VAT on hot food A recent decision regarding the rate chargeable for hot food will affect lease negotiations, say Ian Montgomery and Karen Mason
Key points |
? A recent decision found that Subway’s toasted sandwiches and marinara filling are classed as “hot food” for VAT purposes ? The ruling is important for takeway operators selling heated products ? Some retailers have used the ruling to request a rent reduction |
There was a time when morning porridge used to be ladled out of a steaming urn at breakfast takeaway venues across the country. Not any more. They are all prepacked in a warm cabinet and supplied lukewarm so that it is not classified as hot food for VAT purposes.
Sub One Ltd (t/a Subway) v Commissioners of HM Revenue & Customs [2010] UKFTT 487 (TC) recently considered the correct VAT liability of supplies of toasted sandwiches (subs) and meatball marinara filling in Subway restaurants in the UK. The appellant operated franchised stores in the north of
This case is significant for all operators selling similar toasted or heated products, such as hot porridge, for consumption off the premises.
What is hot food?
Supplies of food for human consumption are VAT zero-rated under Group 1 of Schedule 8 to the Value Added Tax Act 1994 (the VATA) except where the supply is made in the course of catering, such as (i) supply of food for consumption on the premises; and (ii) supply of hot food for consumption off the premises.
Subway was particularly concerned with what constitutes “hot food” as their sandwiches are prepared to be consumed off the premises. Hot food is defined in Note 3(b) to Group 1 of Schedule 8 to the VATA as:
Food which or any part of which –
(i) has been heated for the purposes of enabling it
to be consumed at a temperature above ambient air temperature and
(ii) is at the time of the supply above that temperature.
After much debate, the parties agreed that the toasted subs and meatball marinara were heated to a temperature above that of the ambient air and that the temperature of the food was above ambient air temperature at the point of supply.
The case hinged on whether a customer would be indifferent to eating the food hot or cold, that is, was it heated for the purpose of enabling it to be consumed by the customer at a temperature above ambient air temperature? Expert witnesses gave evidence on issues such as the effect on flavour of toasting subs and heating the meatball marinara.
The tribunal found that both food items were less desirable to the customer if served cold and that Subway made efforts to deliver the products to the customer so that they could be consumed hot. As a result, the tribunal decided that both the toasted subs and the marinara met the definition of hot food in Note 3(b) of Group 1 and supplies of them were therefore standard rated for VAT purposes.
Subway will face a bill for the VAT that was due on the supplies of the two products in previous years. The time limit for correcting errors in previous returns was increased from three years to four from 1 April 2009. However, in order to ensure that accounting periods that were out of time on 31 March 2009 are not brought back in-time by the change, transitional arrangements have been put in place. Thus, until 30 April 2010 the earliest accounting period for which such an adjustment or claim can be made would be that ending on 30 April 2006.
Lease negotiations
Subway will also have to factor the additional ongoing VAT cost into the price of these two products. This becomes more significant with the increase in VAT from 17.5% to 20% from 4 January 2011. It is clear that unless the tax cost is passed on to the customer by way of higher prices, the retailers’ profits will be adversely affected.
Some retailers have used this case as the basis for requesting a rent reduction because the fall in profit is seen as significant. Both landlords and tenants need to be aware of the effects of this case. Tenants in particular need to factor in any additional costs early in any negotiations.
Ian Montgomery is a solicitor in the corporate tax department and Karen Mason is a partner in the commercial property department of Boodle Hatfield
