20322

EXEMPTION – Land – Letting or leasing of immoveable property – Hairdressing salon owned by Appellant – Arrangements with stylists – Stylists granted right to occupy chair and designated area in salon – Fixed fee charged for that right – Stylist has access to other salon facilities in return for service charge based on stylist’s turnover – Whether grant of right to occupy an exempt supply – No – Art 13B(b) of Council Directive 77/388/EEC – Whether single standard rated supply of all facilities provided by salon owner – Yes – Appeal dismissed

LONDON TRIBUNAL CENTRE

VIGDOR LIMITED T/A MICHAEL JANE	           Appellant

-	and –

THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

Tribunal:	SIR STEPHEN OLIVER QC  (Chairman)
DIANA WILSON

Sitting in public in London on 28 June 2007

Edmund King, counsel, for the Appellant 

Sarabjit Singh, counsel, instructed by the general counsel and solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

1.	Vigdor Ltd appeals against a ruling given by Customs on 28 January 1997 (affirmed by letter of 14 April 1997) to the effect that supplies by it to self-employed stylists were wholly taxable supplies.

2.	Michael Spiegler, a director of Vigdor, gave evidence.  
3.	At all material times Vigdor carried on business from premises in Queensway, London W2 as a hairdressing salon.  The salon was opened seven days a week.

4.	The premises consisted of two floors.  The ground floor was accessed directly from the street.  It consisted of a reception area, a till, nine seats, three sink units and a mixing room.  The floor was open-plan.  Michael Spiegler worked for Vigdor as a stylist.  His place of work was the ground floor which he occupied along with other employed stylists.  

5.	The basement consisted of an administrative office, four self-contained beauty rooms and a separate room.  The separate room contained chairs, two washbasins and a dye-mixing area.  The dispute concerns the supplies made by Vigdor in respect of this room.  

6.	Michael Spiegler’s evidence shows that, at the material time, there were chairs in the basement for each stylist.  There was a client waiting area in that separate room with its own chairs.  In 1996 there were three self-employed stylists.  A sign on the door to this separate room in the basement stated that the room was for the use of independent contractors.  On each mirror there was a sign stating that each stylist’s chair was for the sole use of a designated stylist.  Each of the three stylists share the use of the washbasins and the dye-mixing room.  The report of a visiting Customs officer stated that there were no separate price lists on the wall for each stylist and that they shared the use of a junior assistant.  The self-employed stylists shared the same appointment book and till as the rest of the staff of Vigdor.  They received their shares of the takings from Vigdor each week.

The arrangements between Vigdor and the Stylists
7.	We were not provided with any original agreements.  It is not in dispute however that an agreement containing the following provisions was in operation between Vigdor and the three stylists in 1996.  The stylist is referred to as a “chairholder”.  

8.	Clause 1 provides that the “chairholder will operate his/her own business within the licensed area-floor space at [Vigdor’s] premises or at such other premises as the parties shall agree from time to time”.  By Clause 2 the chairholder is to have “exclusive use of the area-floor space known as           at [Vigdor’s] premises” (sic) or at such other premises as they shall agree.  The agreement then provides as follows:

“(3)	The parties hereby agree that service facilities (independent of and without obligation to area-floor space) shall be made available at the option of the chairholder only.

(4)	The parties hereby agree that in respect of the licence to occupy area-floor space herein granted the chairholder will pay the company a rental-fee of   his/her gross turnover or such other percentage rental-fee as the parties shall agree from time to time.

(5)	The parties hereby agree notwithstanding Clause 4 herein there shall be paid by the chairholder to the company for the exclusive occupation of the area floor space known as                 a minimum annual rental-fee of  £2,500 … or that payable under Clause 4 herein if greater.  

(6)	The parties hereby agree that in addition to the rental-fee payable by the chairholder to the company by virtue of Clause 4 the chairholder should he/she elect for the provision of service(s) shall pay a service charge of 10% of his/her gross turnover or such other percentage as a service charge as the parties shall agree from time to time.

(7)	The parties hereby agree that at the option of the chairholder only and in consideration of the service charge that could become payable by virtue of Clause 6 herein the Company will if so requested provide all or any of the undermentioned service facilities:

(a)	lighting, heating, telephone, water cleaning and general maintenance;
(b)	a fully staffed reception;
(c)	the use of stock held in the dispensary stockroom but that the chairholder shall have complete freedom to purchase products elsewhere;
(d)	the services free of charge of apprentice and/or junior staff;
(e)	a laundered towel service free of charge.”

9.	We accept that at the material time the stylists actually paid 10% of takings as service charge (Clause (6)); the Clause (4) charge was 60% of takings.   Mr Spiegler said of the 10% that he had reckoned that this would cover his expenses and the 60% would provide a profit to Vigdor on the downstairs area.

10.	There were no floor-markings to show the area floor space referred to in Clause (2)  Mr Spiegler did not know what size those floor spaces were.

