More exotic facts than are typical for a VAT case reached the First-tier Tribunal (Tax Chamber) (the FTT) last month. The dispute in Dazmonda Ltd (t/a Sugar & Spice) v HMRC concerned whether the provision of a booth for "live nude, semi nude or bikini clad dance entertainment" was an exempt supply of land under Article 135(1)(l) of the Principal VAT Directive. While the case creates no new law as such, it demonstrates an application of recent CJEU and Upper Tribunal decisions to difficult facts and serves as a potential warning to those attempting analogous tax planning.
Sugar & Spice, the appellant taxpayer, is an adult entertainment club in Norwich. The club has a dance floor, a seating area, a bar, and six booths for private performances. It was common ground that the club's dancers were self-employed and not agents of the club. On every evening worked, the dancers paid to the club:
- a house fee of £20 (£40 at peak times); and
- 25% commission on each fee negotiated with a client for a private performance in a booth.
The parties agreed that the house fee was standard rated for VAT purposes during the course of the litigation. The only issue remaining for determination by the FTT was whether the 25% commission was exempt or not.
Sugar & Spice argued that providing a booth was an exempt supply of land. HMRC argued that, as the club supplied more services than just the booth in return for the dancers' payments, there was a single composite supply. HMRC further argued that this composite supply was not an exempt supply of land, but a supply of services standard rated for VAT.
The FTT's decision
The FTT agreed that provision of a private booth could in theory be a supply of land. It was accepted in evidence that a dancer had control over a booth for the duration of the dance and could exclude whom she wished, subject to the right of the management to enter in the event of an emergency or to remove clients breaching its club licence. However, the FTT held that there had not been the simple provision of a private booth. The various services provided by Sugar & Spice were to be treated as a single composite supply of services, which was not a supply exempt from VAT; accordingly, its appeal was dismissed.
Single supply or many?
The first question to be considered by the FTT was whether the right to use a booth was a separate supply of land, or whether it formed part of a single supply with the other services that were provided in exchange for the payments. Such services included the use of the dance floor, dressing room and lavatories, and the benefit of the music, lighting, cleaning, security, management and advertising.
In reaching its conclusion, the FTT followed the guidance set out in the Middle Templecase. The FTT also found that the recent CJEU decision in Deutsche Bank of particular relevance. Citing Deutsche Bank, the FTT stated that a "helpful indicator" in deciding this question was whether, for the typical consumer of the supply, the individual elements would be "pointless" on their own. If so, they could not be economically separated.
The FTT concluded that the supply of the booth was part of a single supply of services. Although the use of a booth and the use of the main floor were charged separately (a factor referred to in Middle Temple), the "dancer's ability to make money is dependent upon the use of the main part of the club to attract customers for private dancers." The two supplies were not economically separable because provision of either the main floor or the booths alone would have been "pointless" without the other for the typical dancer consumer.
The FTT added that the supply of the booth could have been regarded as a separate supply if the other supplies had been limited to the provision of cleaning, lighting, music and so on, without the main floor. Such services could be fairly regarded as ancillary to the main supply, to better enjoy occupation of the booth, but the dancers' businesses depended upon the ability to use the main floor to attract customers, and this is not to be regarded as an ancillary supply.
A supply of land?
Having decided that the supply of the booth to a dancer formed part of a single composite supply of services, the FTT had to decide whether that composite supply was an exempt supply (in accordance with Article 135(1)(l) of the Principal VAT Directive and the national implementation in the VAT Act 1994).
Despite the uncertain duration of the occupation by the dancer and her customer, the FTT considered that the provision of the booth alone would have been an exempt supply of land: the "passive right to possess land and to repel others from occupation". But, as already mentioned, the FTT found that the supply was not simply the provision of a booth. Sugar & Spice also provided "advertising, music, lighting, heating, cleaning, management, security and the use [of the dance floor]", and this was to be treated as a single composite supply of services, not land. Such a supply of services would be standard rated and Sugar & Spice's appeal was dismissed.
The dismissal of Sugar & Spice's appeal is worth noting, even if one is not involved in the business of providing exotic dances for financial reward.
The club had taken steps to separate the house fee and commission, but this was insufficient. Separation of pricing may be indicative of separate supplies, but it is not conclusive of separate supplies (see point 11 of the factors to be considered as set out in the Middle Temple case). A service, like lighting, can be considered ancillary to a supply of land in order to enhance the supply. But a supply without which the other supply will be considered "pointless" – such as the provision of access to a dance floor to attract custom – cannot be considered ancillary to it and the two must be regarded as a single supply.
The consequence may be that a supply will be considered to be standard rated for VAT, even if it would otherwise have been exempt.