Front view of Subway Franchise Restaurant

VAT: Zero-rated food sales were correct

25th Oct 2018
Independent VAT Consultant
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Neil Warren explores a case where HMRC chose unrepresentative days to check the ratio of standard-rated and zero-rated sales in a takeaway sandwich shop.


Consider this: HMRC attend the premises of a restaurant (a Subway franchise) that makes both zero-rated and standard-rated sales – the only zero-rated sales being cold takeaway food. The HMRC officer carries out 13 hours of invigilation over three separate days to check the ratio of zero-rated to standard-rated sales, and finds the standard-rated sales average 82% of total sales.

He compares this percentage to the VAT returns for the previous four years, where the standard rated average has always been between 45% and 65%. In fact, for six quarters, the average is less than 50%. What would you conclude from this evidence?

The case

The above facts applied in the case of Golden Cube Ltd (TC06666), a franchise of Subway based in South Shields. The Subway outlets mainly sell a range of hot and cold fillings in different types of bread, some of which is toasted.

HMRC used the 82% average from its three-day observation period to raise an assessment for £47,875 using its power of ‘best judgment’ (under s73(1), VATA 1994). In other words, it adjusted the percentage of standard-rated sales upwards to 82% for the VAT periods May 2012 to November 2015.

The three Ms

There are three possible reasons why the taxpayer might have understated his output tax:


The zero-rated button is pressed for either on-premises sales (always standard-rated, irrespective of what is being served) or sales of hot take-away food.  


Perhaps the wrong buttons were pressed during busy periods when staff were under pressure. But surely these mistakes would be made both ways, ie sometimes a zero-rated sale is entered as being subject to VAT, and vice versa on other occasions.


This is the horse that I backed as I read through the case report. I thought that perhaps the business owner wrongly thought that toasted sandwiches could be zero-rated if sold on a takeaway basis. This is an understandable misconception as that very point was taken all the way to the Court of Appeal in 2015 by another Subway franchisee, who fell at the last fence so to speak. That case decided that the toasted bread and hot fillings sold at Subway had to be treated as hot food in the same way as, say, fish and chips (VAT Notice 709/1, para 4.3 Test 2).

But the judge did not think any of “the three Ms” accounted for the difference.

HMRC testing period

Without sounding overcritical of HMRC, my initial thought was that the HMRC officer had been a bit lazy in the choice of his three representative days to attend the shop and do his testing: a Monday, Wednesday and Thursday over just a two-week period between about 10.30am and 3pm. It almost felt like these hours gave him the chance of an early afternoon finish. Why not venture out on a Friday evening when the shop would have been really buzzing? Perhaps he should have varied the chosen hours and days to include a weekend?


The judge shared my concerns about the testing period, and fully allowed the appeal. He said:

“On balance I am satisfied that the most likely explanation for the different proportions of standard-rated sales is that the invigilations were not representative of the VAT periods to which they were compared. I cannot say precisely why that should be the case. It may be because the invigilations were all carried out during lunchtime over three days at the same time of year and over a short period of time.”

I always enjoy telling the tale of the kebab shop I visited as a VAT officer for Customs and Excise back in 1985. The only zero-rated product it sold was takeaway milkshakes, and I noted that the percentage of milkshake sales compared to total sales had increased from 3% at the time of the last VAT inspection to nearly 40%. The figures showed that over 100 milkshakes had been sold on a particular day in February when it was snowing. Unlike the Golden Cube case, that visit did not have a happy ending for the taxpayer!

Learning points

If you act for a retail business that makes both zero- and standard-rated sales, it is worth regularly reviewing the “three Ms”.

I also think a year-on-year comparative between the zero and standard rated split is important.

Replies (4)

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By Jdopus
26th Oct 2018 12:48

I have to say, I was extremely happy to read this case. I've been in an almost word for word identical argument to the one advanced by the appelant here with HMRC over two years in nearly identical circumstances for another Subway store. Fantastic result.

Thanks (2)
By graydjames
29th Oct 2018 10:28

The Subways I know are most busy from about 12 noon and until about 3pm. My local one declares its most popular time to be 1pm and this then declines steadily every hour until closure. At 9pm is it less busy than at 10 am. Having said that, I accept that the officer should have visited at all times.

What intrigues me though is that my (admittedly purely anecdotal) experience of Subways is that cold take away food accounts for a higher proportion of sales at lunchtimes whereas, on a Friday night, sales of standard rated food are likely to be higher! The figure of 82% seems very unlikely to me - except I can't account for people's tastes in South Shields!

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By Moo
30th Oct 2018 16:58

What about seasonal differences? Surely more hot food sold in January than July?

Thanks (0)
By graydjames
31st Oct 2018 11:58

Of course, Subway would sell a good number of soft drinks. I overlooked that. I still think 82% sounds high.

More soft drinks in summer too possibly countering any reduction in hot sales in those months. Interesting to know if there is any seasonal effect. Not much is my guess.

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