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)
Wednesday 18 July 2007
Tuesday 17 July 2007
Illegality cuts both ways
The European Court has come to the rescue of traders in a couple of cases in which countries tried to restrict VAT relief to people who were acting lawfully. For example, in the UK you are not allowed to sell insurance unless you are properly authorised to do so – after all, you are taking people’s money on the promise that you will pay up if something happens to them, and there has to be someone to make sure that you don’t just disappear with their premiums. It’s now the Financial Services Authority, and it used to be the Department of Trade.
Insurance policies are exempt from VAT under EU law. These days, you pay Insurance Premium Tax on many insurance policies, but you don’t pay VAT. When the UK VAT rules were first written, this exemption was included – as it had to be – but it was restricted to sales of insurance by authorised insurance companies. The argument was that only “proper” insurance ought to be exempt. If the company wasn’t authorised to sell insurance, it was hardly insurance at all – it might well be a worthless bit of paper.
Card Protection Plan sell a package of benefits to their customers, which include the service of registering all your credit cards so you can cancel them with one phone call if you lose your wallet (except that I kept my CPP contact card in the wallet as well so I couldn't find the phone number, bother). They also insure your luggage if you lose it. They had an insurance policy which covered their risk of customer claims, and they effectively sold on an insurance-type product to their customers. That is, it was a promise to pay them up to an indemnity limit if certain things happened.
Customs wanted VAT on CPP’s income. They argued that it couldn’t be exempt as insurance, because CPP wasn’t an insurance company. After years of wrangling through the UK courts, the case went to the ECJ, where the judges said it was simple: it was a contract of insurance, so it was exempt. If it broke national laws on financial regulation, the authorities could fine the company, put it out of business, put the directors in the pillory – but they couldn’t make the company pay VAT, because the EU law said that insurance was exempt.
Customs took this defeat in their usual way. They changed the rules so that insurance is exempt whether it’s lawful or not; and they pointed out that anyone claiming the exemption without the proper authorisation will be fined, put out of business and put in the pillory (well, maybe not the last – but the Financial Services Authority surely still has thumbscrews somewhere in the vaults).
The ECJ came to the same decision about a German gambling den – the German authorities wanted to exempt gambling only if it was in accordance with the law. But gambling is exempt, and they could not charge VAT on it in any circumstances.
Insurance policies are exempt from VAT under EU law. These days, you pay Insurance Premium Tax on many insurance policies, but you don’t pay VAT. When the UK VAT rules were first written, this exemption was included – as it had to be – but it was restricted to sales of insurance by authorised insurance companies. The argument was that only “proper” insurance ought to be exempt. If the company wasn’t authorised to sell insurance, it was hardly insurance at all – it might well be a worthless bit of paper.
Card Protection Plan sell a package of benefits to their customers, which include the service of registering all your credit cards so you can cancel them with one phone call if you lose your wallet (except that I kept my CPP contact card in the wallet as well so I couldn't find the phone number, bother). They also insure your luggage if you lose it. They had an insurance policy which covered their risk of customer claims, and they effectively sold on an insurance-type product to their customers. That is, it was a promise to pay them up to an indemnity limit if certain things happened.
Customs wanted VAT on CPP’s income. They argued that it couldn’t be exempt as insurance, because CPP wasn’t an insurance company. After years of wrangling through the UK courts, the case went to the ECJ, where the judges said it was simple: it was a contract of insurance, so it was exempt. If it broke national laws on financial regulation, the authorities could fine the company, put it out of business, put the directors in the pillory – but they couldn’t make the company pay VAT, because the EU law said that insurance was exempt.
Customs took this defeat in their usual way. They changed the rules so that insurance is exempt whether it’s lawful or not; and they pointed out that anyone claiming the exemption without the proper authorisation will be fined, put out of business and put in the pillory (well, maybe not the last – but the Financial Services Authority surely still has thumbscrews somewhere in the vaults).
The ECJ came to the same decision about a German gambling den – the German authorities wanted to exempt gambling only if it was in accordance with the law. But gambling is exempt, and they could not charge VAT on it in any circumstances.
Saturday 14 July 2007
All right then, cannabis dealing...
It’s well-known that you are allowed to smoke dope in some establishments in Amsterdam, although the Dutch authorities are apparently thinking about restricting this to Netherlands residents. They may find that such a rule contravenes the European law on freedom of movement – under the EU treaty, you can’t be meaner to foreigners than you are to your own people just because they are foreign. That’s a nice idea, but individuals and governments keep trying it on.
