VAT in hot water: £114,122 bill for keeping food warm
By Philip McNeill, Head of Taxation (Tax Practice and Owner Managed Business Taxes)
21 August 2018
Philip McNeill discusses the recent case of a £114,122 VAT bill for keeping food warm.
A Manchester business selling African and Caribbean cuisine was recently billed £114,122 in VAT on takeaway food (Pegasus (Manchester) Limited TC06382 [2018] UKFTT 01 26 (TC). Their appeal to Tribunal failed. What went wrong?
Where’s that legislation?
Value Added Tax Act 1994 (VATA 1994) s30 (2) provides zero rating for food. The detailed list of what is covered is in VATA 1994 schedule 8 group 1.
Then there are exceptions, and exceptions to the exceptions. In the words of the statute ‘a supply of anything comprised in any of the excepted items set out below, unless it is also comprised in any of the items overriding the exceptions set out below which relates to that excepted item’.
By this stage, most people would call in their tax adviser.
Simplification
Back in 1984, the definition of ‘catering’ was extended to hot takeaway food and drink, so bringing them within standard rate for VAT. Only cold takeaway food could continue to be zero rated for VAT. So far, so good – all hot food is ‘catering’.
But by 2011, a German VAT case challenged the position (Finanzamt Burgdorf v Bog). What about food supplied hot simply because it had just been cooked, like takeaway sausage and chips?
While trying to distance itself from the German situation, Finance Act 2012 followed by clarifying the definition of hot takeaway food. ‘Hot food’ was defined as food which is hot when provided to the customer, and:
- has been heated for the purposes of enabling it to be consumed hot, or
- has been heated to order, or
- has been kept hot after being heated
- is provided to a customer in packaging that retains heat
- is advertised or marketed in a way that indicates that it is supplied hot
‘Hot’ is defined as ‘above ambient air temperature’ and ‘kept hot’ included re-heating or slowing down the cooling process.
Bed-time reading
The owners of Pegasus would have done well to add VATA 1994 and VAT Notice 709/1: catering and take-away food to their bedtime reading list.
There are two definitions of critical relevance to them:
- 'Hot' means above ambient. It doesn’t matter if the food is actually ‘hot’ or just warm. Selling Chapatis from a hotplate in an Igloo, where inside temperature could fall to minus 7°C, is going to be standard rated as, even if the product is lukewarm, it would be above ambient.
- 'Keeping warm' is for the purpose of enabling the customer to consume the food hot. If food is heated for an unrelated reason, standard rating may not apply.
This latter point was considered in the Deliverance Ltd case (Deliverance Ltd v Revenue and Customs Commissioners [2011] UKUT 58 (TCC)). Here the business owners successfully argued that the food was heated in order to comply with health and safety rules and not in order for the customer to consume it hot.
VAT in hot water
In the case of Pegasus, food prepared each morning was cooled to around 19-20°C. It was then put in large catering dishes – gastronorms - which were stored in a water-bath (the bain-marie) until it was sold later in the day.
The business owners avowed that their food does not taste good hot and that the bain-marie was not to keep the food hot. Was it then to comply with health and safety rules?
Is it a good idea to claim exemption from the food safety regulations?
Again, the owners were clear: food safety regulations require storage of hot food at 63°C or above, but this would spoil the food, so their bain-marie were heated to just 56°C and they were exempted from the full force of the regulations by the “hot holding defences” (which include an exemption for food on display for sale for a period of less than two hours).
But remember Deliverance Ltd - is it a good idea to claim exemption from the food safety regulations?
Basic physics
As the Tribunal pointed out ‘it is a matter of basic physics that heat will be exchanged between the water in the bain-marie, which is maintained at a constant 56C, and the food which is in a gastronorm that enters the bain-marie at the ambient temperature such that the food will be heated as a result of being placed in the bain-marie’.
Basic physics means that the first leg of the VAT test towards standard rating has been met.
Furthermore, was there not an inherent conflict in the owner’s submission? The business owner considered that food kept in the bain-marie at 63° would become dry and tasteless. So, the bain-marie must heat the food.
Basic physics means that the first leg of the VAT test towards standard rating has been met: the food was being supplied ‘hot’ – having been heated by the bain-marie to a temperature above the ambient room temperature where it was sold.
Conflicting evidence
By asserting that they were not complying with food safety requirements, the business owners unfortunately closed another escape route from standard rating.
The business had zero rated its sale of food since the commencement of trading.
Hot takeaway food includes food which ‘has been heated for the purposes of enabling it to be consumed hot’. And the Tribunal concluded ‘As no other reason was given for the food being heated, we must conclude that the food is heated in order to enable it to be consumed hot’.
The business had zero rated its sale of food since the commencement of trading. The result is a large VAT bill. Some cold food, such as salads, were sold alongside the ‘hot’ food, but the business had not separated these details at point of sale.
Conclusion
Errors in direct taxes, like income tax and corporation tax, are likely to amount to a percentage of your profits, but VAT is a turnover tax - errors, plus penalties, could be a percentage of your entire turnover.
As this case shows, expert advice ab initio is essential to avoid large, and potentially unmanageable shocks later.