Introduction

In Sub One Limited T/A Subway v HMRC [2012] UKUT 34 the Upper Tax Tribunal has fundamentally changed the way the supply of “hot food” is treated for VAT purposes in the UK.  In yet another example of the scope of VAT litigation in the UK, the appellant was a franchisee of the Subway chain, and the appeal was one of over 1200 appeals lodged by Subway franchisees.

Under the UK provisions, the supply of “hot food” is taxable where it has been heated “for the purposes of enabling it to be consumed above ambient air temperature”.  Prior to the decision, it was accepted that the test was a subjective one (i.e., why did the supplier heat the food?).  The Upper Tribunal found that this approach, which had been applied since 1988, was contrary to European Law which required that the test be an objective one.  It followed that the Tribunal below had applied the wrong test in considering the question of whether the supply of “toasted subs” and “meatball marina” by the appellant was taxable. Applying that objective test, the Upper Tribunal found that the food was taxable.

This decision raises the question as to the proper test to be applied in the context of the GST Act in Australia.

The decision at first instance

The appeal was against the decision of the First Tier Tribunal in Sub One Ltd (t/a Subway) v Revenue & Customs [2010] UKFTT 487.

Before the Tribunal, the issue was whether the Revenue was correct to treat supplies of toasted sandwiches (known as “Subs”) and meatballs as standard rated (taxable) for the purposes of VAT.  Having regard to the legislation, the question to be determined was whether the Applicant’s dominant purpose was to enable the supplies of toasted Subs and meatballs to be consumed at a temperature above the ambient temperature.  It was common ground that the test was a subjective one.

The legislation in question was s 8 of the VAT Act 1994, which zero rated (GST-free) supplies of food used for human consumption except a supply made in the course of catering, which is standard rated (taxable).  The definition of “a supply in the course of catering” expressly includes:

(a) any supply of it for consumption on the premises on which it is supplied; and

(b) any supply of hot food for consumption off those premises.

“hot food” was defined to mean:

Food which or any part of which – 

(i) has been heated for the purposes of enabling it to be consumed at a temperature above the ambient air temperature; and

(ii) is above that temperature at the time it is provided to the customer.

The Tribunal found that the authority for the proposition that the test of the dominant purpose of heating the good was a subjective one and must be applied solely to the purposes of the applicant was the Court of Appeal decision in John Pimblett and Sons Ltd v CCE [1988] STC 358.  That case concerned the treatment of pies which were baked in retail shops and placed on wooden racks to cool before being offered for sale.  The main purpose of the baking was found to be not to enable the pies to be eaten hot but to provide a pleasant smell and atmosphere and to make it plain to the customers that they were getting freshly baked pies.  The Tribunal also found that:

• the proper test is determining whether the supplier had made a supply of hot food for consumption off the premises was to determine the dominant purpose of the supplier.
• There was no reason for confining the meaning of heated to some process which took place after the cooking process had produced a finished product.
• The Tribunal is entitled to look at all the circumstances to arrive at a conclusion as to the supplier’s purpose which included what he said and what he did after the cooking process.

Having regard to the evidence (which was substantial, and included expert evidence), the Tribunal summarised the factual findings as follows:

• the toasting process was intimately connected with the temperature at which the toasted sandwich was eaten.
• the toasted Sub lost its distinctive characteristics and flavour if allowed to cool.
• the temperatures of the toasted Sub was significantly above ambient temperature at the time they were provided to the customers – the speed oven heated not only the bread but also the meat and/or cheese filling to temperatures significantly above ambient air temperature
• the significance of the toasted Sub being wrapped in paper which had no insulating qualities was much diminished when viewed in the context of the nature of the product (ready to be eaten from the hand), the speed of service delivery, and no evidence that the business relied on home delivery
• although the advertisements did not use the word “hot”, the strap line of “fresh toasted” and the images of browned bread and melted cheese were consistent with the application of heat

Having regard to these factual findings, the Tribunal found that the dominant purpose of heating the Sub (and the meatballs) was to enable them to be consumed at a temperature above the ambient air temperature.

The Appeal

On appeal, the Upper Tribunal first considered the legislation as though it was free from authority.  The Tribunal considered that the legislation raised the following matters:

• the draftsman was distinguishing between food which is “hot” (ie. above ambient temperature) at the time of supply because it had been heated for the purposes of enabling it to be consumed at such a temperature on the one hand, and food that is “hot” because it has been heated for some other purpose on the other hand
• the draftsman chose to differentiate by reference to “purposes” and not by reference to “intention”.  This second matter suggests that the draftsman must have intended an objective test.

Based on the views of the Tribunal in the judgment, it is clear that the Tribunal would have applied an objective test in the absence of the decision of the Court of Appeal in Pimblett.   After discussing this decision, and its application in subsequent cases, the Tribunal noted that there did not appear to have been a proper attempt to re-examine the correctness of this decision in light of European Law.

Having regard to European Law, in particular the principle of objective assessment, the Tribunal found that it was common ground that European Law required an objective test.  Applying this objective test, the Tribunal found that it was “perfectly clear” that the toasted subs were heated for the purpose of enabling them to be consumed at above ambient temperature, and not for some other purpose.  In this context, it did not matter whether that was the applicant’s subjective intention or not.

The position in Australia?

Section 38-2 of the GST Act provides that food is GST-free, subject to s 38-3 which makes the following supplies taxable:

(a) food for consumption on the premises from which it is supplied; or

(b) hot food for consumption away from those premises

The expressions “hot” and “hot food” are not defined in the GST Act, but the following paragraphs in the Further Explanatory Memorandum to the GST Bill 1998 provide some context:

1.28 Hot food means food that had been heated above the room temperature or above the generally surrounding air temperature for consumption.  You do not need to check the precise temperature because food or drink which has been heated so that it can be consumed while still hot will be at a higher temperature than the surrounding air temperature.

1.29 Food that you sell while it is still warm because it happens to be freshly baked and is not intended to be earn while hot is GST-free.  For example, freshly baked bread…

Having regard to the above, there are clear similarities with the UK legislation.  This raises the question of whether the test here is a subjective or objective one.  In my view, the proper test is a subjective one and the recent decision of the Upper Tax Tribunal discussed here does not impact on this view.  The first reason is that the basis for the objective test is that is the test required by European Law.  Secondly, while it appears clear that the Tribunal considered that an objective test was correct under the words of the legislation, I prefer the approach of the Court of Appeal decision in John Pimblett and Sons Ltd v CCE [1988] STC 358.

I also note that the basis upon which the Tribunal sought to argue that the test was objective, namely that the draftsman of the legislation chose to differentiate by reference to “purposes” and not by reference to “intention” is not present in the Australian legislation.  Section 38-3(b) uses the words “hot food for consumption” and there is no reference to the purpose of heating the food.  Further, the Explanatory Memorandum supports a focus on the “intention” of the supplier (which supports a subjective purpose), noting the references to “food or drink which has been heated so that it can be consumed while still hot” and “food that is not intended to be eaten while still hot is GST-free”.