Supply – Taxpayer Subway franchisee supplying hot toasted subs and meatballs – Taxpayer seeking ruling that supply zero-rated for VAT
Sub One Ltd (trading as Subway) v Revenue and Customs Commissioners: Upper Tribunal (Tax and Chancery Chamber) (Mr Justice Arnold): 3 October 2012
Section 30(1) of the Value Added Tax Act 1994 provides, so far as material: 'Where a taxable person supplies goods or services and the supply is zero-rated, then, whether or not VAT would be chargeable on the supply apart from this section - (a) no VAT shall be charged on the supply; but (b) it shall in all other respects be treated as a taxable supply; and accordingly the rate at which VAT is treated as charged on the supply shall be nil.'
(2) A supply of goods or services is zero-rated by virtue of this subsection if the goods or services are of a description for the time being specified in schedule 8 or the supply is of a description for the time being so specified... schedule 8 part II group 1 note 3 provides so far as material: 'A supply of anything in the course of catering includes - (a) any supply of it for consumption on the premises on which it is supplied; and (b) any supply of hot food for consumption off those premises; and for the purposes of paragraph (b) above "hot food" means food which, or any part of which - (i) has been heated for the purposes of enabling it to be consumed at a temperature above the ambient air temperature... .'
The taxpayer appealed to the Upper Tribunal (Tax and Chancery Chamber) (the tribunal) from a decision of the First-tier Tribunal (Tax Chamber) (the FTT) dated 14 October 2010. By its decision the FTT dismissed the taxpayer's appeal against the decision of the Revenue and Customs Commissioners (the Revenue), to treat supplies of toasted sandwiches known as toasted subs and meatball marinara as falling within schedule 8, part II, group 1, note (3)(b) of the Value Added Tax Act 1994, as being standard-rated rather than zero-rated for the purposes of VAT.
The taxpayer formerly carried on business as a franchisee in the Subway Chain. The instant appeal was one of over 1,200 appeals from Subway franchisees challenging the correct VAT treatment of such supplies. On 1 February 2010, the FTT directed that the taxpayer’s appeal should be treated as the lead appeal. The issues before the FTT had been (1) whether the toasted subs and meatball marinara had been above ambient air temperature at the time of the supplies within note (3)(b)(ii), and if so; (2) whether they had been heated for the purposes of enabling them to be consumed at a temperature above ambient air temperature within note (3)(b)(i).
The FTT answered both questions in the affirmative. There had been little or no dispute before the FTT as to the relevant law. In relation to issue (2) the test applied was a subjective one. The taxpayer did not challenge the FTT’s conclusion on issue (1), but it did challenge its conclusion on issue (2). The FTT gave the taxpayer permission to appeal on the sole ground that, although the FTT had identified the correct legal test, it had gone on to ask itself the wrong question.
On a further application to the tribunal, the taxpayer was given permission to appeal on two further grounds. The first was that the FTT had reached conclusions on the evidence which were irrational. The second was that the FTT’s conclusions gave rise to a result that was in breach of European Union law because (a) there was inequality of treatment as between the taxpayer and other traders making objectively similar supplies and (b) the taxpayer’s supplies were not of services, but of goods. At the hearing of the appeal, the principal focus of the taxpayer’s argument was limb (a) of the second additional ground of appeal, although she maintained the other grounds.
In response to the second additional ground of appeal, the Revenue served a respondents’ notice in which it went a considerable way towards conceding that the test applied by the FTT had not complied with EU law. The result of the stance adopted by both parties was to require the tribunal to consider for the first time the correct approach to note (3)(b)(i) having regard to applicable EU law notwithstanding the existence of a substantial body of domestic case law.
The issues were, inter alia, first, whether the FTT had identified the correct legal test in relation to schedule 8, part II, group 1, note (3)(b)(i). Secondly, the impact and responsibility for the case law since Pimblett was decided. Thirdly, whether the taxpayer’s supplies were not of services, but of goods. The appeal would be dismissed.
(1) It was settled law that the principle of fiscal neutrality which was a 'fundamental principle' of the common system of VAT precluded treating similar goods and supplies of services, which were in competition with each other, differently for VAT purposes. That was a reflection in the field of VAT law of the wider European principle of equal treatment (see  of the judgment).
It was possible to construe note (3)(b)(i) in a manner which did not infringe the principle of fiscal neutrality. That note should be interpreted as imposing a wholly objective test, the subjective intention of the supplier being immaterial. That would ensure that supplies which were objectively the same were not treated differently merely because of a difference in the subjective intention of the supplier. The question to be addressed was whether on an objective assessment, the food was hot, (above ambient temperature), at the point of supply because it had been heated for the purpose of enabling it to be consumed hot or because it had been heated for some other purpose.
In answering that question account should be taken of why customers preferred to eat food hot (see  of the judgment). Pimblett & Sons Ltd v Owen  All ER (D) 70 (May) disapproved; Beynon and Partners v Customs and Excise Comrs  All ER (D) 396 (Nov) considered; Procter & Gamble UK v Revenue and Customs Comrs  All ER (D) 177 (May) considered.
(2) It could not be said that the Revenue's failure to appeal certain adverse decisions combined with its support for the FTT’s decision in the instant case had placed the UK in breach of the principles of fiscal neutrality or effectiveness. The UK’s superior courts and tribunals could not be said to have adopted an entrenched interpretation of the legislation in defiance of European law. It followed that it was not incumbent on the UK legislatively to overrule certain adverse decisions (see  of the judgment).
(3) It was clear that the toasted subs had been 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 had been the taxpayer's subjective intention, nor did it matter whether the toasted subs had in fact been consumed at above ambient temperature. It was therefore beyond dispute that the meatball marinara had been heated for the purposes of enabling it to be consumed at above ambient temperature.
The FTT had been correct to conclude that both toasted subs and meatball marinara should be subject to VAT at the standard rate, even though it applied the wrong test (see , ,  of the judgment).
(4) It did not matter for VAT purposes whether the taxpayer's supplies were of goods or services. Nor did it matter in determining whether or not a particular supply fell within exception (a) to group 1 in schedule 8, part II. The exception was not of 'catering services', but of supplies 'in the course of catering'. Classification of the supplies as being supplies of goods rather than of services was perfectly consistent with the supplies falling within note (3)(b) (see  of the judgment)
Philippa Whipple QC, Andrew Young and Isable McArdle (instructed by Dass Solicitors) for the taxpayer; Melanie Hall QC, Owain Thomas and Ewan West (instructed by the Solicitor for the Revenue and Customs Commissioners) for the Revenue.