been truly ‘at arms’ length’.”

I do not understand that paragraph to have involved the conclusion that the use of the waiting area or the wash basins was therefore purely by toleration, rather than as an implied consequence of the existence of the right to trade from the allocated areas. In my judgment the Tribunal ought to have chosen between those factual alternatives, rather than left the question in the air. This is because the correct classification of the services being provided by Mr Denyer to his self-employed stylists necessitates a determination, as a matter of fact, as to the precise services being provided.

In my judgment it is plain from the primary facts found by the Tribunal that the facility of a waiting area for customers and the provision of wash basins were both, by necessary implication, part of the services being provided, even though they were not expressly linked to any of the three parts of the payment structure which the Tribunal identified. Taking the wash basins first, it is plain that customers’ hair could not be washed within the allocated areas, but only in or in front of the wash basins. Without a right to use the wash basins, in common with Mr Denyer and other stylists, each individual stylist would have been unable to carry on his or her business.

I regard the same conclusion as inevitable, albeit perhaps with slightly less force, in relation to the waiting area for customers. Mr Andrew Young, who appeared for Mr Denyer, submitted that, perhaps, the customers would all make appointments and arrive on time. He readily accepted, however, that it would be extraordinary if a customer who, out of caution, chose to arrive a little early, had to be kept waiting in the street on a cold winter’s day.

It is because I have concluded that there is only one inevitable answer to the question whether those particular facilities were used by way of toleration or by way of the enjoyment of an implied term in the agreement between Mr Denyer and each stylist, that it is unnecessary to refer the matter back to the Tribunal. Mr Young accepted that, faced with those alternative findings of the Tribunal on that factual issue, it was open to me to choose between them, as I have done. The question whether a right is to be implied as a necessary incident to a right expressly conferred is, in any event, at least partly a question of law.

HMRC’s main contention was that the Tribunal erred in law, in its analysis of the facts. Two areas of law call for consideration. The first is as to the principles for the correct VAT classification of a supply which is capable of being analysed as including more than one specific good or service. The second is as to the nature and extent of the exemption defined in Schedule 9 of the Act as “the grant of any interest in or right over land or of any licence to occupy land”, properly construed by reference to the Sixth Directive and relevant case law, both here and in the Court of Justice.

As to the first, it is unnecessary for me to do more than direct myself by reference to my own summary of the relevant principles in Tumble Tots (UK) v Revenue & Customs Commissioners [2007] STC 1171, at paragraph 11. Mr Sarabjit Singh, who appeared for HMRC invited me to adopt it as a sufficient summary for present purposes, and Mr Young did not demur. There have, so I am informed, been no further authoritative rulings in relation to those principles since January 2007.

As to the second, the starting point is Article 13B(b) of the Sixth Directive, which provides as follows:

“Without prejudice to other Community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of the exemptions and of preventing any possible evasion, avoidance or abuse;

…

(b)

the leasing or letting of immovable property …”

There follow four specific exclusions from that exemption which may be summarised as (1) hotel accommodation; (2) parking spaces; (3) lettings of permanently installed equipment and machinery; and (4) hire of safes.

It is common ground that the exception in Schedule 9 of the Act must be interpreted in accordance with the meaning and purpose of Article 13B(b), which it was designed to implement. The following principles as to the meaning and purpose of Article 13B(b) emerged from the decisions of the Court of Justice and of the House of Lords which have considered this provision:

In addressing HMRC’s criticisms of the Decision of the Tribunal, I remind myself that, although generally questions of characterisation of transactions for VAT purposes are questions of law, questions of the type which arise in the present case are by their nature highly fact sensitive, in particular where relatively small factual differences may take a particular case to one or the other side of a dividing line which is difficult to describe in purely abstract terms. If follows that, on appeal, the court should exercise caution before departing from the Decision of an experienced specialist Tribunal on what is, viewed in the round, a mixed question of fact and law.

For HMRC, Mr Singh’s first main submission was that on the facts found by the Tribunal there was not shown to be a letting of immovable property at all, within the meaning of Article 13B(b) of the Sixth Directive. Mr Singh first pointed out that the Tribunal made no express reference to Article 13B(b) at all, and may therefore have ignored it altogether. There is no substance in that point. At paragraph 31 of the Decision the Tribunal referred to Sinclair Collis (supra) which is a decision of the Court of Justice on the meaning of Article 13B(b). Furthermore, the European jurisprudence on the meaning of Article 13B(b) was given a detailed analysis before a Tribunal which was also chaired by the late Mr Johnson in 1997, in Characters (Hairdressers) Ltd (Man/96/919). I have no reason to doubt that the Tribunal in this case had the broad terms of the Article 13B(b) jurisprudence well in mind, and in particular that it was well aware of the need to construe the Schedule 9 exemption in the Act in accordance with the meaning and purpose of Article 13B(b).

