Government Can Tax Sex Trade, British High Court Rules

By Mike Wendling | July 7, 2008 | 8:11 PM EDT

London ( - Procurement of prostitution may be illegal under British law, but that's no excuse for pimps to dodge sales taxes, according to a ruling by the U.K. High Court.

The judgment came in reply to an appeal filed by Britain's Customs and Excise department, which claims that the Superior Escorts agency owes about $185,000 in back taxes.

A tax tribunal ruled in March of last year that since escort agencies are fundamentally illegal, the firm was exempt from Britain's 17.5 percent value-added tax (VAT) on goods and services.

In a High Court ruling Wednesday, Judge Robin Jacob ruled that European laws stipulate that profits from illegal activities such as drug trafficking and importation of counterfeit money are effectively exempt from tax - but that there is no similar loophole for escort agencies.

"The mere fact that conduct amounts to an offense is not sufficient to justify exemption from VAT," the judge wrote in his opinion.

Jacob cited a case in which a cannabis cafe was deemed not to be violating the law because the owners were not hawking the drugs themselves, but merely providing a place where marijuana could be bought and sold.

"The criminal aspect does not alter the fact that making available a place of sale is in itself a supply of services for the purposes (of tax law)," the judge ruled.

"Renting out a place intended for commercial activities is, in principle, an economic activity. The fact that the activities pursued there constitute a criminal offence, which may make the renting unlawful, does not alter the economic character of the renting," he added.

Jacob said that only businesses, which are so "inherently unlawful" that they operate outside the rules of market competition, are exempt from VAT.

Although procuring prostitutes is illegal in Britain, the act of selling sex is not, thus the judge concluded that pimps and escort agencies were in competition with the legal prostitution market.

"I conclude that this case is not within the very narrow rules which allow moral scruple by a paradox to reward criminality by exempting it from taxation," the judge wrote.

The case was the first in Britain to test whether illicit activities are taxable.

Supreme Escorts owners Robert and Julie Polok of Ashford, a town about 50 miles south of London, have consistently claimed that their business is legal, and instead challenged their tax bill on the grounds that they didn't make enough money to be charged under VAT rules.

Julie Polok declined to comment on the particulars of the case when contacted by phone Thursday. Polok said she was surprised by the verdict and wasn't even aware that the case was about to be ruled upon by the High Court before the decision was announced.

The case will now go back to the tax courts, where judges will make a further ruling on how much tax the Poloks owe.

The Customs and Excise department welcomed the ruling.

"Whether the activity is illegal or not, our job is to collect tax from those who owe it," a spokesman said.

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