Byrom, Kane & Kane (t/a Salon 24) v Revenue & Customs

For VAT purposes, a transaction containing several elements may constitute one overarching supply where the elements form a single economic supply which it would be artificial to split. An element is ancillary only where it is a means of better enjoying the principal supply. Services which assist a business conducted in rented premises are not necessarily ancillary to the licence to occupy those premises.

Once the transaction is characterised as one supply, the court must identify its economic and social reality and determine whether that overarching supply falls within the statutory exemption. The fact that the room is the most important, or even predominant, element does not make the overall supply a supply of land. A tribunal’s decision on this fact-and-degree question attracts appellate circumspection.

The appellants operated a massage parlour and supplied self-employed masseuses with rooms together with reception, security, advertising, card-handling, laundry, waiting-area, parking and other facilities. They contended that the supplies were exempt grants of licences to occupy land under Value Added Tax Act 1994, Schedule 9, Group 1, Item 1.

The VAT & Duties Tribunal held that the appellants supplied a taxable package of services, with the room licence merely incidental, and dismissed the appeal. The central issues were whether the transaction comprised one supply, whether the additional services were ancillary to the licence, and how the resulting supply should be categorised for VAT purposes.

1. Appeal dismissed. The Tribunal’s conclusion that the appellants supplied a single package was upheld, although parts of its reasoning and its description of the room as incidental were criticised.
2. VAT classification requires an overall assessment of the essential features of the transaction from the perspective of a typical consumer. A transaction which is economically indivisible should not be artificially split. A single supply may comprise several integral elements without one being ancillary to another.
3. An element is ancillary only if it is subordinate to, and a means of better enjoying, the principal supply. The services supplied by Salon 24, including reception, laundry facilities, use of the day room and card-handling facilities, assisted the masseuses in conducting their businesses but were not subordinate to the use of the rooms themselves. Cleaning, lighting and common access facilities could more readily be regarded as ancillary to the room licence.
4. The fact that the room was probably the most important element, and might even predominate over the other elements taken together, did not determine the character of the single supply. The correct overarching description was a supply of massage parlour services, one element of which was the provision of a room. That taxable description did not fall within the exemption for the grant of a licence to occupy land in Schedule 9.
5. The Tribunal had been entitled to reach its conclusion despite opaque reasoning. On the totality of the evidence, the judge would independently have reached the same result. Its further finding that the room was incidental to the other services was unsustainable, but nothing turned on that error.

• High Court (Chancery Division): appeal from the VAT & Duties Tribunal dismissed. The Tribunal’s decision dated 26 July 2005 was upheld in substance.