Back to professional services...

To appreciate the case of Customs & Excise v Polok, you have to know a bit more about the oddities of VAT – but the soap opera of the case is definitely worth the effort. There is a VAT problem whenever you deal with a group of individuals who work together in some larger organisation: are you dealing with the person who deals with you, or the organisation? It’s the same problem whether it’s a taxi firm, a hairdresser’s salon, a driving school… or, as we’ll see in a minute, an escort agency, lapdancing club or “sauna”.
Take a haircut. You go into a hairdresser’s and someone cuts your hair. You pay that person £25 (many men and many women think that this is a ridiculous amount to pay for a haircut, but from different directions). The stylist gets to keep £15 of it, and the salon gets £10.
Now, is that…
· you buying a haircut from the salon for £25 and the salon paying the stylist £15 to do it?
· or you buying a haircut from the stylist for £25 and the stylist paying the salon £10 for the use of the facilities in which to cut hair?
The difference is that the stylist is almost certainly such a “small business” that he or she won’t be registered for VAT. Because the salon sells haircuts through a number of stylists, it will probably be large enough to have to charge VAT. So if you are buying the haircut from the salon, Customs get VAT on £25; if you are buying from the individual, the VAT is only on the £10 the salon charges the stylist for the use of the facilities (in fact, there’s another argument about that, but I’ll come back to it later).
If the individuals are employees of the big business, there’s no question – the business is selling the services, and more VAT is due. But it doesn’t automatically follow the other way if the individuals are self-employed – they can be treated as “legal agents” selling on behalf of the big business, and the whole turnover still belongs to it rather than to them. It’s a question of who makes a deal with whom – when you go into the hairdresser’s shop, are you going there to see your hairdresser Kim who always cuts your hair, or are you going into your local barber’s “because it’s there” and you don’t really care who cuts your hair? Tricky. Customs tend to prefer the idea that you are dealing with the large business because they get more money that way, but the Tribunal has to establish what the facts are.
Anyway, the case of Polok was not about hairdressers, but about an escort agency. Customers paid the escort £130, of which £30 was paid to the agency. You see that the issue is the same as for the salon: VAT on £130 or VAT on £30?
The first hearing before the Tribunal went something like this (I am using artistic licence, but the published summary implies it was so):
Customs: “We think the VAT should be on £130 because the escorts are acting as agents of the escort business.”
Trader: “No, it’s just £30, the £100 belongs to the escort and is nothing to do with me.”
Tribunal chairman: “All right, tell me a bit about how the business operates.”
Customs: “No.”
Tribunal chairman: “What?”
Customs: “You don’t want to know.”
Tribunal chairman: “How can I decide whether the escorts are acting as agents or separate individuals without knowing how the business operates?”
Customs: “Don’t go there, just give us a decision.”
Tribunal chairman: “Trader, you tell me how the business operates.”
Trader: “I agree with him, you don't want to know.”
The Tribunal (three members sitting together) seem to have been a bit baffled by this. They said that it was possible for them to come to a conclusion about who was supplying the services – the individuals or the organisation – based on the limited information they were being given. They were aware that Customs had a great deal more evidence which had been collected during the course of a thorough investigation, and they asked the parties to go away and decide whether they might let the Tribunal see a bit more of it so they could make a judgement rather than a guess… (to be continued)