Mr Singh’s next point was that, having regard to the plan of the premises, it was an inevitable inference that the allocated area around each chair in respect of which each stylist was to have exclusive occupation would be encroached upon by other stylists and their customers in the ordinary operation of the salon, in particular when customers were asked to move between chairs and wash basins. Mr Singh’s point was that there was therefore no sufficient exclusivity of occupation of any defined area under the arrangements made by Mr Denyer with his independent stylists sufficient to constitute a letting of immovable property.

In my judgment, that submission falls foul of the Tribunal’s findings in paragraph 13 of the Decision, which I have quoted above in full, to the effect that each stylist had exclusive enjoyment of the chair and the allocated area immediately surrounding it. This was a decision which the Tribunal described as not having been challenged. It is, in my judgment, too late to challenge it now.

Even if Mr Singh was correct in submitting that, inevitably, there would be some encroachment upon the allocated area around each chair (however narrowly identified) by other stylists and their customers, that encroachment is not of itself enough to deprive the stylist to whom that chair and the surrounding area had been allocated, of exclusive occupation of it. Proof of occupation of demised premises is not undermined merely by evidence that persons other than the tenant had a right of way over the locus in quo, or a right to inspect.

Mr Singh relied, with rather more force, upon the de minimis exception derived from the speech of the Advocate General in the Coffeeshop Siberie case (supra). If exclusive use of a table in a coffee shop for a specific purpose cannot be a letting of immovable property – i.e. the floor space beneath and around the table – then, he submitted, by parity of reasoning nor could the grant of the exclusive right to use a chair and the immediately adjacent area around it in a hairdressing salon.

Although I have been attracted by that submission I have not in the end been persuaded by it, for the following reasons. First, it would be dangerous to erect into a principle of interpretation of Article 13B(b) an obiter observation of the Advocate General in a case where the question was not addressed by the Court of Justice, and where no analytical reasoning was provided by the Advocate General himself. Secondly, I can discern no reason for a de minimis principle as flowing from either the language, context or purpose of Article 13B(b). Thirdly, in practice it seems to me that the same question will usually arise in a different form, at least in relation to supplies which (as is common ground in the present case) consist of a package of services or of goods and services. In such cases, the modest size of the immovable property in question will be relevant to the issues first, whether that supply is economically severable from the rest of the package, and if not, secondly, whether the supply of the exclusive use of the relevant space is sufficiently prominent within the package, considered as a whole, to make it appropriate to characterise the package as a letting of immovable property.

Mr Singh’s final submissions on this aspect of the case were all based upon the decision of the Court of Justice in Sinclair Collis (supra). That was a case about the grant of a right to the owner of cigarette vending machines to install, operate and maintain them for two years in pubs, hotels, clubs and leisure centres, in each case in a place within the premises nominated by the owner of the premises. On its facts, the case is clearly distinguishable from chair rental arrangements in hairdressing salons. The case under Article 13B(b) failed for three reasons. First the owner of the premises had the right to alter the location of the machine from time to time, so that the agreement did not identify a particular area or space within which, or upon which, the machine was to be placed. Plainly, the contrary is the case in relation to this hairdressing salon.

The second reason was that the agreement did not confer on the owner of the machine rights characteristic of the occupation rather than merely the use of the space, both since his right to enter it for maintenance and stocking was dependent upon the permission of the owner of the premises, and secondly because all users of the premises had the right to enter the same space so as to use the machine to obtain cigarettes. Again, that factor is not present in relation to this hairdressing salon, where the stylist has unrestricted use of her chair, and the right to limit its occupation to herself and her customers.

Finally, the case failed because the use or occupation of the space was “merely the means of effecting the supply which is the subject matter of the agreement, namely the guarantee of exercise of the exclusive right to sell cigarettes at the premises by installing and operating automatic vending machines, in return for a percentage of the profits”: (paragraph 30 of the judgment). I consider that to be an aspect of the second question raised by this appeal, namely the true VAT classification of the package of rights conferred upon stylists, viewed as a whole, on the assumption (which is common ground) that its elements are not economically severable.

It follows that I have not been persuaded by any of Mr Singh’s submissions that the Tribunal was wrong in law to conclude that the grant of the exclusive right to use a particular chair within the salon and the area immediately surrounding it was inherently capable, viewed separately from the rest of the package of rights of which it formed an important part, of constituting the letting of immovable property. I turn therefore to the second question, namely the VAT classification of the package as a whole.

The analysis of this issue by the Tribunal may be summarised as follows. First, it divided the supplies within the package into two classes. The first consisted of the right to exclusive use of the chair, coupled with the provision of heat, light, water and the use of the telephone. The second class consisted of the right to have towels laundered and consumables provided, periodically as and when required: see paragraph 38 of the Decision.

