Spearmint Rhino Ventures (UK) Ltd v Revenue and Customs [2006] UKVAT V19439 (27 January 2006)

19439
	SUPPLY OF SERVICES — supply — table-dancing premises — dancers entering into agreements with proprietor of premises to dance at the premises — whether dancers supplying services to customers on behalf of proprietor — yes — appeal stood over for further argument on tips obtained by dancers

LONDON TRIBUNAL CENTRE

SPEARMINT RHINO VENTURES (UK) LIMITED	Appellant

- and -

THE COMMISSIONERS FOR
HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

Tribunal:	Stephen Oliver QC (Chairman)
Michael Sharp FCA

Sitting in public in London on 19 and 20 December 2005

Conrad MacDonnell, counsel, instructed by Vaughn Chown of Numerica, consultants, for the Appellant

Nicola Shaw, counsel, instructed by the acting General Counsel and Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

1.	Spearmint Rhino Ventures (UK) Limited (“SR”) appeals against a ruling, in a letter of 20 June 2005, that SR, through its six clubs in the UK, makes supplies of entertainment services to customers.  
2.	The ruling was made in response to SR’s claim that the supplies of entertainment services were made, not by it, but by dancers who came to the “clubs” as licensees of SR and themselves provided the relevant entertainment services to the customers.
Brief History and Background Facts, Issues and Contentions
3.	Shortly stated the position is this.  SR operates six establishments in the UK where live nude and semi-nude dance entertainment is available to members of the public.  The members of the public (“the customers”) enter the establishments on payment of admission fees.  When inside, the customers are able to enjoy, for the exclusive benefit of each one of them, performances by individual dancers of dances and/or the opportunity to participate in a conversation with a dancer.  The customer pays the dancer direct.  The dancer makes payments to the club of, in London, £80 per eight hour session and £40 for each one hour conversation (known as a “sit-down”).  SR contend that the VAT position is governed by the proper contractual analysis of the arrangements.  The supply of entertainment services is, they say, made by the dancer to the customer pursuant to the contract for the particular dance or for the one hour sit-down; the entire consideration provided by the customer for the dance or the sit-down is due to and belongs to the dancer.  Accordingly, say SR, it does not make supplies of entertainment to the customer in return for consideration.
4.	The Customs say that the entertainment services (either provision of dancing or sit-downs by the particular dancer) are made by SR to the customer; the consideration for SR’s supplies is not limited to the set price for the dance or the sit-down; it includes any additional amount paid to or given by the customer to the dancer.  The Customs accept that the dancer is self-employed.  They say that SR provides the services through the dancers whom they have engaged.  Consequently, the VAT on the services supplied through the dancer is the liability of SR.
5.	The question for us arises from VAT Act 1994 which provides, in section 1(1)(a) that VAT shall be charged “on the supply of … services in the UK” and, in section 1(2), that VAT on any supply of services “is a liability of the person making the supply”. 
6.	The question whether SR or the dancer supplies the relevant services to the customer depends primarily on the contracts written and oral.  From those we have drawn the conclusions of law as to whether, when the dancer supplies her services to the customer, she is doing so as a principal in her own right (as SR contends) or, as the Customs contend, a self-employed person acting on behalf of or for the account of SR.  We were referred to a number of decisions of the Courts and Tribunals that provide examples of that approach.  Those cases were:
Potter v Customs and Excise Commissioners [1985] STC 45
Cronin v Customs and Excise Commissioners [1991] STC 333
MacHenrys (Hairdressers) Limited v Customs and Excise Commissioners [1992] STC 170
Kieran Mullin Limited v Customs and Excise Commissioners [2003] STC 274
Di Resta & Di Resta v Customs and Excise Commissioners (2005) VAT Dec 18641
Our findings are based on the evidence of the witnesses who attended the hearing and on the documents referred to in this Decision.
7.	We start by examining the documents.   The documents relating to the contractual relationship between dancer and SR are primarily the Dance Performance Licence (“the DPL”) which in terms binds the dancer to comply with SR’s Code of Conduct.  
The DPL
8.	The DPL is between SR, described as “the Owner”, and the dancer, described as “the Performer”.  We were not provided with an actual agreement; instead we were shown a printed and unexecuted document in triplicate form (like the “small print” of an insurance policy).  
9.	The operative part follows three “Background” provisions.  First, the DPL describes SR’s role as follows:
“(1)	Owner operates a business establishment at the Premises where live nude, semi-nude and / or bikini dance entertainment is presented to adult members of the general public …”
The Second and Third Background provisions state the respective interests of SR and the dancer.  SR is said to be desirous of licensing to the dancer the right to use the premises for the purpose of presenting nude, etc. entertainment to the public and the dancer is stated as being desirous of licensing those premises for the purpose of performing the entertainment.  