Anyway, the Coffeeshop Siberie rented space to drug dealers who would sell dope at tables for people to take advantage of the relaxed atmosphere. Presumably they are preparing to examine passports or local utility bills before making the sale, if only the Dutch are to be allowed to get stoned. Anyway, the Dutch authorities asked the coffee shop’s owners for VAT on the rent paid by the dealers, and the owners appealed to the European Court. This time, surely, it was sufficiently illegal. Although the consumption of drugs was tolerated, it was still against the law, and it must therefore be not VATable.
The judges pointed out that the coffee shop was not actually selling drugs. They were just providing the space for other people to sell drugs. Although selling drugs was completely illegal, and there was no legitimate market in cannabis, renting space was a normal business activity. Renting space to someone who did something illegal with it was in the same category as the dodgy perfume sales in Goodwin & Unstead: it was a bit illegal, but not illegal enough. The VAT was still due.
Anyway, the Coffeeshop Siberie rented space to drug dealers who would sell dope at tables for people to take advantage of the relaxed atmosphere. Presumably they are preparing to examine passports or local utility bills before making the sale, if only the Dutch are to be allowed to get stoned. Anyway, the Dutch authorities asked the coffee shop’s owners for VAT on the rent paid by the dealers, and the owners appealed to the European Court. This time, surely, it was sufficiently illegal. Although the consumption of drugs was tolerated, it was still against the law, and it must therefore be not VATable.
The judges pointed out that the coffee shop was not actually selling drugs. They were just providing the space for other people to sell drugs. Although selling drugs was completely illegal, and there was no legitimate market in cannabis, renting space was a normal business activity. Renting space to someone who did something illegal with it was in the same category as the dodgy perfume sales in Goodwin & Unstead: it was a bit illegal, but not illegal enough. The VAT was still due.
Thursday 12 July 2007
Drugs, then...
So, after the court decided that you needed to be really illegal to be outside the VAT net, the next case on this subject was about drugs. John and Carlo Citrone pleaded guilty to not paying over the VAT on sales of anabolic steroids to athletes. They were given suspended prison sentences for VAT evasion. They appealed to the Court of Appeal, pointing to the ECJ decision in Goodwin & Unstead as showing that they should not have to charge VAT on drugs they were selling illegally (a breach of the Medicines Act 1968). They could be prosecuted for the drugs offences but not the VAT evasion.
The appeal judge ruled that this was not the sort of drug dealing the European Court had been referring to. It was possible to sell anabolic steroids legally, under licence and to the right people for the right purpose. They were not completely illegal like cocaine or heroin. The judge pointed out that it was peculiar to improve the chance of avoiding VAT by exaggerating the illegality of the activity, but that was the law. So their convictions for VAT evasion stood.
Was it just a coincidence that the court chose Lord Justice Pill to give the leading judgment in this case? There are quite a few judges who seem to be named for the job – Judge Rant sat on this particular case with Pill LJ; it seems almost impossible that there is a Lord Justice Judge, who was plain Judge Judge until his elevation to the appeal court; and Lord Justice Laws presumably knows what’s what. Or VAT's VAT.
The appeal judge ruled that this was not the sort of drug dealing the European Court had been referring to. It was possible to sell anabolic steroids legally, under licence and to the right people for the right purpose. They were not completely illegal like cocaine or heroin. The judge pointed out that it was peculiar to improve the chance of avoiding VAT by exaggerating the illegality of the activity, but that was the law. So their convictions for VAT evasion stood.
Was it just a coincidence that the court chose Lord Justice Pill to give the leading judgment in this case? There are quite a few judges who seem to be named for the job – Judge Rant sat on this particular case with Pill LJ; it seems almost impossible that there is a Lord Justice Judge, who was plain Judge Judge until his elevation to the appeal court; and Lord Justice Laws presumably knows what’s what. Or VAT's VAT.
Tuesday 10 July 2007
Dodgy perfume
Goodwin and Unstead were in business selling counterfeit perfume. They were also up-front about what they were doing – at least, they claimed to be. Unstead claimed that “Everything I can carry in my vehicle, everything I trade in and sell, is a complete copy of the real thing. I do not sell goods as the real thing. In fact I sell my goods for a quarter of the original price. I am not out to defraud or con the public. I only appeal to the poseurs in life.”
