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Sub One Ltd (t/a Subway) v Revenue and Customs Commissioners.  UKUT 34 (TCC). Arnold J. 3 October 2012
The Value Added Tax (VAT) Act 1994 Sch.8 Pt II Group 1 Note (3)(b) had to be objectively construed as a matter of EU law and to the extent that it decided differently the Court of Appeal case of John Pimblett and Sons v Customs and Excise Commissioners  was wrong in law.
It was possible to construe Note (3)(b)(i) in a manner which did not infringe the principle of fiscal neutrality, by imposing a wholly objective test.
Applying that test it was clear that toasted sandwiches and meatballs were heated for the purpose of enabling them to be consumed at above ambient temperature within Note(3)(b)(i), and not for some other purpose, so that they were excepted from zero-rating.
Sub One Ltd (t/a Subway) appealed against a decision that supplies of toasted sandwiches and of meatballs were excepted from zero-rating by virtue of the VAT Act 1994 Sch.8 Pt II Group 1 Note (3)(b). Sub One Ltd had carried on business as a franchisee of the Subway chain.
Its appeal to the First-tier Tribunal was treated as the lead appeal in a large number of appeals by Subway franchisees challenging the VAT treatment of their supplies.
The issues before the tribunal were whether the toasted sandwiches and meatballs were above ambient air temperature at the time of supply within Note (3)(b)(ii) and, if so, whether they had been heated for the purpose of enabling them to be consumed at a temperature above ambient air temperature within Note (3)(b)(i).
In relation to the question of purpose it was common ground that the test was subjective. The tribunal answered both questions in the affirmative. The supplies were therefore supplies in the course of catering and as such excepted from zero-rating.
Subway’s case on appeal was that the tribunal had asked itself the wrong question and reached irrational conclusions, resulting in a breach of EU law because there existed an inequality of treatment between Subway and other traders making objectively similar supplies. The main issue on appeal was whether the subjective test applied by the tribunal complied with EU law.
The use of the word ‘purpose’ in Note (3)(b)(i) suggested that the draftsman intended an objective test. If he had intended that the test should depend on the subjective intention of the supplier, he would surely have said so.
The Court of Appeal case, John Pimblett and Sons v Customs and Excise Commissioners , had generally been taken as deciding that the test was subjective. Tribunals had found the Pimblett test impossible to apply in a consistent manner.
By virtue of the Marleasing principle, the Upper Tribunal was not merely free, but obliged to depart from Pimblett to the extent that it was necessary to do so in order to interpret Note (3)(b)(i) in accordance with EU law.
It was for the UK government to determine the boundary between zero-rated supplies and standard-rated supplies and the principle of fiscal neutrality could not be relied upon as depriving the UK of its discretion in that respect.
However, the maintenance of the exemption was only permissible in so far as it complied with the principle of fiscal neutrality. The UK could distinguish between supplies that were different from the point of view of the consumer, but not between supplies that were the same.
It was possible to construe Note (3)(b)(i) in a manner that did not infringe the principle of fiscal neutrality, by imposing a wholly objective test.
Applying that test to the findings of the First-tier Tribunal it was clear that the toasted sandwiches and meatballs were heated for the purpose of enabling them to be consumed at above ambient temperature, and not for some other purpose.
It did not matter whether that was Subway’s subjective intention or not. Nor did it matter whether the food was in fact consumed at above ambient temperature. It followed that the tribunal, even though it applied the wrong test, was correct to conclude that the toasted sandwiches and meatballs were subject to VAT at the standard rate.
It did not matter whether Subway’s supplies were goods or services; the exception was not for catering services, but supplies in the course of catering.
Commentary: Leigh Sayliss
Jaffa Cakes, Pringles, hot and cold pasties - food and VAT do not always mix well. Simply put, you don’t pay VAT on essentials - a roof over your head, food and clothes for your children. Food is generally zero-rated for VAT, apart from luxuries such as crisps, confectionary and biscuits.
Similarly, the extravagance of dining out turns a zero-rated supply of food into a standard rate catering supply. This is why it costs more to eat your cake (not a luxury, Marie Antoinette would be pleased to know) inside a café than outside.
Regardless of where eaten, takeaways are catering supplies if intended to be eaten hot, but the boundary between “heating to cook” and “cooking fresh to eat hot” is not always clear - this is where Subway went wrong.
Any takeaway serving hot food should review what it is selling. The Government’s bowing to public pressure and dropping VAT on pasties has not clarified matters. It should now look at levelling the playing field between convenience food supplies.
Subway raises a further question. HMRC resists - on grounds of “unjust enrichment” - repaying wrongly charged VAT if the taxpayer cannot repay the VAT to its customers. Franchisees face crippling VAT claims going back years with no means of recovery from their customers - should they be allowed a defence of “unjust impoverishment”?
Leigh Sayliss, senior associate, Stephenson Harwood