10.	The operative part starts with the “license” clause:
“(1)	License of Premises
A	Owner licenses to Performer the right during normal business hours to use those parts of the Premises designated by Owner for performing of live nude, semi-nude and/or bikini entertainment known as “Booths” upon the terms and conditions set out below.
B.	Performer shall exercise her rights under this license in respect of the Booths at the Premises in occupying whichever Booth that she may for the time being choose, together with a customer and, if relevant, another performer.  
C.	Whilst in occupation of a Booth, Performer shall have the right to exclude and admit all others as she shall choose.  
D.	In return for her right to occupy a Booth, Performer shall pay the License fee stipulated in Clause 4 below.
E.	Performer’s rights to occupy a Booth under this clause will be for the duration of each dance that she performs in the Booth.  
11.	By clause 2, the licence is said to be for one year and thereafter renewable automatically for successive three year terms unless terminated by either party on 30 days notice or on account of a material breach on the part of the dancer.  
12.	To enable the dancer to make use of her rights as licensee, Clause 3 entitles her to book in for three sessions known as “Sets” a week, or more, subject to space availability.  If she misses a booked session, the clause provides that she is to pay damages to SR.  In full, the clause reads:
“Performer shall exclusively establish and set the particular days on which she desires to enjoy her license in respect of the Premises.  All such days for each week to be set at least one week in advance.  Each day so scheduled shall consist of a minimum of eight consecutive hours (one set) during which Performers shall provide entertainment consistent with this license.  The Performer acknowledges that there are other Performers licensing the Premises and agrees to establish her sets consistent with and in co-operation thereof.  Owner shall make the Premises available to Performer and Performer hereby agrees to take up her licence in respect of the Premises for a minimum of three sets per week.  Once scheduled, neither Performer nor Owner shall have the right to cancel or change any scheduled sets except upon material breach as defined below or as mutually agreed.  Performer may be permitted to licence space during unscheduled sets subject to space availability and to the conditions provided below.  If Performer misses an entire scheduled set, Performer shall pay to Owner as liquidated damages [£	] for each set missed.  If Performer fails to timely commence a scheduled set, Performer shall pay to Owner as liquidated damages [£		] for each set Performer so fails to timely commence.  Such liquidated damages to be paid by Performer to Owner no later than the end of the next set …”
13.	Clause 4 provides for the License Fee.  For what it is worth, we set out the wording found in the printed draft.
“(4)	License Fee (delete as applicable)
Performer agrees to pay a License Fee to Owner, at the end of each shift in cash.  The sum [£	] for each topless and nude table and / or lap dance, [£	] and a stage fee.  
OR
A set sum of [£		] for each shift and [£		] for a stage fee, excluding only tips given by the general public.”
It may be convenient at this stage to summarise the evidence as to the payments said to be covered by that clause.  At the Tottenham Court Road premises, the dancer pays SR for day time sessions (mid-day to 8.00 pm) £15 to enter plus £5 a dance.  For night-time sessions (8.00 pm to 4.00 am – subject to variation at weekends) she pays £80 to enter plus £40 for each “sit-down” (a facility we will explain later) for the first hour with a customer and £20 for each succeeding hour with that customer.  Dancers attending regional SR premises pay SR a fixed £20 to enter plus £7 a dance.  
14.	Clauses 5 and 6 govern the dancer’s obligations whilst at SR’s premises.  The dancer agrees to dance and in doing so the dancer has to have regard to maximising sales and entertainment at the premises.  The dancer is to charge no more than the fees fixed by SR.  The dancer is allowed to take tips.  Relevant to these appeals are the following undertakings by the dancer who agrees to:
“A.	Perform nude, semi-nude and / or bikini entertainment at the Premises for the general public during all hours of each set.  Performer hereby specifically acknowledges that Performer’s agreement to perform such entertainment during all set periods of time is a material obligation under this License.  In consultation with Performers who enjoy licenses in respect of the premises, Owner shall establish a fixed fee for the price of chair, table and couch dances performed on the Premises (“Dance Performance Fees”) and Performer agrees not to charge a customer more than the fixed price for any such dance performance although nothing contained in this License shall limit  performer from obtaining “tips” and / or gratuities over and above the established price for such dances.  The parties acknowledge and agree, however, that the Dance Performance Fees are neither tips nor gratuities, but are, rather, charges to the customer as consideration for the service of obtaining a dance performance.  Performer recognises that her obligations as set forth in this paragraph are material considerations to Owner in order to (i) produce the maximum gross sales possible from dance performances during the term of the license for the benefit of both Owner and Performer and (ii) assure regular maximum operation of entertainment at the Premises for the benefit of Owner and Performer.  
