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VALUE ADDED? MAYBE NOT 'FAMILY VALUES'

April 03, 2007

The "value-added tax" lurks on the fringes of tax policy debates, but it never seems to get to sit down at the table. Maybe it would have better luck if it was willing to pay for a "sit-down."

The VAT is sort of a sales tax that applies at every level of the delivery chain, rather than just at retail. The United Kingdom has a value-added tax. Determining just where value is added poses all sorts of interesting problems, as U.K. blogger Tax The Fish explains:

Spearmint Rhino Ventures (UK) Ltd operated six gentlemen clubs, offering lapdancing entertainment by partially clad women.

The women paid a licence fee to the club for allowing them to conduct their business on their premises for an eight hour period. The lapdancers' 'portfolio' consisted of private dances for the customers, for which the customers paid upfront. Also, if a customer so requested, a lapdancer could arrange a 'sit-down', which basically meant that she would sit and chat with him for an hour. The customer paid extra for this service.

In addition to the licence fee, the lapdancer also paid £40 to the club for each sit-down she arranged.

The rest of the money was retained by the lapdancer.

The taxman tried to claim VAT on the fees paid by the customers to the lapdancers. However, instead of going after the lapdancers for the money, the taxman decided to get it from the club. There would have been no point chasing the women for the money as, generally speaking, there is no requirement to register for VAT unless your sales exceed £64,000 in a year. As it was unlikely that each lapdancer would be earning that amount of money in a year, there was no point chasing them for VAT. On the other hand, as a result of their high sales turnover, the clubs were already liable for VAT, so it was in the taxman's interest to see if they could be stung for some extra.

It is interesting that the VAT has some of the same compliance problems we see in an income tax. The service providers in question work in a cash economy, making collection difficult, so the tax man tries to go after the establishment owner. A U.S. version of this is the restaurant tip collection program.

In this case, the taxman struck out:

The judge wasn't having any of this. He didn't see how the lapdancers could be described as agents of the club. The way he saw it, when a lapdancer arranged with a customer for either a private dance or a 'sit-down', the customer was contracting, not with the club, but with the lapdancer herself. He therefore concluded that the club did not have to pay the VAT.

Related: prior Spearment Rhino tax coverage.

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