The High Court held that the broad consensus of VAT tribunal decisions characterising hairdressers’ chair rental arrangements as the supply of hairdressers’ facilities rather than the letting of immovable property was correct and the minimal nature of the services, other than the exclusive use of the chair and its surrounding area in the present case, was not sufficient to take it out of the general run of cases.

Facts

The taxpayer hair stylist operated from premises in Salisbury. Customs informed him that he should have registered for VAT some nine years previously. They issued an assessment for unpaid VAT in the sum of £80,547 and imposed a penalty of £6,041. The taxpayer had invited other self-employed stylists to trade from his salon on the basis that they would be providing hairdressing services to their own customers and that he would charge the stylists for the right to use an agreed part of the salon premises. For other facilities, such as utilities and laundry, the taxpayer made a further charge of 75 pence per customer. There was no written agreement.

Customs submitted that the lack of written agreements was fatal to the taxpayer's case that he was making exempt supplies to the other stylists of licences to occupy land. In their view, he was making composite standard-rated supplies of facilities which fell to be included as part of his taxable turnover. The taxpayer argued that his supplies to the stylists were exempt grants of licences to occupy land and, consequently, that his taxable turnover remained below the VAT registration threshold.

The VAT tribunal held that the taxpayer had made distinct supplies to the stylists comprising on the one hand a right to use part of the premises, including the exclusive use of a chair, the provision of utilities and use of the telephone and, on the other hand, laundry services and consumables. Of these supplies, the former was predominant and was the principal element in a composite supply. Once it became established that there were grants of exempt interests in land, the other services had to be regarded as either ancillary or comprised within the principal supply.

In those circumstances the tribunal decided that the proper VAT classification of the taxpayer's supply of services 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 Grp 1, Pt. 2 of Sch. 9 to VATA 1994. It was common ground that Sch. 9 to VATA 1994 had to be interpreted in accordance with the meaning and purpose of art. 13(B)(b) of Council Directive 77/388 (‘the sixth directive’), which it implemented. Accordingly the disputed supplies were exempt and did not count towards the taxpayer's turnover for VAT registration purposes and his appeal was allowed ([2007] BVC 4,090; Decision No. 20,121).

Customs appealed, contending that the tribunal had erred in law in its analysis of the facts. In particular, on the facts found by the tribunal, it had not been shown that there had been an exempt letting of immovable property within the meaning of art. 13(B)(b). Moreover, the tribunal's reasoning had been vitiated by an artificial split of the taxpayer's package into two arbitrary classes, followed by the attribution to the package as a whole of the wrong classification. The correct classification was that the package constituted a supply of hairdressers’ facilities.

Issue

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 Grp 1, Pt. 2 of Sch. 9 to VATA 1994 was correct.

Decision

Briggs J (allowing the appeal) said that, since art. 13(B)(b) conferred an exemption from VAT, it had to be strictly construed, but not so strictly as to deprive the exemption of its intended effect. The concept of the letting of immovable property within the meaning of art. 13(B)(b) was 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. The letting of immovable property was characteristically a relatively passive activity linked simply to the passage of time and not generating any significant added value, to be distinguished from other activities which were either industrial and commercial in nature, or which had as their subject matter something which was best understood as the provision of a service rather than simply the making available of property. The right to occupy an area or space for a period of time might not be a letting of immovable property if it was merely the means of effecting the supply which was the principal subject matter of the relevant agreement.

There might be a de minimis limitation on the exemption in art.13(B)(b). An agreement might fall short of being a letting of immovable property if, on analysis, it conferred merely a licence to use rather than to occupy land. However, an agreement was not disabled from being a letting of immovable property merely because the grantee's exclusive use was subject to conditions (such as a landlord's right to enter and inspect), or because it included the right to use parts of the landlord's property in common with other occupiers (Belgium v Temco Europe SA (Case C-284/03) [2007] BTC 5,339; [2004] ECR I-11237, Sinclair Collis Ltd v C & E Commrs (Case C-275/01) [2003] BTC 5,318; [2003] ECR I-5965 and Staatssecretaris van Financiën v Coffeeshop ‘Siberie’ vof (Case C-158/98) [1999] BTC 5,320; [1999] ECR I-3971 considered).

Although generally questions of characterisation of transactions for VAT purposes were questions of law, cases such as the present were by their nature highly fact-sensitive, where relatively small factual differences might take a particular case to one or the other side of a dividing line which was difficult to describe in purely abstract terms. If followed that, on appeal, the court had to exercise caution before departing from the decision of an experienced specialist tribunal on what was, viewed in the round, a mixed question of fact and law.

In this case the tribunal had made an initial error of analysis in its two-part classification of the rights constituting the package. The exclusion of the waiting area and wash basins from the package led the tribunal to an overly narrow view of the package as a whole, so that they overrated 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, they failed to consider the whole package. That was an error of analysis which required the court to consider afresh whether the entire package was to be characterised as the letting of immovable property, or as the supply of hairdressers’ facilities, or as something else.

On a proper analysis, in all chair letting hairdressers’ arrangements including the present, the supply could not properly be categorised as the letting of immovable property. The business of the stylists had 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 significantly also the facilities shared in common within the salon as a whole. It was one of those cases, expressly contemplated by Warren J in Byrom & Ors (t/a Salon 24) v R & C Commrs [2006] BTC 5,210 where the correct VAT classification of the package as a whole was not to be derived from the identification of one, or even the most important, of its elements. The classification identified in the broad consensus of hairdressers’ cases was therefore correct, and the present case was no exception, despite lying at the minimalist end of the spectrum of shared services (Tumble Tots (UK) Ltd v R & C Commrs [2007] BTC 5,210 applied).

Chancery Division.
Judgment delivered 22 November 2007