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Is it taxable?

Yup, I’m afraid so. Whether you are being paid for your time and companionship, to give a massage, for sexual services, or simply to tie a naked businessman to your coal bunker with the clothes line and thrash his buttocks with wet stinging nettles, the income is taxable. There is absolutely no doubt about that.

If you go onto the HM Revenue & Customs web site and type the word “prostitution” into the search box you will quickly find this:

If the activities of a prostitute or any other person deriving income from prostitution are organised in such a way as to constitute a trade or profession, the profits are liable to income tax. This was confirmed by the ‘Miss Whiplash’ case, CIR v Aken [1990] 63TC395.

In a later article we’ll come back to the various courtroom adventures of Miss Whiplash (a.k.a. Lindi St Clair) because they’re not only still relevant, but also hugely entertaining.

So escorting profits are caught in the income tax net, but is income from escorting liable to VAT? Well, yes it is. We know that thanks to the Polok case (of which much more later) in which the High Court looked at the VAT position of an escort agency and untangled a hopeless muddle created by a totally misguided VAT tribunal. Any escort whose takings go over the registration limit of £77,000 (from April 2012) in any 12 month period has to register and charge her clients VAT.

But it can’t be taxable because …….

Prostitution is illegal

Actually, no it’s not.

But I work with another girl which technically makes our workplace a brothel, which is illegal

And if a shopkeeper sells fireworks to a child he is breaking the law but his income is still taxable.

Men pay me for S & M services, which the “Spanner” case decided is highly illegal

Even if you were running a shop which specialised in receiving and selling stolen property the profits would still be taxable.

Surely contracts for the supply of prostitution are not legally enforceable so income from them cannot be taxable?

Barristers can’t sue for their fees either, and until recently gambling debts were not legally enforecable, but barristers and bookmakers have always been taxed.

But that makes the tax authorities guilty of living off immoral earnings.

Now you’re being silly. The offence of living off immoral earnings was abolished in 2003; in any case it only ever applied to men and HM Revenue & Customs aren’t human.

I provide therapeutic massages which are exempt from VAT because they’re a health service.

OK if you’re a registered physiotherapist, or on the VATman’s list of other recognised health professionals. But is that really all you supply because any incidental services would be VATable?

I’m Lithuanian

Su Naujaisiais metais! Makes no difference I’m afraid. If you have a business in the UK, you get to pay UK tax.

Am I in business?

The Revenue’s Business Income Manual talks about the activities of a prostitute being taxable if they are “organised in such a way as to constitute a trade or profession.”

There is no single definition of what constitutes trading but the following ‘badges of trade’ would indicate that an escort is in business and therefore liable to income tax:

  • An intention to make money.
  • Transactions which are systematic and repeated – for example having a web site which sets out how you work, what you charge and what you provide, indicates that you are trading.
  • A method of sale which is typical of trading transactions – advertising, talking to potential customers, giving a quote for the services required, taking a booking, receiving the fee and finally doing the deed are all typical of trading transactions.
  • The existence of similar trading transactions – do other people in business provide similar services in a similar way.

Basically if you set yourself up in a businesslike way then you are trading. Or in the words of Lord Reid in Ransom v Higgs (1974),

trade means ..operations of a commercial character by which the trader provides to customers for reward some kind of goods or services.

Activities that don’t amount to trading

Here are a few examples of activities which don’t count as trading and won’t be taxable:

  • forced prostitution or sex slavery – a girl who is pimped and working under compulsion is not doing it with the intention of making money. She is the victim of a crime.
  • the generous boyfriend – having a boyfriend who settles your credit card bill every month and expects nothing in return other than regular sex doesn’t, on its own, amount to trading. Having several relationships like that, probably does.
  • casual bartering – occasionally asking the guy next door if he’ll clean out your guttering in return for a shag doesn’t amount to trading as a prostitute. Having a similar arrangement with every tradesman in your village, possibly does.

Employed or self-employed?

There is one final reason why you might not be regarded as running a taxable business, and that is if you were deemed to be employed rather than self-employed. In practice it is almost inconceivable that anyone providing personal sexual services could be treated as an employee but there are a couple of issues to watch out for.

The rules for deciding whether someone is employed or self-employed are a mess and open to interpretation. There is a popular misconception that if you and the person you work for simply decide between yourselves that you are self-employed then that is the end of the matter. It isn’t. The Revenue will look at the detail of your actual working relationship and decide whether that amounts to employment or self-employment. The basic difference is between a contact of service (employment) and a contract for services (self-employment). If I agree to serve you, in some kind of mistress-servant relationship, then I am your employee (always assuming that you agree to pay me!), but if I agree to handle your tax affairs then I am providing a service and self- employed. Unfortunately things are often not that clear cut and the courts have developed various pointers to help decide whether a particular business relationship amounts to employment or self- employment.

First of all, the easy situations.

If you are an independent escort who does her own advertising, works when she wants, where she wants and has complete freedom to decide who she sees and how much she charges, then there can be no doubt that you are self-employed.

And at the other end of the spectrum an un-pimped girl who works the streets is also clearly self-employed.

But it is possible that an over-zealous tax inspector might try to argue that a girl working in a brothel or through an escort agency is really employed by the madame or agency. HMRC publish a booklet (IR56) and an online ‘Employment Status Indicator Tool’ which are designed to weigh up the various factors which indicate employment or self-employment. However I’m not aware of any cases where the tax man has seriously argued that an escort is employed – and that has got to be correct because a sex-worker’s absolute legal right to decide whether she goes through with a booking trumps all the other considerations about working to the agency rules, setting of prices and not be able to swap the booking with another girl – all of which would normally point to employment.

If you get work through an agency then they will usually be very careful to make sure the arrangement is structured so there is no doubt that you are self-employed for tax purposes.

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