11.	Mr Spiegler said that within the confines of the basement area were all the facilities a self-employed stylist could require.  The self-employed stylists were given the opportunity to work upstairs if their clients were unwilling to go downstairs.  When the downstairs flooded (which was frequent) upstairs chairs were made available to the stylists who were affected.  The self-employed stylists used each others’ chairs when one or more were absent.  Mr Spiegler said it was “up to them, between themselves, if they wanted to change chairs”.  

12.	Sometimes Vigdor’s own clients came to the salon but for cultural reasons wanted to have their hairs styled downstairs rather than in public view.  They would be brought downstairs by a Vigdor employee and the styling done on one of the vacant chairs without prior permission from the self-stylist whose chair it normally was.  “There will always be a vacant chair” said Mr Spiegler: “We are open seven days a week”.  

13.	The stylist who has rented the chair cannot carry on her business from her “floor space area” alone; she has, for example, to go and meet her client, to take her client to the washbasins and she has to go to the dye-mixing area.  They have to move around the premises “to do their jobs”, explained Mr Spiegler.  While Mr Spiegler could not say what area comprised the particular stylist’s floor area, he observed that no stylist had ever complained that another stylist had crossed her floor space; it had “never been an issue”, he said.

14.	We infer from the evidence that exclusive use of the area floor spaces was not part of the arrangement.  The area-floor space of the stylist was not defined in the agreement that we saw.  Nor were the dimensions of such space specified. The only thing that could possibly be described as exclusive use was the chair allocated to the particular stylist.  But even that was available to Vigdor and to the other stylists when the particular stylist was absent.

15.	Regarding the facilities, there was no evidence that any stylist had chosen not to use the services listed in Clause (7).  They were listed because they were all essentials to enable any stylist to carry on business.

16.	Regarding the so-called rental of the floor area of 60% of turnover, we are not satisfied that it reflects an arm’s length commercial rent for the area licensed (whatever that might be).  We see it as a source of profit to Vigdor, as Mr Spiegler explained. 

Was there an exempt leasing or letting of immoveable property by Vigdor to the self-employed stylist within Article 13B(b) of the Sixth Directive?

17.	The argument for Vigdor, presented by Mr Edmund King, is that on the strength of the decision of the Court of Justice in Belgium State v Temco Europe SA (Case C-284/03) [2005] STC 1451, a supply of land remains just that if someone else has a right of access or the right to cross over it.  Temco, he argues, establishes that an exclusive right to occupy will exist and be recognised as falling within Article 13B(b) even if the contract cuts down the class of people the holder of the right is allowed to exclude.  Reliance is placed on paragraph 25 of Temco which reads as follows:-

“The presence in the contract of such restrictions on the right to occupy the premises let does not prevent that occupation being exclusive as regards all other persons not permitted by law or by the contract to exercise a right over the property which is the subject of the contract of letting.”

18.	We now summarise our conclusions on the Article 13B(b) issue.

19.	The Temco reference related to the grant by one company of a licence to three associated companies in return for a payment calculated on the basis of the area occupied.  The grantor company retained unlimited access.  The passage from paragraph 25 set out above does not stand alone.  It is preceded by a number of other statements of principle.  In paragraph 19 the Court identified exclusivity as a key factor of the concept of letting or leasing of immoveable property in Article 13B(b).  It used these words:-

“In numerous cases, the Court has defined the concept of letting of immoveable property within the meaning of Article 13B(b) … as essentially the conferring by a landlord on a tenant, for an agreed period and in return for payment, of the right to occupy property as if that person were the owner and to exclude any other person from enjoyment of such a right …”

Then in paragraph 20 the Court sought to distinguish from letting and leasing of immoveable property “activities which … have as their subject matter something which is best understood as the provision of a service rather than simply the making available of property, such as the right to use a golf course (Sweden v Stockholm Lindopark (Case C-150/99)) … or the right to install cigarette machines in commercial premises (Sinclair Collis Ltd v C&EC) (Case C-275/01 [2003] STC 898”.   In paragraph 22 the Court observed that it was not essential for the period of the letting to be fixed at the time the contract was concluded.  For this purpose it was necessary to “take into account the reality of the contractual relationships”.  In paragraph 23 the Court saw a payment obligation that was strictly linked to the period of occupation as best reflecting “the passive nature of the letting transaction”.  

20.	Paragraph 24 contains this passage:
Lastly, as regards the tenants’ right of exclusive occupation of the property, it must be pointed out that this can be restricted in the contract concluded with the landlord and only relates to the property as it is defined in that contract.  Thus, the landlord may reserve the right regularly to visit the property let.  Furthermore, a contract of letting may relate to certain parts of property which must be used in common with other occupiers.”

Paragraphs 26 and 27 of the Court’s judgment contain a direction to the national court to consider all the circumstances of the transaction in order to establish its characteristics and to access whether it can be treated as a leasing or letting of immoveable property.  The national court must also establish whether the contracts “have as their essential object for making available, in a passive manner, of premises or parts of buildings in exchange for payment linked to the passage of time, or whether they give rise to a service capable of being characterised in a different way”.