The real manufacturers might have sued these men for passing off the product of their chemistry experiments in trademarked bottles, but it was Customs who sent them to jail – for failing to register for VAT and pay over the tax on their sales. The amount they should have collected was estimated at £750,000, which shows that they must have shifted a great deal of perfume.
If they had paid the VAT, Customs would have had no problem with them. Their customers must have been reasonably satisfied – if your counterfeit perfume smells something like the real thing, why worry?
They tried to get out of jail with an ingenious argument, similar to Lindi St. Claire’s – if the sale of the perfume was illegal, surely there shouldn’t be VAT on it. It wasn’t legitimate business activity, so it wasn’t something that ought to be taxable.
The European Court had no time for this. They pointed out that it would give lawbreakers an advantage over lawful businesses – they wouldn’t have to charge VAT. The judges suggested that maybe people would even deliberately break the law so they could get out of tax – in this case, the only thing that made the trade illegal was treading on someone’s trademark rights, and that was something that might happen at any time in legitimate businesses.
The judges said that VAT would apply to any trade which competed in a legal marketplace, even if the particular sales broke the law for some reason. Counterfeit perfume is VATable because real perfume is too. They then went on – unwisely, in my view – to give examples of what would really be too illegal to charge VAT on. They said that there is no lawful market in counterfeit money or in restricted narcotic drugs, so these are genuinely outside the scope of VAT.
Of course, Customs have traditionally had two main roles – looking for drug smugglers, and dealing with VAT-registered traders. They have generally treated both with much the same suspicion, but the European Court made it clear in this case that the two sets of customers are completely separate.
The real manufacturers might have sued these men for passing off the product of their chemistry experiments in trademarked bottles, but it was Customs who sent them to jail – for failing to register for VAT and pay over the tax on their sales. The amount they should have collected was estimated at £750,000, which shows that they must have shifted a great deal of perfume.
If they had paid the VAT, Customs would have had no problem with them. Their customers must have been reasonably satisfied – if your counterfeit perfume smells something like the real thing, why worry?
They tried to get out of jail with an ingenious argument, similar to Lindi St. Claire’s – if the sale of the perfume was illegal, surely there shouldn’t be VAT on it. It wasn’t legitimate business activity, so it wasn’t something that ought to be taxable.
The European Court had no time for this. They pointed out that it would give lawbreakers an advantage over lawful businesses – they wouldn’t have to charge VAT. The judges suggested that maybe people would even deliberately break the law so they could get out of tax – in this case, the only thing that made the trade illegal was treading on someone’s trademark rights, and that was something that might happen at any time in legitimate businesses.
The judges said that VAT would apply to any trade which competed in a legal marketplace, even if the particular sales broke the law for some reason. Counterfeit perfume is VATable because real perfume is too. They then went on – unwisely, in my view – to give examples of what would really be too illegal to charge VAT on. They said that there is no lawful market in counterfeit money or in restricted narcotic drugs, so these are genuinely outside the scope of VAT.
Of course, Customs have traditionally had two main roles – looking for drug smugglers, and dealing with VAT-registered traders. They have generally treated both with much the same suspicion, but the European Court made it clear in this case that the two sets of customers are completely separate.
Crime doesn't pay... VAT?
A number of people have been surprised to find that crime does pay tax, thank you very much. It seems bad enough that the police should chase and catch you, put you in the dock and send you to prison, without finding that your first visitor is an Inspector of Taxes.
One of the main cases on crime and tax featured a prostitute called Lindi St. Claire (under her real name, plain Marion Aken). She argued that the Inland Revenue couldn’t tax her income as it would amount to the state “living off immoral earnings”, and she was being unfairly picked on as burglars don’t pay income tax.
She was always very up-front about what she did, which led to various problems with the authorities. The judge noted that she had been advised by her accountant that she could save tax by setting up a limited company, so she tried to do that. “The Registrar of Companies rejected her first choices, Prostitutes Ltd., Hookers Ltd. and Lindi St. Claire (French Lessons) Ltd., but accepted Lindi St. Claire (Personal Services) Ltd. and registered the company. There was no subterfuge as to the purpose of the company. In the memorandum of association the first of the objects was spelled out as: ‘To carry on the business of prostitution’.”
She was also unwise enough to allow ITV to make a programme about her. She described her business and her high charges, and the Inspector of Taxes who was watching decided to check whether she had declared everything.
She was rumoured to have a number of influential clients, which is perhaps one reason why judges wore wigs in those days – harder to be recognised. The Court of Appeal held unanimously that she had to pay. They said that burglary is not a proper trade, while prostitution is (traditionally, it’s posh enough to be a profession). The fact that it’s illegal has nothing to do with it: if you make a profit from a regular income-earning activity, you pay tax on it.