C. 	Use the Premises in a professional, courteous and reasonable manner in consideration of and for convenience of the customer and other Performers of the Premises.
F.	Maintain accurate daily records of all income earned from the Premises during this License in accordance with all applicable taxation laws; …”
15.	Clause 6 gives SR the right to impose rules and the dancer agrees to be bound by them.  The rules, in the Code of Conduct which the dancer is required to sign, are used at all SR premises throughout the UK.  They require the dancer, among other things -  
•	to sign in with club management at the start of the shift and to arrive in good time, 
•	to wear appropriate attire (e.g. full length gowns and at least three inch heels), (to “remember style and elegance is the desired intent”), 
•	to remain clothed, save when dancing,
•	to give customers no details about, for example, the addresses and phone numbers of the dancer,
•	when table dancing to ensure that customers are seated with their hands by their sides, to touch the customer only above the chest and not to dance indecently or to use suggestive language,
•	never to leave the premises during a set except in case of an emergency and then only with the express permission of the duty manager,
•	when leaving, either to travel in a nominated taxi or else to be escorted by a member of SR security to their car,
•	not to leave the Premises at the end of the night shift until after the customers have departed and the dancers have been cleared to leave by the manager,
•	to participate from time to time in promotional activities and offers as designated by the club manager and
•	to participate in stage and podium performances as designated by club staff.
The final clause of the Code of Conduct provides that any dancer found to be violation of any of these rules without exception will be subject to the disciplinary procedure.
16.	Clause 7 of the DPL is headed “Status of Parties”.  Clause 7(A) reads as follows:
“(A)	The parties acknowledge that the status created between Owner and Performer is that of Licensor and Licensee in relation to the Premises and that this status is a material consideration of this License.  The parties specifically disavow any employment relationship and agree that this License shall not be interpreted as creating an employer/employee relationship.   
(It is, as already noted, accepted by the Customs that the dancer is not an employee of SR.)
17.	Clause 7(B) provides that “were the relationship between” SR and dancer “to be that of employer/employee”, SR would be entitled to collect and retain all Dance Performance Fees, “such funds being acknowledged … to be the sole and exclusive property of” SR; instead the dancer would become entitled to the “applicable minimum wage and … to retain all ‘tips’ and/or gratuities”.  It goes on to say that the dancer’s entitlement to obtain and retain the Dance Performance Fees is “conditional upon the acknowledged status of the parties as so set forth in sub clause 7(A)”.  
18.	Clause 7(C) provides that if any Court or Tribunal determine that the relationship between SR and the dancer is other than Licensor/Licensee and that the dancer is entitled to monetary consideration from SR, then, to ensure that SR is not unjustly harmed and the dancer is not unjustly enriched, the dancer “shall disgorge herself of and pay to” SR “all net Dance Performance Fees” (subject to certain adjustments).  
19.	Clause 10 is headed “Nature of Performances”.  It reads
“Owner shall have no right to direct and/or control the nature, content, character, manner or means of performer/performance. Performer acknowledges and agrees, however, to perform live nude, semi-nude and/or bikini entertainment consistent with the type of entertainment regularly performed at the Premises.” 
20.	Clause 15 contains the additional obligations of the Owner, it provides
“Owner shall, in addition to the licensing of the Premises as set forth above:
A.	Provide to Performer at Owner’s expense, music used on the Premises, lighting and dressing room facilities;  
B.	Pay any and all copyright fees due relative to the music used on the Premises and;
C.	Advertise the business in a commercially reasonable manner for the benefit of both Performer and Owner …”
21.	The dancer releases all rights to photographs and grants the right to use and publish photographs etc of herself.  
The local authority license
22.	We saw only the London Borough of Camden license for the Tottingham Court Road premises.  This permits SR to use the premises for “music, dancing and entertainment of a like kind” with a maximum of 480 people being accommodated there at any time.  Simon Gordon, Chief Financial Officer of SR, explained that the Code of Conduct (referred to above) had been drawn up following long negotiations preparatory to the grant of the license.  The negotiations had been between SR, the Council and the Police.  The license conditions for each of the SR venues regulate the table dancing which takes place at them all.  The following provisions of the license are relevant:
“9.	In consultation with the Council and Metropolitan Police, a Code of Conduct for dancers designed to prevent prostitution or unlawful activity taking place shall be produced together with a disciplinary procedure for breaches of the code. No amendment shall be made to the Code or disciplinary procedure without prior consultation with the Council and Police. 
