19187
OUTPUT TAX – Computation – Sauna and massage business – Masseuses working at Appellant’s premises are paid cash direct by customers – Masseuses pay part to Appellant – Whether Appellant’s outputs include the full amount of receipts of masseuses – Yes – Appeal dismissed 

LONDON TRIBUNAL CENTRE

	SPARKHOLME LIMITED T/A TOP CLASS SAUNA	Appellant

-	and –

	HER MAJESTY’S  REVENUE AND CUSTOMS 	Respondents

				Tribunal:	STEPHEN OLIVER QC (Chairman)
						HELEN FOLORUNSO					 

Sitting in public in London on 14 July 2005

No appearance for the Appellant 

Phyllis Ramshaw of the Solicitors office of HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2005

DECISION

1.	Sparkholme Ltd appeals against an assessment of value added tax in the sum of £50,502 (plus interest) made on 13 February 2004.  The assessment was in respect of underdeclared output tax due, so the Commissioners have claimed, on consideration paid by masseuses to Sparkholme. On 23 February 2005 the Commissioners issued a new ruling to the effect that Sparkholme was liable to account for output tax in respect of the total consideration paid by its customers for masseuses’ services.  The original assessment and the amount assessed were left in place.  

2.	The appeal was listed for hearing on 14 July 2005.  Sparkholme was notified of the hearing but did not attend. We were told by Phyllis Ramshaw for the Commissioners that enquiries by the Commissioners had provided them with reliable information that trading was no longer taking place at Sparkholme’s premises and that its principal director, a Mr Guy Sicka, was no longer in the United Kingdom.  We decided to proceed with the hearing.  Rule 26 of the Tribunals Rules allows us to do where one party is absent from the hearing; but the absent party, if unsuccessful, has the right to apply to the Tribunal to have the appeal re-heard if the Tribunal, at its discretion, considers this to be just.  If an appellant wishes to take this course, it must apply to the tribunal within 14 days of the release of the decision and must personally attend the hearing when the application for a further hearing is dealt with.  

3.	We extend the time for Sparkholme to make an application under rule 26(3), if it wishes to do so, to 28 days to take account of Mr Sicka’s absence abroad.  We also direct that this decision be sent to Mr Sicka’s last known address in London.  

The background facts
4.	During the periods covered by the assessments Sparkholme operated from premises at 38 Chalk Farm Road, Camden Town, London.  Its application for registration for VAT described its trading activities as “sauna massage”. 

5.	The services advertized in the Press were “massage, sauna, steam room, sun bed and Jacuzzi”.  The website advertising is as follows:

“Top Class Sauna is London’s newest sauna.  Under new management and totally refurbished, Top Class Sauna has an excellent selection of friendly and attractive female masseuses, two saunas, a large steam room, Jacuzzis, sun beds, stand-up tanning, free refreshments, TV lounge and much more, all for just £15 admission.”

It goes on to display its opening hours as 6.00pm to 6.00am, seven days a week, stating “some of the features that make us special” as being:

“a beautiful selection of multi-national massage girls
various types of massage on offer
all masseuses are fully qualified”

6.	On 19 December 2003 officers of the Commissioners visited Sparkholme’s premises unannounced. The receptionist and some of the masseuses were interviewed.  In interview four of the five masseuses stated that each customer pays £15 to the reception staff to gain admission to the premises.  The customer then pays £50 to the masseuse for a 30 minute massage, of which £15 is “paid back” to the “house” by the masseuse. If the customer then requires a further 30 minute massage, he pays an additional £10 to the receptionist, and an additional £30 to the masseuse.  Of this £30, a further £10 is “paid back” to the “house”.  (One masseuse stated that there is no “pay back”.)

7.	Among the documents taken by Commissioners was a daily record sheet showing the admission fees for the night. This recorded thirty-two customers, all entered by their  first names. Three of them were recorded as having paid £25.  The rest are shown as having paid £15.  The cash held at reception in a drawer was well over the aggregate of the recorded takings.  

