A franchisee of the takeaway sandwich chain Subway has lost the latest in a string of legal actions to prevent its toasted sandwiches from being standard-rated for VAT, following a Court of Appeal decision with implications for a number of fast food outlets.
The case [Sub One Ltd (t/a Subway v Commissioners for Her Majesty’s Revenue and Customs 2014 EWCA Civ 773 Case No. A3/2012/3400] concerned a Yorkshire Subway outlet which was appealing against earlier decisions at the First Tier Tribunal (FTT) and Upper Tribunal (UT) over the VAT treatment of its toasted ‘subs’ and a product called meatball marinara which was heated up before being given to customers.
The franchisee argued that HMRC’s decision to apply VAT to these items, contrary to the attitude taken towards other hot food takeaway purchases which are zero-rated, had resulted in a breach of a principle of EU law. The branch argued that the differing VAT treatment of its products as compared with that of competitors infringed the fiscal neutrality principle, rendering it unable to compete fairly and contributing significantly to its ultimate liquidation.
The FTT ruling on the issues focused on the temperature of the sub and any fillings as being ‘above ambient air temperature’, with advertising material which cited ‘fresh toasted’ as evidence of this being hot food and therefore standard-rated.
Subway’s appeal against this decision was based on the argument that FTT's conclusions were irrational and resulted in a breach of European law because of the inequality of treatment as compared with other traders making similar supplies. The company also argued that its supplies were not of services, but of goods. The UT dismissed all these arguments and agreed with HMRC that description of the sandwiches as supplies ‘in the course of catering’ made no difference to their VAT rating.
The judge dismissed the Subway franchisee ’s appeal against the VAT rating of its toasted sub range, noting that this was one of some 1,200 appeals by such franchisees and so likely to have a substantial impact
In the latest case, the Court of Appeal was reviewing the UT’s decision with regard to the fiscal neutrality principle and the question of whether Subway was supplying goods or services.
The judge found that the UT had been correct in agreeing with HMRC that zero-rated supplies falling within Article 110 are not harmonised, and that it was for the UK to determine the boundary between zero-rated supplies and standard-rated supplies in accordance with its own social policy, saying that the principle of fiscal neutrality could not be relied upon to challenge the UK's decision as to where to draw the line.
The judge also did not agree with Subway’s claim that the supplies made in this case were of food as goods and not food as services, and so should be zero-rated, saying that for the purposes of the VAT definition in the UK legislation it does not matter whether the supply in question is of goods or services, provided that the supply is ‘in the course of catering’.
The judge dismissed the Subway franchisee ’s appeal against the VAT rating of its toasted sub range, noting that this was one of some 1,200 appeals by such franchisees and so likely to have a substantial impact.
The case is here: http://www.bailii.org/ew/cases/EWCA/Civ/2014/773.html