10.	Pre employment checks for dancers shall be carried out.  The checks shall include suitable proof of identify, permission to work, photo, third party insurance, safe system of work.  Details of the checks shall be supplied on request to the Council and the Metropolitan Police.
11.	Rules shall be produced for customers indicating conduct that is unacceptable.  These rules shall be prominently displayed at tables and at other appropriate locations within the club.”
Mr Gordon said that it was a condition of the license that SR was obliged to have fixed rates for the dancers’ services.  The dancer, Mr Gordon agreed, might charge more in breach of the rules; but from SR’s perspective, he said the excess would be regarded as a tip.  This was in line with his unchallenged statement that SR’s policy is for strict and full compliance with the license.  We were shown a Dancer’s Assessment form (in blank) covering the recruitment and induction of the dancer.  This states, among other things, that the dancer is to be made familiar with the payment and charging arrangements and with the house rules and codes of conduct.  It goes on to state that the dancer will be subject to “ongoing evaluation and supervision by club management to ensure compliance of the above”.  It is to be signed by SR and the dancer.
23.	Following up from the provision in the Code of Conduct that any dancer found to be in violation of the rules will be subject to disciplinary procedures, the club has in place a Procedure for Disciplinary Action.  This deals with different gradations of breaches and provides for penalties ranging from warnings to fines to termination of the Dance Performance License.
SR, the entity
24.	Spearmint Rhino Ventures (UK) Limited, a UK company, is part of a worldwide group headed by Spearmint Rhino Companies Worldwide Inc.  SR has six operating subsidiaries in the UK, each running its own “club”.  The largest of these clubs is at Tottenham Court Road in London.  Simon Gordon, who gave evidence, is Chief Financial Officer of SR.
The Venue 
25.	We heard evidence only about the Tottenham Court Road club.  We understand that our decision covers all six clubs and that our conclusions on Tottenham Court Road will cover the others.  
26.	The Tottenham Court Road club has a street level entrance.  A red carpet leads to the door where there are two doormen.  The customer proceeds to the till, pays a £8 entrance fee and descends the stairs to the club premises at lower ground floor level.  A desk is situated there at which the customer can buy “Rhino Chips” (see paragraph 44 below) and souvenirs.  There is an ATM cash dispenser nearby.  The club premises contain a bar area with seating, a central area with tables, more seating, two raised podiums and a disc jockey providing music.  There is a restaurant area.  At one side of the club premises are several separate booths with banquette-type seating.  The booths are there to be occupied by dancers and customers; there is room for as many of six couples per booth. 
27.	The premises are furnished in a luxurious manner and the style is opulent.  
28.	CCTV cameras cover the whole area including every part of every booth.  SR has security staff posted within 15 feet of every booth.  
29.	The podiums will usually be occupied by a dancer dancing topless.  Around the bar and throughout the central area are dancers clothed in full length gowns who are available to provide table dances or “sit-downs” (see paragraph 33 below) for customers.  
30.	Simon Gordon explained the aim of SR as this: “We create an illusion of intimacy, an overall concept within which the dancers can work.  We have to have the right ambience to attract the right dancers who will attract the right customers”.  
The facilities provided at the Tottenham Court Road club 
31.	Customers can buy drinks at the bar and can eat at the restaurant.  They can watch the podium dancers without payment (other than the admission charge).  
Table dances
32.	Customers can engage dancers for table dances.  On their way down to the club premises is a notice provided by SR.  So far as relevant to table dances it reads: 
“TO OUR VALUED CUSTOMERS
                                TABLE  DANCE  FEES
TOPLESS TABLE DANCES ARE £10 PER TRACK
NUDE TABLE DANCES ARE £20 PER TRACK …
Dancers are under exclusive contract to perform at this club and are not considered employees.  Table dance fees as detailed above, are fees and not tips which are set by the club and may not be varied by a dancer.  Dancers in turn pay the club a commission set by the club in which they perform.  Tips for main and other stage performances and elsewhere voluntarily given by the customers are considered gratuitous and the club receives no portion thereof.”
A track is a three minute track of recorded music provided by the disc jockey.  On occasions when business is light, the disc jockey will announce that one payment buys two tracks worth of dance.  Contact between customer and dancer is not permitted during the dance.  Security staff may eject customers who try to touch the dancer.  On each table is a free standing notice which contains these words:
	“Club Rules