8.	The Commissioners wrote to Sparkholme on 22 January 2004 advising that they were of the view that output tax had been underdeclared on takings received by Sparkholme from the masseuses. These takings were a proportion of the consideration that was paid by clients to the masseuses and which was “paid back” to Sparkholme.  Sparkholme was notified by letter of 13 February 2004 that an assessment had been issued.  We quote from the letter of 22 January:

“…  cash-up was conducted on the visit of the 19 December 2003.  The total cash in the drawer, excluding a float was £1,225.  Entry fees accounted for £510 of this, whilst £480 would have been taken as a minimum pay back. Total takings should therefore have been £999. Therefore there was £235, which was unaccounted for.  In order to work in the favour of the business I shall be using the lower figure of £999 as the takings figure for the evening.  The average daily takings for the business as based on the figures declared in your VAT returns for the past year are £328.  This is significantly lower than the takings observed on the night of the visit and indicate a level of suppression at 66%.  However, to further work in favour of the business, I have used calculations based on the undeclared pay back money received by the business from the girls to prepare an assessment for £50,502 undeclared output tax.  The workings for this assessment are outlined in the schedule to this letter.”

9.	In a letter of 18 February 2004, the solicitors to Sparkholme disputed the assessment and stated that the masseuses did not pay any moneys to Sparkholme.  It was alleged in this letter that the masseuses did make payments to Sparkholme’s managers but it was argued that the payments did not relate to Sparkholme’s earnings.

10.	The assessments had been made on the basis that Sparkholme had not disclosed the full amount of the consideration received by it for its services, i.e. Sparkholme had omitted to return the £15s “paid back” by it to the masseuses.  

11.	Subsequent to the appeal being lodged the Commissioners reviewed the evidence and formed the view that Sparkholme was employing the masseuses and therefore liable to account for output tax on the total amount of the consideration paid for massage services.  A new ruling to this effect was issued on 23 February 2005.  

12.	The Commissioners served their statement of case on 23 February 2005 arguing two alternative analyses of the nature and liability of Sparkholme’s supplies.  Sparkholme was invited by the Tribunal in a direction released on 28 April 2005 to amend its grounds of appeal to respond to the alternative case put by the Commissioners.  It has not done so.  

The Issues
13.	The first issue is whether, as the Commissioners contend, Sparkholme supplies the massaging services (as distinct from access to the saunas and showers for which the customer pays £15 entrance fee) to the customer.  The second issue is whether Sparkholme is liable to account for output tax on the massaging services and, if so, in what amount.  The Commissioners’ main contention, as noted above, is that the masseuses are Sparkholme’s employees.

The evidence
14.	We were at a disadvantage on account of Sparkholme’s failure to attend the hearing and explain how its business was actually carried on. We were also disadvantaged by Sparkholme’s failure to have amended its grounds of appeal to respond to the Commissioners’ alternative case.  

15.	We note that Sparkholme applied to Camden Council for certification of five individuals, all apparently female.  The certificates described the individuals as “prospective employees” appearing on the “staff record” on Sparkholme. The qualifications of the individuals as “massage therapists” are confirmed by the Council.  The Certificates were signed for the Chief Trading Standards Officer for Camden.  Sparkholme lists a number of its staff, including some of those for whom massage therapist certificates have been obtained from Camden, as employed persons in its tax returns.

16.	Sparkholme’s business, according to the advertisements referred to in paragraph 5 above, goes beyond offering sauna facilities.  It offers “an excellent selection of friendly and attractive masseuses” and “various types of massage”.

17.	The interviews of the masseuses indicate that Sparkholme had a set charge for massage therapy, e.g. £50 for the first half hour and £30 for the second.  Moreover the arrangement for payment of the consideration that was in place, i.e. the customer paying the consideration for the massage directly to the masseuses who each retained part of the consideration, indicates that there was a system by which payment was to be made for services.

