In Dazmonda Ltd t/a Sugar & Spice v HMRC TC 03473, the FTT held that, when an adult entertainment club allowed dancers to use booths at its premises, there was a standard rated single composite supply of services rather than an exempt supply of land.

The facts:

  • An adult entertainment club provided an upstairs dance floor, seating accommodation and a bar; with six booths downstairs in which dancers could give private performances to patrons.
  • The dancers were all freelancers, receiving tips for dancing on the dance floor and fees from patrons for private performances in the booths.
  • The dancers paid a "house fee" to the club for the use of its facilities, which included lavatories, changing rooms, a secure room for valuables, the benefit of music, lighting and cleaning in the booths and the benefit of the club’s advertising. They also paid a commission of 25% of the fees received for dancing in the booths.
  • A booth was allocated to the dancers with their customers by the management for between five minutes and several hours; and different booths could be allocated to the same dancer during an evening.
  • When a dancer was given a booth, she had an exclusive right to it and also the right to exclude anyone from it. The management could also exclude anyone found taking drugs in a booth.
  • A dancer used the dance floor to procure clients to provide private dances in the booths, where most of her money could be made. The booths could be pre-booked, but the tribunal doubted the evidence given that this happened about 80% of the time.

The FTT held that, if the supply was limited to the supply of the booth, it would be an exempt supply of land.

The right of the club to enter in certain circumstances did not diminish the dancer’s right to exclude others, and the uncertain length of occupation did not stop it being the letting of land. However, the club supplied more than just the booth and the tribunal held that the elements of that supply were one single, composite supply, which was not of land.

Referring to Case C-44/11 FinanzamptFrankfurt am Main V-Höchst v Deutsche Bank AG [2012] STC 1951, it stated that a description of the separate elements being “pointless” on their own for a typical consumer was a “helpful indicator of inseparability”.

  • If the elements of the supply were just the provision of the booth, the other facilities would be “ancillary” to the provision of the booth, merely providing a means of better enjoying the occupation of the room. If so, the supply would be an exempt supply of land.
  • However, the supply of the booth was not “economically divisible” from the other elements, because the dancer’s ability to make money was dependent on the use the dance floor to attract customers for private dances. For the typical dancer, the use of the dance floor was “pointless” without the use of the booth, and without the use of the dance floor, the use of the booths would also be “pointless”, since she would not be able to attract customers.
  • The central element of the composite supply made by the club was the use of the booth - the exclusive right to occupy land for a period of time - but the composite service supplied by the club to the dancers was different. It provided advertising, music, lighting, heating, cleaning, management, security and the use of the upper floor and its facilities. That is, it added value to the simple provision of land. Therefore, the proper characterisation of the supply was the provision of standard rated services, rather than a passive supply of land.

Link: Dazmonda Ltd t/a Sugar & Spice v HMRC TC 03473

Comment

A licence to occupy land is an exempt supply when the licence has similar characteristics to a lease. HMRC provides examples of licences which it considers are exempt in its Notice 742 Land and Property and those which it does not (see 2.6 and 2.7 of the Notice). This case illustrates that this is a complex area of VAT and each case is decided according to its individual facts and circumstances.

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