Gentlemen must be seated before a dancer can commence a dance and must remain seated during the dance with their hands at their sides.  There must be no touching of the dancers at any time during the dance except when paying the dance fee into the dancer’s hands or garter.  No propositioning the dancers.  Customers must not dance at any time.  The customer must remain fully clothed during a dance.  Any breach of the above rules will result in the customer being excluded from the club.”
Sit-Downs
33.	Customers can engage dancers for what are colloquially described as “sit-downs”.  The customer agrees to pay a lump sum for an hour (or more) of the dancer’s time.  The dancer will dance for the customer (in a booth if the dance is to be nude) as much or as little as the customer wishes during the period; when not dancing, the dancer and the customer will conduct a one-to-one conversation.  The “no contact” rules are more relaxed in sit-downs.  The “Valued Customer” notice referred to above continues:
“At times a dancer will suggest her company for a period of an hour, if agreed the standard rate is £250, it is negotiable how many dances, topless or nude are performed within this period of time.  Both parties at the start of the period the company is provided must agree the fee and times …”.
In practice, the lump sum payment itself is negotiable.  At all events, when customer and dancer have agreed the price for a sit-down, the dancer will call over a member of the security staff who will ask the customer if he agrees that those are the terms.  The security person may help the dancer to monitor the time spent on the sit-down.  
Topless Dances
34.	A customer may engage a dancer for a topless, instead of a nude dance.  The fee for that is £10 and it will be performed on the main floor at the customer’s table.  When the dance or the sit-down is complete, the customer pays the dancer in cash or in Rhino Chips.  
Number of dancers present at the premises
35.	Depending on the time of the day, the day of the week or seasonable demand, between 20 and 140 dancers will be at the Tottenham Court Road club.  Sometimes customers outnumber dancers and sometimes, in the daytime or early evenings, dancers will outnumber customers. At any given time one in eight to nine of the dancers present will typically be engaged in a sit-down.
Recruitment of new dancers and dancer evaluation
36.	The responsibility for engagement of the dancers lies with the “House Mother” at the Tottenham Court Road club.  We heard evidence from Miss Elaine Reed who has had this role, which she carries out on a self-employed basis, for at least four years.  She describes the role as the dancer’s counsellor, nurse, administrator and trainer.  
37.	Miss Reed auditions applicants.  She checks their identities, she assesses the “quality” and the skills of the applicant.  The dancer is then required to sign the DPL.  She is shown the Code of Conduct and required to sign a sheet of payment acknowledging that she has read the Code of Conduct and that she may be excluded if she breaches the Code.  When the new recruit starts, she may be accompanied by an experienced dancer; that is provided for in a paper headed “Dancer Evaluation”.  That paper (which the dancer signs) records that she understands matters such as the working schedules, the changing room etiquette, payment and charging.  The paper ends with the statement referred to above, that she will be subject to ongoing evaluation and supervision.  
Booking-in of dancers : procedures for particular sessions
38.	The dancer, said Miss Reed, is a key to the success of the club.  So long as the club has the reputation for being full of attractive, charming and skilled dancers then the “right sort” of customers, i.e. those with money to spend, will come to the club.  Dancers are recruited with that in mind and Miss Reed’s aim is to keep them happy.  At the same time, she needs to get the customer/dancer balance right at all sessions (sets).  She runs a shift system; the number of dancers on each session is designed to meet the likely demand.  The dancers book in at the start of a week and are expected to stick to the session that they have booked.  If an evening session looks to be busier than anticipated, Miss Reed may allow a dancer to extend her previous session.  When a session is fully booked, Miss Reed will close the list for that session but, she explained, she would still let the best or the most regular dancers book for that shift, because those are the dancers she aims to keep most happy.
Charges made on dancers
39.	In Tottenham Court Road and at the regional clubs, SR charges the dancer the amounts summarised in paragraph 13 above.  SR uses employees called markers to keep a record of how many dancers a dancer has performed during afternoon sessions at Tottenham Court Road and at all sessions in the regional clubs. 
Keeping up SR’s reputation
40.	Miss Reed keeps a close eye on the appearances of the dancers.  She advises the dancers on dress colours and keeps “a spare or two” in case dancers come in “something awful”.  If a dancer’s appearance ever became sloppy, she said, she would then suggest improvements, or “I would not let her book any shifts in the future”.  Standards are important to dancers as well as to customers.  Once dancer, “Miss C” who gave evidence, described the Tottenham Court Road premises as “a good clean club with a better atmosphere and better dancers and better spenders than others I know”. 
41.	To avoid any possibility of prostitution or solicitation, SR engages “mystery shoppers” from a third party firm to visit SR clubs regularly in order to test the dancers are complying with the SR Code of Conduct.