18.	The interview of the receptionists, referred to in the Witness Statement of Michael Clarke, a Customs officer who took part in the 19 December 2003 visit, contains a statement that there were five or six on the “shift”.  Also in the Witness Statement is a reference to copies of a “rota” found in the takings folder and “a list of girls working by nationality”.

19.	Sparkholme provides a receptionist, managers and a security guard.  
Conclusions
20.	There is no evidence indicating that any of the masseuses were operating as sole practitioners, either as masseuses, as therapists or in any other field of treatment.  Nor is there any evidence that the masseuses or any of them had introduced any capital or equipment into the business conducted at the Sparkholme premises.  But we have taken into account the evidence we have and applied the usual tests for determining whether an employer/employee relationship exists.  It appears to us that Sparkholme exercises a substantial measure of control over the work of the masseuses and the hours and conditions of work.  There appears to be a “mutuality of obligation” between Sparkholme and each of the masseuses in the sense that Sparkholme provides the work and the facilities and the masseuses get paid for it.  Moreover, having regard to the facts that Sparkholme gets each masseuses certificated by Camden Council as a member of Sparkholme’s staff and that they are certificated as prospective employees, this indicates that the masseuses are part and parcel of Sparkholme’s organization.  

21.	Those features, coupled with the fact that Sparkholme has made tax returns describing some (if not all) of the masseuses as employed persons, paint a tolerably clear picture of an employer/employee relationship existing between Sparkholme and each of the masseuses.

22.	Our conclusion therefore is that Sparkholme is supplying the massage services through its masseuses as its employees.

23.	The next question is whether, as the Commissioners contend, Sparkholme should have accounted for tax on the full amount of the receipts, i.e. those taken by the receptionist plus those retained by the masseuses.  We note in this connection that the assessments were calculated by adding to the amounts paid by the customers to the receptionist the amounts “paid back” to the receptionist by each of the masseuses.  We accept that the assessments were to the best of judgment even though they were made on a different basis to what is now advanced by the Commissioners. 

24.	It seems to us to follow from the conclusion that the masseuses are employees of Sparkholme that the full amount of the consideration received, whether by Sparkholme itself or by each of the masseuses, from the customers is consideration obtained for the supply by Sparkholme of its services.  The masseuses do not separately render any services.  The full range of sauna, massaging etc. services are supplied by Sparkholme as principal; consequently the full amount of the consideration provided by the customer is liable to output tax in the hands of Sparkholme.

25.	We mention one further thing.  Sparkholme has not asserted that it was unaware of the consideration received by the masseuses from the customers.  However, as the only issue in dispute, at the time when the assessment was raised, was the pay back, the Commissioners have anticipated that, had they been present at the hearing, Sparkholme might have argued in response to the new ruling that they were unaware of such consideration.  Even if the consideration paid for the massage services was received without Sparkholme’s knowledge under a fraudulent arrangement between the masseuses and Sparkholme’s managers, the Commissioners submit that Sparkholme remains liable to account for output tax on the entire consideration.  Reliance is placed on the case of G Benton [1975] VATTR 138 where the tribunal held:

“In our judgment the effect of section 7(2)(a) of the Finance Act 1972 is to render the supplier accountable to the Commissioners for all the cash received by him or by his servants or agents in respect of supplies made by him or by them properly as such servants or agents irrespective of whether or not such cash is placed in the till or is diverted by the employee before getting so far as the till.”

26.	In the present case Sparkholme is, as we have found, supplying the massage services.  VAT becomes chargeable once the tax point has passed.  Section 6(4) of VAT Act 1994 provides that the time of supply in this case arises at the point when the customer pays the consideration.  That is before the customer receives the supply of the massage service.  At that point the supply becomes chargeable to VAT and Sparkholme becomes liable to account to the Commissioners for the tax due.  No account is therefore to be taken of the fact that some part of the money paid by the customer is diverted away from Sparkholme.

27.	For all those reasons we dismiss the appeal.  

STEPHEN OLIVER QC
CHAIRMAN

RELEASED: 28 July 2005

LON/04/907