High-earning lap dancers face losing a share of their income to the taxman after the High Court ruled that the dancers – and not the clubs where they perform – are liable for VAT.

The decision came in a successful challenge by Spearmint Rhino - which describes itself as operating a chain of “gentleman’s clubs” - against an earlier VAT tribunal decision that found the club had to pay the tax.

In a test case that could apply to dancers in other establishments - and have ramifications for other jobs - Mr Justice Mann agreed with Spearmint Rhino’s claim that since the dancers were self-employed, there was a “direct engagement” between them and the customer.

He said that although the dancers must pay the club to use its premises and abide by a code of conduct, they were essentially “plying their self-employed trade at the club in their own right” and so liable to pay VAT on their takings.

The court heard how establishments such as Spearmint Rhino, whose flagship club in Tottenham Court Road, London was described as a “typical example”, offer two discreet forms of entertainment: general podium dancing and private dancing.

The judge said he was concerned with the second, more lucrative, arrangement where dancers interact with customers directly to offer individual dances for £10 or £20 a time.

In addition, he noted that dancers offer a “sit down” service where, for around £250, “a woman can be engaged to sit and socialise with the customer for an hour” that raised the same issues. Both kinds of transaction are typically paid for in cash.

Allowing Spearmint Rhino’s appeal, the judge ruled that the arrangement of private dances or “sit downs” amounted to a transaction between the dancer and her customer, in which the club played only an indirect role and could not be held liable for VAT as the original tribunal found.

Despite the defeat, the ruling will only affect those dancers who earn in excess of £64,000 a year - the limit at which self-employed workers become eligible to pay VAT.

A spokeswoman for Spearmint Rhino said it was “very difficult” to say how much a typical dancer earned each year but added that all dancers were required to declare their earnings to the taxman as a condition of working in their clubs.

A spokesman for HM Revenue conceded that since the bulk of transactions are settled in cash, it would be difficult to detect whether dancers were declaring their earnings honestly. He added that HMRC had not yet decided whether to appeal against the decision.

Harriet Morgan, a tax partner at lawyers Reed Smith Richards Butler, said: “The case hinges on the finding that the dancers were not acting as the agent of Spearmint Rhino in providing dances but as principal.

“Other types of self-employed workers, such as hairdressers who 'rent' a chair in a salon but do not work for the salon directly, could now also become liable for VAT as a result of this decision.”

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