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, Supreme Escorts, from Juniper Close in Ashford. 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.
The Spearmint Rhino case
The case of Spearmint Rhino Ventures (UK) Ltd v The Commissioners for HM Revenue & Customs (2007) concerns self-employed lap dancers. The whole judgement is well worth reading for its sheer entertainment value and clear- sighted good sense, but here are the important bits. Mr Justice Mann began his judgment by setting out how SR’s club in Tottenham Court Road works:
The club is described as a “gentleman’s club”. A member of the public pays £8 for admission and on entering goes into an area in which he (or she) may drink, socialise, eat and watch partially clad women dancing on a podium. At any one time (depending on the day, time of day and availability) there are between 20 and 140 young women available to provide the entertainment services in issue in these proceedings. Some of them will be those dancing on the podium. These proceedings do not, at least directly, concern that activity. The activities which concern me are those provided as a result of more direct engagement between the women and the customer. For a sum of money, the women can be engaged to perform private dances for the customer. For this purpose the customer (with or without accompanying people) and the dancer go to one of several booths where the private dance takes place. A fee of £10 is charged for a semi-nude dance; £20 is charged for a nude dance. Each dance lasts for a “track”, i.e. about three minutes. The dance is arranged as between the dancer and the customer. In addition to those services, the dancer and the customer can agree what is called a “sit-down”. For £250 (a sum which is in fact negotiable) a woman can be engaged to sit and socialise with the customer for an hour. Any additional dancing services will be the subject of a separate arrangement. Dancers are paid in cash or in Rhino chips – chips issued by the club on a credit card transaction and which can be used as a form of currency in the club.
It is common ground in these proceedings that the women are not employed by the club. They are all self- employed. They pay a sum to the club which allows them to ply their trade for a session of eight hours (it is £15 for a daytime session and £80 for an evening session). They enter into an agreement described as a “licence” which entitles them to enter and dance (and to some extent obliges them to as well). They also have to pay £40 every time they arrange a sit-down. There are some limited tips which they habitually or traditionally pay to various people, but I need not dwell on those. Other than that, no other sums pass between the club and the dancers. The monies which are paid for the dances and for the sit-downs go to the dancers. The customers do not pay the club for the dances and sit- downs. The club obviously provides the premises at which the dances take place, and it provides additional services such as the services of a “house mother” who helps to advise and look after them (and who is traditionally tipped £3 by each dancer for each session), and the assistance of security staff who will confirm the bargain made for each sit-down and who will apparently assist in the persuasion of a customer who might otherwise be minded not to pay.
The dispute between the parties is, as I have indicated, whether the entertainment services are supplied by the club or by the dancers. HMRC says that those services are supplied by SR to the customer. They are supplied through the dancers whom they have engaged. Accordingly, it is said that SR is obliged to account for VAT in respect of the consideration supplied for the services. SR says that the services are provided by the dancers themselves and not by the club.
And then the critical part of his judgment goes like this:
If one asks whether the club benefits from the dancers’ activities, then of course it does. If one asks whether it controls their activities, then again it does, to an extent. But neither of those questions is the relevant one. If one asks the question – when a dancer reaches an agreement with the customer, is she in fact making an agreement between the club and the customer, the answer is plainly not. The monetary arrangements point the other way, and the other factors do not bring the situation back towards agency.
Spearmint Rhino won their case and established that they are only liable for VAT on the sums the dancers pay to the clubs.
Incidentally the case was widely misunderstood by the press. The Daily Telegraph reported it under the headline “Strippers are exposed to the taxman” and it is quite true that lap dancers are now accountable to the VATman for the whole of their income from customers. But in practice most lap dancers are likely to be receiving less than the VAT threshold of £77,000 per year (from April 2012 – previously £73,000), and if they get close to it they would be well advised to negotiate some time off with SR.