Breaches of the DPL and the Code of Conduct.
42.	These are dealt with under SR’s disciplinary procedure referred to above and will result in fines or termination of the dancer’s rights under the DPL.  Simon Gordon was not aware of any occasion on which SR had sought to enforce “liquidated damages” (see Clause 3 of the DPL) against a dancer for failing to attend a session; we heard no other evidence of this happening.  SR has, as already noted, a published procedure for disciplinary action.  This itemises and describes minor, intermediate and serious breaches.  It provides for cash fines and, at worst, termination of the dancer’s license.  The dancer is given a right of appeal to individuals within the SR organisation.
SR’s clientele
43.	The nature of a typical customer depends on the day and time.  In the day time, it is most usually regular customers of the club or business men looking for an unusual venue for lunch or for a drink. In the evening it can be anyone from groups of young men with cash to spend (examples given by the dancers were city traders or property developers) to people looking to do some client entertainment or simply for a luxurious venue to go to (particularly late at night as the club is open until 4 am).  On Friday and Saturday evenings “stag” parties are common, but not good as sit-down customers.  Catherine Banks, a dancer who gave evidence, said of the Tottenham Court Road premises that “it is a high class venue where the customers tend to be wealthier and to treat the dancers with more respect”.  She said that the Tottenham Court Road club used billboards to market itself.  
Rhino Chips
44.	When a customer has been provided with dancing or sit-down services, he pays the dancer direct, either in cash or in Rhino Chips.  Rhino Chips are tokens that may be purchased from the club with a 20 per cent commission rate and exchanged in return for services while the customer is on the premises.  At the Tottenham Court Road club, the dancers are also charged 20 per cent commission on redemption of the Rhino Chips.  None of the witnesses had ever come across a case in which payment in Rhino Chips had been refused by a dancer, nonetheless, we accept that, in theory, a dancer can refuse to be paid in Rhino Chips.  Miss C said that when it came to the tip, the customer who used Rhino Chips might be induced to give more than he would have tipped had it been in cash.
Defaulting Customers
45.	If ever a dancer had difficulty getting payment from a customer, SR’s security staff would, Miss Reed said, try to help the dancer to get payment from him.  Sometimes that did not work and in that case SR would not reimburse the dancer for lost income or compensate her at all.  
The Dancers
46.	The particular dancer’s reward matches her success in generating demand for her dancing and conversational services.  She pays the set fee to SR, e.g. £80 to enter the Tottenham Court Road premises and pays £40 for each sit-down at an evening session there and otherwise keeps what the customer pays her.  Choosing the customer who is likely to be compatible and getting that customer to engage her for a dance or a sit down depends on the discretion and the skill of the particular dancer as does the amount of the tip.  One of the witnesses, a dancer, explained her technique as follows:  
“When I am choosing which customers to approach, I look at what they are wearing as well as their demeanour.  I am very good at watches.  I can tell a Breitling from Rolex at 50 paces (and I can always tell a real one from a fake).  My best friend is a pro at ties, suits and shoes.  She and I have a sign language to point out the wealthiest looking customers to each other.  These kind of customers want to show people that they have money, and they want to be seen spending it; so they are good prospects for several dances or a sit down. 
In practice, the club management has very little to do with how we dancers make money in an evening except to provide the venue.”
Tips by Dancers
47.	Dancers tip disc jockeys.  This is because disc jockeys call dancers up to the podiums on a rotational basis.  This may not be convenient for a particular dancer who may, for example, be close to agreeing terms for a sit down.  In that case, she might tip the disc jockey to defer her turn.  
48.	Dancers tip doormen.  There is a special zone in the club for VIPs who pay a high entrance fee for access to the VIP area.  The doorman may chose to introduce a particular dancer to a VIP and will expect a tip in return.  
49.	Dancers tip waitresses and “chip girls” for introductions to big spending customers.  £3 is paid to the house mother for each session by each dancer.  That, we were told is the industry standard.
Conclusions
50.	SR’s case is based on the proposition that the customer and dancer 	negotiate terms of, and enter into, a contract for the dancer to perform for the customer’s benefit; the dancer will have exercised her own skill and discretion in choosing the customer with whom to contract.   SR is not  (so SR’s case goes) a party to that contract; SR gives no undertaking to the customer to provide either the dance or the sit-down and SR has no financial interest in the price agreed between dancer and customer because the fees payable by dancer to SR do not relate to the dancer’s actual receipts from customer.  The DPL permits the dancer, for her own benefit, to perform dances on the premises; but, so SR’s case runs, the dancer is under no obligation to perform either at the direction of SR or for people selected by SR or to perform any particular number of dances or sit-downs for customers.

