The heat is on

03 December, 2010
Following the recent Subway VAT case, Dipak Jotangia picks his way through the minefield of hot or heated takeaway foods
Page 15 

What is the difference between a toasted sandwich sold by Subway and one sold by Quiznos? Answer: 17.5% VAT, soon to go up to 20%. Why? because HMRC treats one as hot food and not the other.

It is all to do with the legal definition of hot food for the purposes of VAT. The law makes suppliers of hot food subject to VAT. But to be classed as hot food, the food must have been heated for the dominant purposes of hot consumption. In other words, if the food was heated for some other purpose, it may be zero-rated for VAT. The trouble lies in establishing the purpose.

In the case of Quiznos, a tax tribunal found that the dominant application of heat was to toast the sandwich, but for Subway, the tribunal found that the same process had a dominant purpose of making the food hot for consumption and the toasting was not the dominant element.

In the past, the VAT tribunal has found that the dominant purpose in applying heat to hot meat pies (Pimblett) and Cornish pasties is to finish the baking process, the same is true of hot ciabatta melts (Ainsleys) and panini (Warren), to name but a few zero-rated items. On the other hand, freshly baked pizza is taxed.

So how do you go about deciding which rate of tax is correct for your product? By checking the temperature. Did you know that the law regards something as hot if it is above ambient air temperature? This means that, on a cold day, lots of things could be regarded as hot even if your customer would regard them as cold. Subway's toasted sandwiches were found by the tribunal to be lukewarm, but this made them above ambient air temperature.

The other feature is that, if any part of a product is above ambient air temperature, the whole of the product is treated as hot. So lukewarm toast containing cold salad may be classed as hot.

Once you have a temperature reading that is anything over ambient air temperature, you must then ask yourself your purpose in heating it. Is your purpose to complete a baking or similar process, or is it so that an item can be intentionally eaten hot by your customer? This bit sounds simple, but in practice, it is a difficult question. Recently, the tribunal has set about analysing intention in evermore complex ways for instance wishing to see franchise agreements of food outlets, operational manuals and advertising materials. The tribunal may attach great significance to a picture of a product showing steam rising from it, for example.

The HMRC view

HMRC does offer guidance in its public notices, which are available online and you may wish to speak to them about this. But remember, HMRC is a tax collector and the number of tribunal cases it has lost shows that it is in the habit of ruling that hot food should be subject to VAT where it should not have done. So bakers need to think very carefully about a product before taking the matter to HMRC.

Also, be prepared for HMRC to come to you and find products currently free of VAT to be reconsidered. In such cases, it is normal for HMRC to issue a back-dated assessment and charge interest, even where the tax was not collected. Sometimes, reconsidering the dominant purpose for heating may lead to a back-claim to HMRC for overpaid VAT, where VAT has been charged by mistake.

But where agreement cannot be reached, appeals against HMRC decisions are taken to the first-tier tribunal tax chamber, a specialist court designated to deal with tax issues. HMRC has solicitors to deal with these issues, who normally instruct a specialist tax barrister to represent them. Although this sounds daunting, with careful preparation, a tribunal appeal can run smoothly. Even if the taxpayer loses the appeal, HMRC will not seek to recover its legal costs unless the appeal was frivolous or vexatious or there had been an agreement on costs at the onset. Each case must be looked at on its own merits.

l Dipak Jotangia is an expert in tax, fraud and regulatory work at Dass Solicitors





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