21.	Reverting to paragraph 19 of the Court’s judgment, can it be said of the right granted to the stylist under the licence agreement that it gives her the right to occupy an “area-floor space” as if she were the owner and to exclude any other person from enjoyment of such a right of occupation?  The answer seems to us to be – No.  The consideration of all the circumstances (see Clause 26) reveals that other stylists are free to use a particular stylist’s area floor space.  There are no floor markings in the defined area.  Other stylists will cross over the floor space of a particular stylist.  Vigdor may use a particular self-employed stylist’s floor space by allowing its own employed stylists to bring their own clients downstairs so that the styling can take place in the discrete surroundings of the basement room.

22.	The full facts are not set out in Temco.  There, it appears, the individual lessee could not exclude either the landlord or its co-lessees. Those restrictions were reserved out of the property as defined in the contract.  The letting, which may qualify for exemption under Article 13B(b) therefore is confined to the property as limited by the rights of occupation of landlord and the co-lessees: see paragraph 24.  In this respect we recognise that the Court was giving advice on the right approach; it was not purporting to decide the issue which was specifically left to the national court.  However here, by contrast to the known facts in Temco, the “area-floor space” could be freely accessed by anyone lawfully in the salon and not just by Vigdor as landlord.  

23.	Vigdor’s functions as licensor are not performed in a "passive manner" (see paragraphs 20, 23 and 27 of the Temco judgment).  Vigdor runs an active hairdressing salon and exploits the floor space by making it available as a service for the self-employed stylists; those stylists use the facilities of the salon as well as the floor space in conjunction with others involved in Vigdor’s business.

24.	Mr Edmund King went on to suggest that the wider licence given by Vigdor to the individual stylist to occupy the entire salon was an exempt supply.  That cannot, we think, be right.  The arrangements in relation to the entire salon were the reverse of exclusive to the individual stylists.  They were shared with Vigdor and its employed stylists and clients as well as with the other self-employed stylists. Access to the salon and all its facilities was, to use the Court’s words in paragraph 20 of Temco, “the provision of a service rather than simply the making available of property”.

25.	For those reasons we are against Vigdor on the question of whether there was an exempt letting or leasing of immoveable property to the stylists.  That therefore concludes the matter against Vigdor.  We turn now to the question whether for VAT purposes the arrangements between Vigdor and the individual stylist gave rise to a single composite supply or, assuming we were wrong on the Article 13B(b) point, an exempt supply of the right to the floor space area and a standard rated supply of the salon services.

Was there a separate exempt supply?
26.	The starting point is to recognise the presumptive rule in paragraph 29 of the Court’s judgment in Card Protection Plan v C&CE (Case C-349/96) [1999] STC 270 that all supplies be regarded as distinct and independent.  But, to address the question in the same paragraph, would the VAT system be distorted if what was in substance a single service from an economic point of view were artificially split?  We think that the system would be distorted.  The licence to occupy the area floor space (in Clause 4 of the Agreement between Vigdor and the stylists) is artificial.  There is no defined area, no duration and no real exclusivity.  It is virtually irrelevant to the stylist’s needs that an “area-floor space” is referred to in that Agreement.  What the stylist wants is a chair and mirrors, lighting, heating and water, use of the reception facilities and of stock in the dispensary and a laundered towel service.  The Agreement has sought artificially to split the already artificial floor space licence from the real service of salon facilities.  There would therefore be no distortion of the VAT system if Vigdor’s supply to the stylist were treated as one single composite supply.

27.	The reality here is that Vigdor has been exploiting its managed salon in the course of its business by making chair space available to self-employed stylists and by giving them access to the facilities required to enable them to conduct their businesses. There are two elements to the consideration given by the stylist.  However no separate negotiation on the deal took place as to the amount of rent to be paid for the floor space area.  The total amount payable was a package.  The two elements are, we think, inseverable.  The stylist would not be able to comply with his or her undertaking to operate his business in the salon (see Clause 1 of the Agreement) without the floor space; and the licence of the floor space would be useless to both parties unless the stylist is committed to work there.  It follows that the services supplied by Vigdor in return for the payments to be made by the self-employed stylist are so closely linked from an economic perspective as to constitute a single supply for VAT purposes: see paragraph 12 of the speech of Lord Rodger in College of Estate Management v C&EC [2005] STC 1597 and paragraph 22 of the judgment of the Court of Justice in Levob Verzekeringen BV v Staatssecretaris van Financien (Case C-41/04) [2006] STC 766 at paragraph 22.

28.	For those reasons we are against Vigdor on its argument that there was a separate supply of the licence.

29.	We dismiss the appeal.  
30.	The Customs ask for costs.  We do not make a cost award for the same reasons as we gave in the Andrew Holland appeal.  

SIR STEPHEN OLIVER QC
CHAIRMAN

RELEASED: 28 August 2007

LON 1997/566