Salon owner wins £18k VAT case
The court has ruled in favour of the taxpayer in an appeal against a VAT assessment of £18,649 in regards to rooms rented to other businesses within a hairdressing salon
The First Tier Tribunal (FTT) upheld the appeal against HMRC for a VAT assessment of £18,649 issued under section 73 of the Value Added Tax Act (VATA) 1994, to Welsh hairdressing business, Errol Willy Salons Ltd in 2017.
Errol Willy, who owns and runs the Cardiff-based salon, rented out two rooms in the property to two separate beauticians who both ran their own businesses. Both beauticians provided their own equipment, materials, and other products including towels, and were responsible for cleaning the space with their own products. The rooms were also decorated by the beauticians, and not Erroll Willy’s salon.
During the period of the assessment, only one of the rooms was used by a beautician, referred to as K in court, and Errol Willy charged rent for the room, calculated as 40% of K’s takings.
The other room was rented out to another beautician, referenced as A, who had since ceased to use the space. The rent in respect of A’s room had been calculated as 33.3% of her takings. The beauticians set their own prices and opening hours.
Within relevant case law, the characteristics of leasing or letting of immovable property with regard to VAT are that the arrangement must relate to a defined area of immovable property, it must confer a right to occupy that property, to the exclusion of all others, for an agreed period, and for payment.
HMRC agreed that the arrangement provided a defined area for the beautician but contended that Errol Willy provided the beauticians with a package of services rather than just two rooms. These services included access to the staff toilets and rest area, the services of a receptionist as well as light, heat, and advertising.
The tax authority stated that there was ‘no evidence’ that the three other characteristics were not met because it was uncertain whether there was a right to exclude others from the area, there was no evidence that the right of occupation was for an agreed period, and as the rent was calculated as a percentage of turnover, the condition that payment must be given is not met. As such, HMRC issued a VAT assessment for £18,649 in February 2017.
Regarding the characteristics, Errol Willy argued that they were present in the leases between the salon and the beauticians in December 2018. The leases included a landlord’s covenant for quiet enjoyment of the property by the tenant subject to compliance with obligations, for a term of one year and stated that payment of a percentage of turnover should be regarded as the payment of rent.
The First Tier Tribunal decided that even though the leases were not in place at the time of the assessment, the evidence provided by Errol Willy as to arrangements at the time is consistent with the terms of the leases and that, therefore, there was a right to exclude others from the area. The court noted that the treatments also provided by the beauticians included personal waxing which a beautician would be unlikely to agree to the possibility of another person entering the room without permission.
HMRC also argued that the services supplied by Errol Willy were such that the arrangement should be regarded as the active exploitation of the rooms, adding significant value, so that it could not be regarded as meeting the conditions of a supply of land.
HMRC argued that the decision in the Byrom and others (trading as Salon 24) [2006] case which concerned a salon that rented rooms to masseuses. In this case, the recipients of the supply were provided with a fully furnished room at daily rates which included services aimed at ensuring their safety, as well as benefiting from active advertising.
Errol Willy also argued that that the services supplied were ‘ancillary’ which enabled a better enjoyment of the room supplied and did not constitute an aim in themselves. As such, the service should share the VAT exemption which applied to the letting.
The main issue that needed to be determined by the First Tier Tribunal was whether the additional services such as receptionist services, the availability of a toilet and staffroom, the display of posters in the window, and the display of a price list on a website was classed as ‘significant added value’ meaning that the supply could no longer be characterised as a ‘relatively passive’ supply of land or, in the alternative, that the economic and social reality of the arrangement was not one of a supply of an interest in land.
The First Tier Tribunal ruled that the salon did not actively advertise the beautician’s businesses and the beauticians acquired their clients by word of mouth. Regarding the receptionist, the court ruled that it was not mandatory or was it suggested that there was any specific need for such service, for example for safety reasons which contrasts from the Byrom case.
The First Tier Tribunal stated that overall, the only services which would specifically enable the better enjoyment of the room itself were the services such as heat and light and ‘arguably, the access to the toilet facilities’. The court ruled that the other services would only ‘assist with the conduct of the beautician’s business generally’ rather than the enjoyment of the room specifically.
For these reasons ‘the arrangements should be characterised as a VAT-exempt relatively passive supply of land, as the services were not such as to change that character’ and upheld the appeal. The decision can be appealed, however, no appeal has been announced by HMRC.
Glyn Edwards, VAT director, MHA MacIntyre Hudson commented: ‘If HMRC had succeeded in its case then thousands of salons would have been vulnerable to similar attacks whenever additional services were supplied along with room hire to beauticians operating independently in a salon.
‘A victory for HMRC could have had a wider impact too. Potentially any businesses letting out a spare room to a tenant (such as an accountant or solicitor letting a room to a financial adviser) could have become vulnerable to a VAT assessment. So a huge number of small businesses and some larger ones renting out spare rooms have dodged a bullet here.
‘It seems likely that HMRC took this case to try to establish where the line was to be drawn between a supply of a room (VAT exempt) and a supply of services of which the room is a part (taxable).’