The Commissioners
of Customs & Excise v Robert & Julie Polok
(2002)In many ways this is a
completely absurd case which only got to court because of the
antics of a misguided VAT tribunal, but it does mean we now have a
court ruling on the VAT liability of prostitution and escort
agencies.
Robert and Julie Polok
ran (and for all I know, still run) an escort agency. They did not
register for VAT because their turnover was below the VAT
registration limit. Customs & Excise disagreed. They argued
that when a punter booked an escort he was making a contract with
the escort agency and when he handed the envelope to the escort she
was receiving it as agent for the Poloks. Then as a quite separate
contract the agency paid the escort her agency fee. Conventional
wisdom had it that the escort agency was acting as a booking agent
for the escort, but the VATman contended that in reality the escort
was acting as agent for the Poloks and she was delivering the
services which the Poloks had contracted to supply to the
punter.
The Polok's argument
was that as their share of the price paid by punters was below the
VAT threshold they had no need to register. Customs & Excise
added up the total amount paid by all the punters which came to
more than the registration threshold.
The dispute went to a
VAT tribunal which agreed with the Poloks. Customs & Excise did
not dispute the decision and it still stands. Provided an agency
and an escort organise themselves properly the agency's turnover
for VAT purposes is just their share of the fee paid by the punter.
And for VAT purposes the escort's turnover is the total paid to her
by the punter including the bit that she later pays on to the
agency. So far, so good.
The tribunal then had
a rush of blood to the head and decided to consider a question
which neither the Poloks nor Customs & Excise had raised. The
tribunal asked both sides to submit more evidence so they could
decide whether an escort agency should be exempt from VAT because
its activities are illegal. Despite both sides declining to co-
operate because the issue was irrelevant the tribunal ploughed
on.
The tribunal drew a
distinction between an "agency providing escorts for social
purposes and one which, while called an escort agency, is in fact a
prostitution racket." And they concluded that the Polok's
activities were "straightforwardly criminal, masquerading as a
lawful business." Accordingly they decided that escort agencies
were outside the scope of VAT, and they implied that the individual
escorts might be outside VAT too.
Customs & Excise
appealed. Since Mr & Mrs Polok had never sought to claim their
business was illegal they did not attend the appeal and they were
not represented.
The judge pointed out
a number of flaws in the tribunal's decision. For starters they had
overlooked the fact that prostitution is legal. They also missed
the fact that the European Court of Justice (VAT is a European tax)
has decided that a business running illegal activities is normally
still subject to VAT. The only illegal 'business' activities that
have been ruled outside the scope of VAT are narcotics dealing (the
'Happy Families' case) and importing counterfeit
currency.
The judge compared the
running of an escort agency with the case of Coffeeshop Siberie.
This was a business which supplied coffee shop tables. You paid for
your table and drank coffee, and then if you wanted you could sit
and read a book, or you could do what nearly everybody else did
which was use the table as a place to sell cannabis. The judgement
in that case had been that the coffee shop was in genuine
competition with businesses not tainted with illegality so it would
be quite wrong to exempt it from VAT. In the same way, some users
of escort agencies may just want a platonic companion, and the
agency is in genuine competition with other wholly legal
businesses. It shouldn't be outside the VAT net just because some
(or even most) of its customers are paying for sex - which in any
case is not illegal.
The upshot of this
case is that we now know that escort agencies and escorts are
subject to VAT, once they exceed the registration
threshold.
1. Do-it-Yourself
