Whether VAT at the standard rate or zero rate applied to the supply of hot food in the course of catering?

Background

The taxpayer appealed against HMRC’s decision to treat supplies of toasted sandwiches known as toasted subs and meatball marinara as being standard-rated rather than zero-rated for the purposes of VAT.

This most recent case before the Court of Appeal concerns the taxpayer’s appeal against the decision of the Upper Tribunal (UT) ([2012] UKUT 34 TCC) which held that the toasted subs and meatball marinara supplied by Subway should be subject to VAT at the standard rate and not be zero-rated. The taxpayer brought their case to the First-tier Tribunal (FTT) in 2010 which had dismissed their appeal against HMRC.

This case relies on the interpretation in John Pimblett & Sons Ltd. v Customs and Excise Commissioners [1988] STC 358 (“Pimblett”) and applied by Tribunals over the years.

Arguments

Before the Court of Appeal, the taxpayer argued that:

• The UT was wrong to hold that there was no breach of the principle of “fiscal neutrality”.
• The UT was wrong to hold that the legislation could and should properly have been interpreted in an objective fashion. If however, the UT was right to find that the legislation was to be construed objectively, then the history of its application by the Courts and Tribunals demonstrated that it had been applied consistently in a manner contrary to EU law and the UT was wrong to deprive the taxpayer of a remedy. Their supplies were made of food as “goods” rather than of “services” and that the domestic legislation is inconsistent with EU law and the UT was in error in concluding otherwise.
• The different treatment of its products as compared with that of competitors infringed the fiscal neutrality principle, rendering it unable to compete fairly and contributing significantly to its ultimate liquidation.

Decision

The Court of Appeal dismissed the taxpayer’s appeal.

The Court held that the legislation when construed objectively does not fail properly to implement EU law. The Court did find that the Pimblett decision showed that the statutory provisions, as interpreted in the courts, were likely to be incompatible with developing EU law. However, nothing was done either to amend the legislation or to take a suitable decision to the higher courts.

But in the end, the Court could not find that the UK Courts and Tribunals have adopted an entrenched attitude to the legislation. There is no EU law right for a taxpayer to be treated in the same way as other taxpayers who secured an historic windfall due a misapplication of the law.

The UK legislation has adopted a definition of the zero rate and is well within the ambit of its national discretion under Article 110 of the Principal VAT Directive. For the purposes of the definition it does not matter whether the supply is of goods or services, provided that the supply is “in the course of catering”. The UK legislation is entitled to decide that food supplied in the course of catering should be standard rated and there is no authority of the European Court that holds the contrary.

This recent judgement casts further doubt on the validity of the Pimblett decision and upholds HMRC’s position that the supply of toasted sandwiches is standard rated. The appeal was one of over 1200 appeals from Subway franchisees challenging the correct VAT treatment of such supplies and potentially refuels the debate on the “pasty tax”.

The full judgement is available on the Baillii website: www.bailii.org

The UT case was reported on in the November 2012 issue of tax.point.