Tag Archives: vat-hot-food

VAT: Apportionment and best judgement – The Homsub case

By   3 October 2019
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Latest from the courts

In the Homsub Ltd case the issue was the apportionment of values when a supply comprises goods at different VAT rates.

Further to the M & S case here is another First Tier Tribunal (FTT) case on the value of food and drink in meal deals. It also considered whether HMRC exercised ‘best judgement’ when it carried out an invigilation exercise to establish the percentage split between supplies subject to VAT and those which were not.

Background

Homsub is a franchisee in respect of Subway products, essentially being hot and cold food, which can be consumed either on or off their premises.

HMRC had concerns that the correct amount of output tax was being declared on sales. Consequently, it carried out an invigilation exercise as follows: The invigilators recorded, in respect of each of the five outlets, each sale made and annotated it with whether it was eat in or take out. A record was also made as to whether the food was hot or cold. Those differences needed to be recorded because of the different VAT treatment in respect of hot food and cold food on the one hand and eat in and take out food on the other. All eat in food is taxable, while some takeaways are zero rated. Further information here.

Contentions

Homsub complained that the methodology adopted by HMRC was flawed as it was not sufficiently refined to give rise to a reasonably reliable overall picture. It was argued that the exercise should have been undertaken by reference to transaction values, rather than the number of transactions. That is – HMRC should have looked at the value of supplies made which did attract VAT as compared to the value of supplies made which did not attract VAT.

The court identified that the true area of concern on the part of the respondents was that Subway sometimes had promotions called “Meal Deals” whereby several products would be bundled together for a single headline price.

Homsub contended that a meal deal offer was available to customers whereby for the all in price of £3 a customer could purchase a sandwich (hot or cold) and a drink (which could be a fizzy drink or hot beverage upon which VAT would be due). If the meal deal involved hot food, then it would be subject to VAT.

HMRC’s issue was that because of the way in which the appellant’s till was set up, it treated £2.99 of each meal deal as attributable to the sandwich (VAT free if cold) and only 1p to the accompanying drink which, if subject to VAT, would mean that the VAT would be one fifth of one penny.

Outcomes

Homsub stated that it is entitled to run its business as it sees fit and to make such commercial decisions as best suit its business. The appellant said that it is entitled to sell loss leaders, as do many major retailers, or to sell stock at less than cost price if that somehow serves the best overall commercial interests of the business.

The court ruled that this was not a true loss leader situation. This was a transaction were goods are packaged together to be sold at a single price. What must be done is to look at the reality of the transaction when apportioning the part of the money paid by the customer between the various components within the package of goods sold. Consequently, Homsub needed to apportion the sales value in a different way. This would not necessarily be on the basis of the relevant retail prices. This is because accurate apportionment is difficult, especially as, as Homsub explained, that labour is by far the largest cost component within the cost of a sandwich and the overall meal deal package, that is; much more staff labour was devoted to preparing sandwiches than serving drinks.

If the case stopped there, there would be additional output tax for Homsub to pay. However…

Methodology and best judgement

The court decided that the assessment methodology adopted by HMRC was significantly flawed and potentially misleading. A simple count of transactions that did attract VAT and those which did not attract VAT might be capable of being appropriate in certain kinds of business, but not in this case. Further, a statistician or forensic accountant would be ‘alarmed to find that the methodology used by HMRC was considered to be either acceptable or such as to give rise to a reasonably reliable result’. In court, the representative of HMRC was forced to agree with this interpretation- which must have caused embarrassment. The court also said that it was not its function to go on to undertake any kind of assessment to ascertain what, if any, additional VAT might be due.

Decision

In the court’s judgement the methodology was flawed to such an extent that it would be wholly unreasonable, and unfair to the appellant, to base a best judgement assessment thereon. The appeal was therefore allowed.

Commentary

Always have assessments of this sort reviewed. There is significant case law on ‘best judgement’ most salient being: Van Boeckel v C&E [1981] and Rahman v HMRC. Additionally, HMRC often make certain assumptions on assessments based on invigilation and mark up exercises. These can be challenged, as can the methodology. As examples, HMRC need to recognise, inter alia;

  • seasonal trade variations
  • discounts
  • customer preferences (in this case, Homsub explained that at some of its shops’ locations a lot of customers were students and preferred to take away rather than eating in)
  • representative periods
  • sales/special offers
  • the times invigilations were carried out (were they representative of all trade?)
  • the number of invigilations and ‘test meals’ – were they sufficient to establish a fair overall picture of the business?
  • own and staff use
  • business promotions
  • loss of goods (destroyed, waste, stolen etc)
  • gross/net
  • gifts to customers
  • alternative methods
  • HMRC staff experience etc

All of these and other situations can affect expected sale values.

