VAT: Zero-rated food or standard rated catering
Neil Warren reviews a case where the company claimed it was supplying zero-rated food and not standard-rated catering, and won its argument at the FTT.
The fascinating subject of VAT and food has always been a source of confusion, uncertainty, frustration and amusement. Many people who know nothing about VAT are often able to recall the famous Jaffa Cake case about whether it was a cake or a biscuit!
The first-tier tribunal case of Olive Garden Catering Company Ltd (TC06595) (referred to as OGC) produced a partial win for the taxpayer in relation to its supplies of food and catering to the University of Aberdeen. I’ll concentrate on the part of the appeal which was won by the taxpayer.
What is being supplied
The starting point for many VAT challenges is to identify who is supplying what to whom, but in this case the “why” question was also relevant.
This is a simplified version of the situation played out in this case, with OGC as Caterer C:
University A usually buys all of its food supplies (ingredients used in meals for staff, students, guests, etc) from Food Wholesaler B. The University uses a private company for a lot of its catering activities called Caterer C. The food ingredients purchased from the wholesaler are mainly zero-rated eg milk, bread, meat, vegetables, fruit.
As a result of a contractual issue, University A can no longer buy goods directly from B, so it adopts an arrangement where it still orders the goods from B but the invoicing procedure is that B will invoice C and C will invoice A at cost. C will make a separate admin/management charge to A for its time and costs, which is standard rated. University A will still benefit from the purchasing discount obtained from B.
Can you see the potential HMRC challenge with the above arrangement?
HMRC argued that because Caterer C was also involved with many of the catering operations at the university, supplying meals for functions as well as staff and students, then the recharge for the ingredients was part of its overall supply of standard rated catering and it was therefore artificial to split the supply. HMRC raised an assessment for £171,951 to correct what it saw as the incorrect zero-rating of the food supplies.
Single or multiple supplies?
There have been many cases about whether supplies can be split to be assessed at different VAT rates. My favourite example is the cup of tea and biscuit supplied during an aeroplane flight, which is a single zero-rated supply of air travel and not a mixed supply that includes standard rated catering. It would be artificial to split the air fare and the standard rated catering, the latter is ignored as incidental. The same principles applied in the OGC case.
The court decided that the wholesale arrangement between OGC and the University of Aberdeen was separate to the main catering contract between the same parties. The goods could therefore be zero-rated as a supply of cold food, rather than as a cost component of the catering. The judge commented on the motive for the arrangement - the ‘why’ question I mentioned earlier:
“The economic and commercial reality behind the procurement agreement was to maximise for both OGC and University of Aberdeen their respective purchasing power by combining their volumes of purchase, thereby enhancing their collective power for procuring better terms from wholesalers”.
The appeal was allowed and the VAT assessment was cancelled.
Definition of catering
It is worth making a reference to the definition of catering in VAT Notice 709/1, para 2.1 which includes:
- the supply of prepared food and drink; and
- a significant element of service.
There is an exclusion for food supplies “that require significant further preparation by the customer.”
If a caterer delivers three loaves of bread, 10 tomatoes and a lettuce to your office, this is a supply of zero-rated food. But if she delivers a tray of freshly made lettuce and tomato sandwiches on a plate, with sausage rolls and crisps as side dishes, this is a supply of standard rated catering.
It’s been six years since George Osborne’s famous pasty-tax budget, which tried (unsuccessfully) to simplify the VAT rules involving food. It is still a potential trap that needs careful thought.
The tip I always give to accountants is to encourage catering clients to assume that everything they sell is standard rated, and then specifically identify the sales that qualify for zero-rating in the legislation. This will hopefully reduce the risk of HMRC challenges such as that experienced by OGC.