Secondly, the Tribunal identified the first class as predominating, since the stylists’ businesses could not be carried on without the grant of those rights, whereas they could obtain their own towels and consumables: see paragraph 39.

Thirdly, the Tribunal described the conferring of the right to use the chairs as paramount and all the other rights as parasitical upon, or alternatively subservient to it, being “not an aim in themselves, but a means of better enjoying the principal element. Alternatively, it may be correct to regard the elements as comprised in an over-arching single supply of land. Either way, exemption from VAT is attracted”: see paragraph 44.

Mr Young, for Mr Denyer, described this as a rational analysis of the facts which disclosed no error of law, from which this Court should not depart on appeal, even if, on my own, I might have reached a different view as a matter of analysis.

By contrast, Mr Singh described the Tribunal’s reasoning as vitiated by an artificial splitting of the package into two arbitrary classes, followed by the attribution to the package as a whole of the wrong classification. He submitted, primarily by reference to point (9) in paragraph 11 of my decision in Tumble Tots (supra) and by reference to the decision of Warren J in Byrom (T/A Salon 24) v Revenue & Customs Commissioners [2006] EWHC 111 (Ch) [2006] STC 992, that the correct classification of the package was that it constituted a “supply of hairdressers’ facilities”.

In my judgment the Tribunal made an initial error of analysis in its two-part classification of the rights constituting the package. The error consisted of leaving out of account the provision of the shared use of the wash basins and of the waiting area, which I have concluded were by necessary implication a part of the package. By contrast with towels and consumables (which the stylists could obtain elsewhere) these two elements were, as a matter of practical commonsense, indispensable parts of the facilities necessary for each stylist to be able to carry on his or her business at the premises. Neither of them were provided for use within the stylist’s own allocated area. Neither of them, by contrast with the shared enjoyment of heat, light and the use of a telephone, were ordinary incidents to the letting of immovable property, although the provision of a shared reception area (like the provision of a shared toilet or canteen) might not of itself be fatal to the identification of the rest of a package as constituting the letting of immovable property.

The exclusion of the waiting area and wash basins from the package led the Tribunal, in my view, to an overly narrow view of the package as a whole, with the consequence that they over-rated the provision of the exclusive use of the chair and allocated area as being predominant. Although there was nothing wrong in law in considering the package as a whole in order to decide whether the chair and allocated area contained a sufficiently predominant element to be decisive of the VAT classification of the package, in my judgment they failed to consider the whole package. This was an error of analysis which requires me to consider afresh whether the entirety of the package is to be characterised as the letting of immovable property, or as the supply of hairdressers’ facilities, or as something else.

In the Salon 24 case (supra), at paragraph 70, Warren J held that a package (in that case of massage parlour services to a masseuse) did not necessarily fall to be categorised as the letting of immovable property, even if the provision of the masseuse’s room was, to her, the single most important element of the overall supply or, indeed, one predominating over the other elements taken together. He held that if (as the Tribunal had decided in that case) the other elements of the package could not be regarded as ancillary to the use of the room, then some different overarching classification of the supply, than the provision of the room itself, was required. In that case, he defined it as the supply of massage parlour services.

Mr Singh took me in addition to a number of Tribunal decisions relating to hairdressing salons in which, with one exception, the decisions had unanimously been that the package of services supplied was to be characterised as the supply of hairdressers’ facilities, or some other similar phrase with much the same meaning, rather than the letting of immovable property. He invited me to conclude that the decision of the Tribunal in this case was therefore an aberration.

The only decision going the other way was Executors of M J Taylor and Mrs Pauline Taylor (T/A Anglian Markets & Bantees), released in August 2007, in which there appears to have been a licence granted jointly to two stylists to use the whole of a salon, rather than individual chairs in it, and which is therefore plainly distinguishable.

Mr Young reminded me, correctly, that classification questions are fact sensitive, and that packages which are superficially similar may require different VAT classification based upon quite small differences between them. Further, he pointed out (as Mr Singh conceded), that in a number of cases there were significant points of difference, for example, where the use of a chair was to be shared rather than exclusive, where each stylist had the services of a common receptionist or assistance from juniors employed by the salon, or the common use of a single till or the shared use of hairdryers. In truth, the Tribunal Decisions presented a whole spectrum of slightly different chair rental arrangements, none of which was precisely identical to that identified by the Tribunal in this case.

It is, in my judgment, fair comment that the package identified in the present case lies at the minimalist end of the spectrum, so far as concerns the provision of shared facilities. Here, there was no common receptionist, no common till, no shared use of juniors or of hairdryers, and each chair was allocated exclusively to a stylist rather than on a basis that permitted any sharing. The question for me is, first, whether the broad consensus of existing Tribunal decisions in characterising hairdressers’ chair rental arrangements as the supply of hairdressers’ facilities rather than the letting of immovable property is correct and, if so, whether the minimalist nature of the services other than the exclusive use of the chair and its surrounding area in the present case is sufficient to take it out of the general run of cases.