51.	The Customs rely on the wider contractual structure to sustain their case that when the dancer is dancing or performing a sit-down, she is doing so for SR.  

52.	SR is correct to an extent.  When the dancer provides a dance or a sit-down service to a customer this arises from a contract that she and the customer have negotiated and it relates to her personal services.  That does not however answer the question of whether, when the dancer enters into that contract and provides the services to the customer, she is doing so for SR.  

53.	For this to be a case where, for VAT purposes, SR is making the supplies to the customer through the dancer as SR’s agent, we would need to be satisfied that mutual obligations existed  between dancer and SR for that purpose.  We would need to be satisfied, among other things, that the dancer was under an obligation to SR to perform, that the services to be performed were agreed, that the consideration receivable by dancer was agreed, that the duration of the dancer’s undertaking was specified, that the dancer had a right of access to SR’s premises and that SR were committed to providing the dancer with facilities, i.e. customers and the facilities of the venue, to enable the dancer to perform as agreed.

54.	The DPL is not as such a licence.  It is, as we read it, a framework agreement.  To get the full effect of the relationship between SR and the dancer it is necessary to read the DPL in conjunction with the Code of Conduct, the Dancer Assessment, the Procedure for Disciplinary Action and the actual agreement that engages the dancer to attend for the particular session.

55.	The DPL, as framework document, sets the scene.  The “background clauses” at the start relate the mutual interests of SR and dancer.  SR runs an entertainment business at the premises and presents dance entertainment for customers.  The dancer, as a dance performer, wants access to SR’s premises to enable her to perform.  Before DPL is prepared to enter into any agreement with the dancer she goes through the Assessment.  SR through Miss Reed interviews her and  explains the House Rules and the Code of Conduct which the dancer signs.  Then she signs the DPL and, according to the steps set out in the Dancer Assessment, SR and the dancer proceed to the “Induction” process.  SR explains that the dancer is required to dance on stage and on the podium as required.  She is told what the payment and charging arrangements are.  She is given a detailed explanation of House Rules and Code of Conduct and the Disciplinary Procedure.  She is told how to conduct “customer relations”.  She agrees to be subject to SR’s ongoing evaluation and supervision.  

