Neil Warren considers a case where a café that got the answer wrong was landed with a £114,122 VAT assessment.
The controversial subject of VAT and hot take away food had its moment in the spotlight when George Osborne attempted to ‘simplify’ the VAT rules in his famous ‘pasty budget’ of 2012.
His efforts failed drastically, with a lot of hot food continuing to be zero-rated if it is allowed to cool down after cooking. But there is no room for complacency, and the costs of getting it wrong can be massive, as Pegasus (Manchester) Ltd discovered in a recent FTT case (TC06382).
The legislation on VAT and takeaway food served by cafés, sandwich bars, fish and chip shops and similar outlets is quite laborious:
- VATA1994, Sch 8, Group 1 makes an exception to zero-rating on food if it is “a supply in the course of catering” – in other words, catering is standard-rated.
- Note 3 to this Group confirms that catering includes “any supply of hot food for consumption off those premises” ie takeaway food.
- Note 3B gives further detail about what is classed as “hot food,” confirming it must be hot at the time it is sold to the customer, ie either heated for that purpose, or kept hot after being heated, or provided to a customer in packaging that retains heat.
- Note 3B also captures supplies where the food is “advertised or marketed in a way that indicates that it is supplied hot”.
This reminds me of the lady working at a leading national bakery in Manchester who happily announced to the waiting punters one day that: “hot pies are ready” - and proceeded to serve them as zero-rated food.
Definition of hot
So what exactly is the definition of “hot”? This issue is clarified by Note 3C, which confirms that food is deemed to be hot if it is served above the “ambient air temperature” in the premises in question. It is deemed to be “kept hot” (another phrase in Note 3B which requires a definition) if it is retained in such a way that it remains hot after it has been cooked, ie the natural cooling process is thwarted.
The Pegasus case related to an assessment for £114,122 covering a four year period, in relation to takeaway sales of Afro Caribbean food such as rice, wraps and curries, which the taxpayer claimed were zero-rated as cold food. HMRC claimed they were hot and therefore should be standard rated.
During preparation in a kitchen on site, the food under dispute was cooked to a temperature of 90/100C but it was then cooled in the kitchen in the pans in which it had been prepared, with a fan being used to assist the cooling process. Once cooled to 19/20C, it is placed in gastro norm containers which fit into the bain marie used in the retail unit (a bain marie is a water-based container powered by electricity). Food is kept in the bain marie for 1 to 1.5 hours at an average temperature of 56C.
Applying the law
All parties agreed that the ‘ambient room temperature’ on the premises was 28C to 30C. This is quite high for the Arndale market in Manchester, but it was accepted by HMRC because of the cooking going on from other units surrounding the client’s trading area.
The taxpayer claimed that this was higher than the temperature of the food when it was served to customers, even though the bain marie had a temperature of 56C. The judge dismissed the latter claim, agreeing with HMRC that the temperature of the bain marie must be reflected in the temperature of the food as well, the aim being so that it was served hot to the customer.
Despite the confusion of the 2012 Budget, there have been very few cases heard in the courts about whether takeaway food should be classed as hot or cold. This case was always going to be difficult for the taxpayer to win when the bain marie had such a high temperature, which would clearly be reflected in the food temperature as well.
My advice is for advisers is to review all VAT issues for catering clients, by following the audit trail of the legislation I provided at the beginning of this article. As the Pegasus case illustrates, the costs of incorrect zero-rating can be massive!
About Neil Warren
Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.