In that respect, I have derived considerable assistance from the analysis of the Manchester Tribunal, chaired by Mr Colin Bishopp in Mallinson & Woodridge T/A The Hair Team and Leon Jaimes Mould T/A Leon Jaimes Hair Fashions (MAN/99/0644 & MAN/02/0041). At paragraph 18, the Tribunal said this:

“We do not doubt that, if the circumstances were right, the Appellants could grant to the stylists, licences for the exclusive occupation of areas in their salons. Mr MacNab did not, in terms, resist that argument, but it seems to us to be beside the point. The Appellants’ argument depends upon our accepting that, even with such a licence, the stylists could realistically be regarded as carrying on the business of hairdressing within the space, whether of 16 square feet or of 40 square feet, allocated to them. In our view, the answer to that question is plainly no. Indeed, Miss Taylor’s own evidence leads inexorably to the conclusion that she did not carry on a business solely within that confined space. An obvious omission is that the licence does not grant her the means by which she and her clients can gain access to the space from the public highway, but even if such an easement were granted, or implied, it is quite clear to us that she is able to carry out only a small part of her business from the confined space. It does not include any facility for answering the telephone to make appointments; for clients to wait; for hair to be washed, or for payment to be taken. In short, it is quite impossible for Miss Taylor to carry on the entire business of hairdressing from her allocated space. Even accepting (which, frankly we doubt) her assertion that she could cut hair without straying outside the space, the cutting of hair, in a modern salon, constitutes only part of the service of hairdressing. The claim that the supply of laundered towels, the wash basins, the telephone, the waiting area, the till and other services of the premises is no more than a means of better enjoying the licence to occupy a space, is, in our view, unsustainable. For that argument to succeed, it is necessary to show that the licence would be sufficient to enable Miss Taylor to carry out her business, even if those services were not provided. That is manifestly not the case. We are satisfied that the proper view is that the Appellants were supplying to the stylists a package including the allocation of space, the supply of goods and the provision of various services.”

In my judgment, that paragraph provides a compelling analysis showing why in all chair letting hairdressers’ arrangements including the present, the supply cannot properly be categorised as the letting of immovable property. Although in that case the other supplies were more generous than those in the present case, including for example the services of juniors, and large floor mounted hairdryers, the principled basis of that Tribunal’s decision is both in substance, and word for word, equally applicable to the present case. Furthermore, it complements Warren J’s analysis in the massage parlour case, and is entirely consistent with it.

While I would not criticise the Tribunal’s view in the present case that the provision of the exclusive use of a chair and its immediately surrounding area was the main element in the package supplied to each stylist, that is not decisive of the classification outcome, and it is apparent that stylists at this salon can no more conduct substantially the whole of their business within their allocated areas than could the stylists in the Mallinson case.

The point is not that a business letting can only qualify under Article 13B(b) if the whole of the tenant’s business is conducted on the demised premises. Plainly that could not be so. Nor is it that the existence of shared facilities, however minimal, is fatal to the classification of the package as a letting of immovable property. The point is that the business of the stylists in the present case, as in Mallinson and all the other cases, needed to be conducted not merely on the exclusively allocated part of the premises, but within the salon as a whole, in particular by use of the wash basins and the waiting area. Looked at in the round, the package in this case was the supply to the stylist of all the facilities requisite for the carrying on by him or her of the business of a hairdresser, including importantly the provision of an exclusive chair and allocated area, but including significantly also the facilities shared in common within the salon as a whole. It is one of those cases, expressly contemplated by Warren J in Salon 24 (supra) where the correct VAT classification of the package as a whole is not to be derived from the identification of one, or even the most important, of its elements.

In my judgment the classification identified in the broad consensus of hairdressers’ cases is therefore correct, and the present case is no exception, despite lying at the minimalist end of the spectrum of shared services. Since, as I have explained, the Tribunal erred in its process of legal analysis of the primary facts found, and since, considering the facts as a whole, I have reached a different conclusion from the Tribunal as to the correct VAT classification of the package, this appeal therefore succeeds.

There remains the question of the late notification penalty. This was not a matter with which the Tribunal dealt in any detail in its Decision, since they concluded that there had been no failure to notify. It is common ground that this is a matter which must be referred back to the Tribunal for decision, not least since there is no material from which I could conclude whether Mr Denyer has a reasonable excuse for his conduct under s.67(8) of the Act. Due to the unfortunate demise of Mr Johnson, this will have to be considered by a differently constituted Tribunal.