At least Customs don’t seem to have pursued her for the VAT – maybe they didn’t think of it. There’s no reason why prostitution shouldn’t be a “VATable service” as well, as we’ll see later on.
I recall seeing a TV news item about an auction of Beatles memorabilia, and someone giving her name as "Lindi St Claire" was proudly displaying her purchase - a pair of Paul McCartney's underpants. I wondered at the time if this was to be a fixed asset of the trade, but it may have been a different Lindi St Claire.
One of the main cases on crime and tax featured a prostitute called Lindi St. Claire (under her real name, plain Marion Aken). She argued that the Inland Revenue couldn’t tax her income as it would amount to the state “living off immoral earnings”, and she was being unfairly picked on as burglars don’t pay income tax.
She was always very up-front about what she did, which led to various problems with the authorities. The judge noted that she had been advised by her accountant that she could save tax by setting up a limited company, so she tried to do that. “The Registrar of Companies rejected her first choices, Prostitutes Ltd., Hookers Ltd. and Lindi St. Claire (French Lessons) Ltd., but accepted Lindi St. Claire (Personal Services) Ltd. and registered the company. There was no subterfuge as to the purpose of the company. In the memorandum of association the first of the objects was spelled out as: ‘To carry on the business of prostitution’.”
She was also unwise enough to allow ITV to make a programme about her. She described her business and her high charges, and the Inspector of Taxes who was watching decided to check whether she had declared everything.
She was rumoured to have a number of influential clients, which is perhaps one reason why judges wore wigs in those days – harder to be recognised. The Court of Appeal held unanimously that she had to pay. They said that burglary is not a proper trade, while prostitution is (traditionally, it’s posh enough to be a profession). The fact that it’s illegal has nothing to do with it: if you make a profit from a regular income-earning activity, you pay tax on it.
At least Customs don’t seem to have pursued her for the VAT – maybe they didn’t think of it. There’s no reason why prostitution shouldn’t be a “VATable service” as well, as we’ll see later on.
I recall seeing a TV news item about an auction of Beatles memorabilia, and someone giving her name as "Lindi St Claire" was proudly displaying her purchase - a pair of Paul McCartney's underpants. I wondered at the time if this was to be a fixed asset of the trade, but it may have been a different Lindi St Claire.
Sunday 8 July 2007
Beverages
Anything charged with excise duty – basically alcoholic drinks – is charged to VAT at the standard rate. The law goes on to say that “other beverages (including fruit juices and bottled waters) and syrups, concentrates, essences, powders, crystals or other products for the preparation of beverages” are chargeable; but there are exceptions for “tea, mate, herbal teas and similar products, and preparations and extracts thereof; cocoa, coffee and chicory and other roasted coffee substitutes, and preparations and extracts thereof; milk and preparations and extracts thereof; and preparations and extracts of meat, yeast or egg”. So Bovril should be all right, as well as cocoa; hot chocolate powder must be an extract of cocoa; chocolate milk is mainly milk. Fizzy drinks are VATable.
Manufactured?
The law used to refer to “manufactured beverages”. This was a rule – charging tax on “soft drinks” – that was brought in for purchase tax in 1962, and preserved for VAT when it was introduced in 1973. Tropicana (UK) Ltd must have seen this as a marketing opportunity, as well as a chance to make more money. They argued that they – unlike many other drinks companies they could name – did not “manufacture” their juice. They picked oranges, squeezed the juice out of them and put it in boxes. They did not concentrate it and then dilute it, they did not mix it with anything else; the only other thing they were required to do was a little light pasteurisation to kill any bugs.
Even though squashing oranges and pasteurising the juice on an industrial scale sounds like manufacture to me, the Tribunal said that it wasn’t. Maybe the Chairman just thought Tropicana was nicer than other juices, and deserved to be zero-rated. Customs adopted the law of the playground – “it’s our ball, we’ll make the rules” – and had the law changed to remove “manufactured”. So now you have to pay VAT on Tropicana as well as on everything else.
Runny food
What’s left is a number of cases about whether something is a beverage – a drink – or “liquid food”. It’s obvious that some food is runny, but you probably wouldn’t drink it as a drink – think custard, think gravy. So it’s possible to argue that something is food and not drink.
