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KFC drivethrough | AccountingWEB | KFC dips don’t wing it alone in VAT case
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KFC dips don’t wing it alone in VAT case

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The decision on whether the dip pot in a KFC takeaway meal deal should be separately zero-rated or part of a single standard-rated supply is the latest finger-lickin’ food and VAT conundrum to be chewed over by the tax tribunal.

14th Jun 2024
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This week the first tier tribunal (FTT) released its decision in the case of Queenscourt Limited v HMRC [2024] UKFTT 00460 (TC).

The question was whether the “dip pot” (containing, some variation of mayonnaise or BBQ sauce, say) is separate from the KFC chicken takeaway meal deal when purchased together, or whether they form one combined supply.

By way of example, the “boneless banquet” includes a selection of hot chicken products, fries, a side dish, a drink, and a dip pot – all bundled together at a discounted price compared to buying the components individually.

A wing and prayer

A hot takeaway meal is subject to VAT at the standard (20%) rate, categorised as a supply of catering: “Any supply of hot food for consumption off those premises”.

Otherwise, cold food generally sold to be consumed off the premises is zero-rated, with 0% VAT. HMRC accepted that cookies, coleslaw, and yoghurts (sold as “sides”) were supplied separately, but contended that dip pots formed part of the supply of the hot food.

The tribunal, therefore, had to determine whether the dip pots formed one single takeaway product with the hot chicken and fries, or whether they were properly described as distinct – effectively as cold food for consumption off the premises.

Bucket of trouble

The legal starting point must be that all supplies are to be regarded as independent. However, broadly speaking, the courts have adumbrated three exceptions to this rule:

  1. Two elements are so closely linked from the view of a typical consumer that they form a single indivisible whole, which would be artificial to split (eg it has a single aim/use, a single price, and must be taken as one);
  2. There is a principal element with an ancillary supply (ie the ancillary element is not an end in itself, but is a means of better enjoying the principal element);
  3. The legislation permits an extension of the treatment to “closely related activities”, which are incidental to a supply and make the exemption fully effective.

Food for thought

The tribunal explained that where an exception applies it forms a single “composite” supply with the VAT treatment following whichever part of the supply predominates. In this case, both parties agreed that the question was whether the dip pots were an ancillary element to the principal hot element under (2) above; ie, for better enjoyment of the chicken and fries.

Such a question is noted to be “highly fact sensitive”. The tribunals are required to look at all the circumstances and features of the supplies to determine whether the supplies, from the view of a typical consumer, can be regarded as several supplies or one single supply. This will include, for example, looking at the purpose of the supplies, looking at whether the customer can choose whether or not to be supplied with one element, and whether the pricing/invoicing is separate.

An example could be a company that leases, say, construction machinery but requires the goods under the lease to be insured, while offering such insurance to its customers as part of the package.

A somewhat similar case involving property leasing went to the Court of Justice of the European Union which concluded that the insurance and leasing did not form one single indivisible supply, and the insurance was not ancillary. Part of the reasoning was that the customer could obtain the machinery without the insurance, and there was a freedom to choose to obtain insurance from a third party.

Interestingly, back in 2003, Domino’s Pizza had mounted a similar challenge to KFC’s. That judgment held that the dips, which were inserted into a designated holder in the packaging and which were provided with all the pizza orders, formed a single supply.

Clucked by HMRC

The tribunal noted that the KFC dips were very popular and some could now be purchased in large bottles and consumed with other foods. The dip pots could be (and were) purchased as standalone items, were larger than the free sachets, and were listed individually on menus. Consumers could choose to exclude the dip pot when purchasing their meal deal, or to buy one separately. Unlike Dominos, the dip pots were not incorporated into the packaging.

On the other hand, the dips contained condiments used for the food (rather than eaten alone, unlike a cookie), and were sold within a discounted bundle pricing scheme.

HMRC also argued that the number of dip pots sold individually was very low. The fact that some people chose not to opt for a dip pot with their meal deal was irrelevant; in that case there is no dip pot to be ancillary or principal - the question concerned the treatment of dip pots sold with meal deals. Furthermore, the ability to purchase the dip separately would increase the price, so although there was a contractual freedom to do so, the economic reality did not reflect this.

Drumstick roll, please!

The tribunal found that it was unlikely that the dip would be eaten on its own, and it was unlikely to be used separately when purchased as part of a meal deal. In short, it was not an aim in itself, it was an ancillary element to better enjoy the principal.

The appeal was therefore dismissed with the FTT finding that the supply of dip pots as part of a takeaway meal deal is part of a single standard rated supply of the hot food and dips.

What, you might ask, do KFC’s Boneless Banquets and the Labour’s proposed imposition of VAT on private schools have in common? The answer lies in the treatment of what are known as single “composite” supplies compared to multiple individual supplies. 

In part two of this article, Max Schofield explores how the recent decision over a dip pot in a KFC takeaway meal is relevant to the Labour Party’s plans to remove the VAT exemption for private school fees.

Replies (8)

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By Open all hours
14th Jun 2024 13:39

These cases used to be amusing but surely the time has come to drastically reform VAT and have done with this expensive tedium.

Thanks (5)
Replying to Open all hours:
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By paul.benny
17th Jun 2024 10:04

How exactly would you reform VAT legislation? As the judgement shows, this case is entirely about KFC trying to gain an advantage by claiming a smidgeon of a standard-rated meal should be zero-rated.

Thanks (0)
Replying to paul.benny:
By Duggimon
17th Jun 2024 10:39

Make cold food takeaway standard rated.

Thanks (1)
Replying to Duggimon:
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By paul.benny
17th Jun 2024 13:01

That would just create a whole new space for traders (and HMRC) to try it on. Is this apple/pork pie/bread roll/etc zero-rated "ordinary" food or standard-rated cold take-away food?

Thanks (0)
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By JustAnotherUser
14th Jun 2024 15:27

would love to know the overall monetary difference applied to this decision.

Quick google.... KFC franchises now serve a staggering 12 million customers every day and, there are currently, around 847 KFC outlets in the UK.

To late on a Friday to do VAT maths on 1 in 3 kfc sales coming with dip pots :(

Thanks (0)
Replying to JustAnotherUser:
By Duggimon
17th Jun 2024 10:45

The dip pots are 50 pence each, so include £0.08333 in VAT each.

If one in three sales includes a dip pot and they make 12 million sales a day that's four million dip pots a day at 8 1/3 pence VAT each, it's a lot of VAT.

Thanks (0)
Replying to JustAnotherUser:
paddle steamer
By DJKL
17th Jun 2024 13:06

How on earth do they sell to 1 in 5 or 1 in 6 UK residents every single day ? Is this stat genuine, does it maybe include their Pizza Hutt sales etc?

On that basis we ought to buy from them once a week, we do not, who is eating my portion of chicken every week?

Has the UK population lost the skill of cooking?

Thanks (2)
the sea otter
By memyself-eye
15th Jun 2024 15:26

Basic rule this -
I would have thought KFC would know better than to park it's tanks on this path of quicksand.
They were never going to win.

Thanks (3)