56.	The actual engagement of the dancer for a particular session takes place when, in response to the dancer’s application, SR through Miss Reed enters the dancer’s name on the list for that session.  Her application is not automatically accepted; all depends, according to clause 3 of the DPL, on how many other dancers are competing for that session and on whether the dance is within her contractual minimum of three sessions a week.  (In any event, as is pointed out in paragraphs 38 and 40 above, Miss Reed retains a residue of discretion as to who gets on the list.)  And when the dancer comes to SR for her session, she is bound “as a material obligation” (by clause 5A of the DPL) to perform during all hours of the session and as a “material consideration” to “produce the maximum gross sales possible from dancer performances” and to “assure regular maximum operation of entertainment”; by clause 10 of the DPL she agrees to perform “consistent with the type of entertainment regularly performed at the premises”, the character and the manner of the performance being left to her.  She is required to dance on stage and podium as and when required.  Her services are personal; consequently she had no right to provide a substitute; clause 13 of the DPL.  If she fails to perform or fails to comply with the Code she can be subject to the Disciplinary Process.  In return SR agrees to give the dancer access to the premises and the customers for the session, to provide the necessary music, lighting and dressing room facilities and to advertise the business.

57.	There is nothing expressed in the agreements that states SR’s undertakings to the customer.  It is clear however that SR’s role is to provide its entertainment services to meet the requirements of its paying customers and to comply with the terms of the local authority licence.  SR recruits the customers, charges them for entering, lays down rules indicating conduct that is unacceptable and provides the customers with a tariff of charges.  The evidence shows that SR aims to provide a sufficient number of dancers to match demand at the particular session.

58.	The essence of those features is that each dancer is committed in contract, from the time she is engaged for the session until her departure from the premises after the session is over, to perform in SR’s entertainment business and, using her own skills “to maximise gross sales”, to entertain individual customers of SR by dancing or participating in sit-downs.  The money side of the arrangement between dancer and SR is agreed between them.  SR is, as regard each session entitled to specified amounts from the dancer (e.g. £80 as the “license fee” plus £40 for each sit-down, at Tottenham Court Road); subject to clause 7(c) of the DPL (see paragraph 18 above) the dancer is free to keep whatever cash or rhinos the customer gives her.  The duration of the dancer’s engagement is agreed.  The dancer’s right of access (her licence) for the session is agreed.  SR agrees to make its customers and the benefit of all its facilities available to the dancer.  The dancer agrees that SR’s management may continue to supervise her.

59.	We think that, in the light of those features, there is a contractual framework within which SR provides the relevant services to the customer through the dancers as agents.  The dancer is at SR’s premises to perform and that is the means by which SR conducts its own entertainment there. 

60.	That concludes the point of principle.  There remains the question of what consideration is provided to SR in return for its supplies.  The tariff fee for the dance and the agreed fee for the sit-down will clearly be consideration due to SR.  What about the payments that the customer makes to the dancer which are over and above the tariff fees and agreed fees?  There was almost no argument on this point.  The best we can do at this stage is to state what is said in the Customs’ Statement of Case and in their Skeleton Argument.  The Statement of Case says that:

	“Where a customer pays more than the set price for a dance, this additional 	sum is further consideration for the supply of entertainment services to the 	customer by the club (SR)”

The Skeleton Argument says:

	“Whilst dancers may well receive additional tips from the customers, this is 	no different from a customer in a restaurant giving a tip for services.  In that 	situation, the supply is nonetheless made by the restaurant.  In this situation, 	the supply is made by the Appellant.”

The VAT position of tips in restaurants may be evidence of Customs practise.  But we need to be sure about the underlying law.  Now that we have decided the point of principle, it should be easier to identify the issues in relation to the extra payments and “tips” obtained by dancers from the customers.  We would like to have fuller argument on the matter.  Accordingly, we give both parties six weeks from the release of this interim decision to provide Skeleton Arguments and, if they wish, to lodge witness statements.

STEPHEN OLIVER
CHAIRMAN
Release Date: 27 January 2006
LON/05/0741