One of the first cases on this point involved something called “BIO LIGHT”, which was made by Bioconcepts Ltd. This was a diet aid, sold with instructions to sip it throughout the day to help eliminate the urge to snack. The box said “Do not drink it by the glassful”. A report produced in the Tribunal said “the product's taste is too unpalatable to drink as a beverage, even in diluted form. Even in diluted form, the dominant flavour is aniseed but there is a strongly bitter background which should probably have an emetic effect if diluted BIO-LIGHT were to be consumed by the glassful. A similar effect would be expected if Worcester Sauce or Tabasco were consumed as a beverage.”
The Chairman commented, “Our impression having tasted BIO-LIGHT is similar”. He suggested that a beverage was something “commonly consumed…to increase bodily liquid levels, to slake the thirst, to fortify or to give pleasure”. It seems that BIO-LIGHT was too nasty for any of those. It was a food, not a drink, and it was zero-rated.
A bit more tricky is the distinction between drink and soup. After all, soup is often served in a cup and drunk, rather than eaten with a spoon. Grove Fresh Ltd made fruit juice, which was clearly standard rated because the law is explicit. But then it started to make vegetable juice as well – one variety being mainly tomatoes but including celery and beetroot, and another consisting of carrot, tomato and red pepper juice. It argued that these were dietary supplements or “meal replacements”, or alternatively they were like gazpacho – cold vegetable soup.
This time, the Tribunal chairman said she really enjoyed the samples provided – which was a problem for the company. As the product was nice, it was a beverage. It wasn’t a full meal replacement, even though it might be drunk by someone who was health-conscious. And it simply wasn’t sold as soup. It was a drink, and VAT was due.
Manufactured?
The law used to refer to “manufactured beverages”. This was a rule – charging tax on “soft drinks” – that was brought in for purchase tax in 1962, and preserved for VAT when it was introduced in 1973. Tropicana (UK) Ltd must have seen this as a marketing opportunity, as well as a chance to make more money. They argued that they – unlike many other drinks companies they could name – did not “manufacture” their juice. They picked oranges, squeezed the juice out of them and put it in boxes. They did not concentrate it and then dilute it, they did not mix it with anything else; the only other thing they were required to do was a little light pasteurisation to kill any bugs.
Even though squashing oranges and pasteurising the juice on an industrial scale sounds like manufacture to me, the Tribunal said that it wasn’t. Maybe the Chairman just thought Tropicana was nicer than other juices, and deserved to be zero-rated. Customs adopted the law of the playground – “it’s our ball, we’ll make the rules” – and had the law changed to remove “manufactured”. So now you have to pay VAT on Tropicana as well as on everything else.
Runny food
What’s left is a number of cases about whether something is a beverage – a drink – or “liquid food”. It’s obvious that some food is runny, but you probably wouldn’t drink it as a drink – think custard, think gravy. So it’s possible to argue that something is food and not drink.
One of the first cases on this point involved something called “BIO LIGHT”, which was made by Bioconcepts Ltd. This was a diet aid, sold with instructions to sip it throughout the day to help eliminate the urge to snack. The box said “Do not drink it by the glassful”. A report produced in the Tribunal said “the product's taste is too unpalatable to drink as a beverage, even in diluted form. Even in diluted form, the dominant flavour is aniseed but there is a strongly bitter background which should probably have an emetic effect if diluted BIO-LIGHT were to be consumed by the glassful. A similar effect would be expected if Worcester Sauce or Tabasco were consumed as a beverage.”
The Chairman commented, “Our impression having tasted BIO-LIGHT is similar”. He suggested that a beverage was something “commonly consumed…to increase bodily liquid levels, to slake the thirst, to fortify or to give pleasure”. It seems that BIO-LIGHT was too nasty for any of those. It was a food, not a drink, and it was zero-rated.
A bit more tricky is the distinction between drink and soup. After all, soup is often served in a cup and drunk, rather than eaten with a spoon. Grove Fresh Ltd made fruit juice, which was clearly standard rated because the law is explicit. But then it started to make vegetable juice as well – one variety being mainly tomatoes but including celery and beetroot, and another consisting of carrot, tomato and red pepper juice. It argued that these were dietary supplements or “meal replacements”, or alternatively they were like gazpacho – cold vegetable soup.
This time, the Tribunal chairman said she really enjoyed the samples provided – which was a problem for the company. As the product was nice, it was a beverage. It wasn’t a full meal replacement, even though it might be drunk by someone who was health-conscious. And it simply wasn’t sold as soup. It was a drink, and VAT was due.
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