I have further set out how HMRC operate in these situations here.

I have a success rate of over 90% in getting these types of assessments reduced or completely withdrawn. Please do not simply accept HMRC’s decision, nor the, increasingly, bullying stance they can adopt. Always challenge!

VAT: What’s hot and what’s not?

By   4 February 2019
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Latest from the courts

In the seemingly never-ending series of cases on hot/cold food comes the latest instalment in the Eat Limited (Eat) First Tier Tribunal (FTT) case.

Issue

Via VAT Act 1994 Schedule 8, Group 1, the sale of certain food is zero rated. However, there is an exception for supplies in the course of catering. Anything coming within the definition of catering reverts to the general rule and is taxable at the standard rate.

The definition of catering includes “any supply of hot food for consumption off those premises…” Note 3 (b).

So, the issue here was whether grilled ciabatta rolls and breakfast muffins which were heated by Eat were hot… or not. HMRC decided that the relevant sales were the standard rated sale of hot food and disallowed a retrospective claim by Eat that they should have been correctly zero rated.

The issue here was whether the products had been heated for the purpose of enabling them to be consumed at a temperature above ambient air temperature. In considering the purpose of the heating, the Tribunal needed to ascertain the common intention of Eat and the customer.

Background

Eat sells a range of hot and cold food and drink products through its outlets in the UK. The food and drink can either be consumed at the outlet or be taken away for consumption elsewhere.

The breakfast muffins are filled bread rolls. The rolls are supplied to the appellant by a bakery in a condition that enables Eat to finish baking the rolls at their outlets. The specification requires the rolls to be “pale and 90% baked”. The muffin is assembled at a central kitchen from various ingredients, bagged, and then distributed to Eat’s retail outlets. The ciabatta rolls are also supplied to Eat part-baked and a similar process applied. If a customer purchases a breakfast muffin or a ciabatta roll, the product is “finished-off” in the outlet’s grill.

For zero rating to apply, Eat had to prove that its intention and that of its customers, was that the breakfast muffins and grilled ciabatta rolls were not supplied to customers in order to be eaten “hot”.

The products are treated as “hot” if:

  • They have been heated for the purposes of enabling them to be consumed at a temperature above the ambient air temperature; and
  • They are above that temperature at the time they are provided to the customer.

It was not disputed that the products were above ambient air temperature at the time they were provided to customers,

Case law

There has been considerable litigation on the meaning of hot food. The decision of the Court of Appeal in Sub One Limited (t/a Subway) (in liquidation) v 30 HMRC [2014] EWCA Civ 773 reviews the meaning of the legislation, and in particular whether the “purpose” test in the legislation should be construed objectively or purposively.

Submissions

Eat contended that the common intention of the parties was that the supply of the products was to be finished as being “fresh” rather than partially complete. Any residual heat in the products was merely incidental to that common intention.

HMRC submitted that it was part of the deal between Eat and its customers that the products should be sold hot (and obviously so).  Further, that no customer seeks to enter into a bargain in a takeaway restaurant containing a term that the food he or she is to purchase is “to be finished as fresh rather than partially complete”. The customer either wants hot food or does not. Either the supplier proposes to supply hot food, or it does not. It was also noted that in Eat’s advertising (at the point of sale and on its website) that the products were described as “hot”

Decision

The judge decided that this was a “hopeless appeal” and that it was the common intention of Eat and its customers that the products were heated for the purpose of enabling them to be consumed at a temperature above ambient air temperature. Further, that they were wrapped in foil-backed sheets that keep them warm. This showed an intention on the part of Eat that the products should be consumed whilst they were hot. So, they were hot and standard rated.

Commentary

Only in the world of VAT can something too hot to touch be treated as cold (as certain foods are). However, in this case common sense prevailed and not unsurprisingly, food which was sold hot was treated as hot food! There is a lesson here however. In such cases, the outcome depends on the precise facts of the relevant transactions and that it is unhelpful to make assumptions.

Now, about that proposed pasty tax…