VAT on Subway Sandwiches – Toasted Snubs

VAT Ruling Impact on Subway Sandwiches

Toasted Subway sandwich fans will now have to pay VAT on Subway sandwiches following the recent VAT ruling. This decision marks bad news for over 1,200 Subway franchisees, as Sub One Ltd loses its challenge in the Upper Tier Tribunal against HMRC’s view that sales of “toasted subs” and “meatball marinara” sandwiches are subject to VAT at the standard rate.

Background of the Appeal

The lead appeal, fronted by Sub One Limited t/a Subway (Case ref [2012] UKUT 34 TCC), was in response to the First-Tier Tribunal decision of 14 October 2010 (case ref [2010] UKFTT 487 (TC)). This decision supported HMRC’s opinion that sales of these products fell within Note (3)(b) of Group 1 of Schedule 8 of the VAT Act 1994 and were thus excluded from zero-rating, being supplies of hot food for consumption on the premises.

These supplies were considered as supplies in the course of catering. This long-standing dispute is likely to have far-reaching implications in the catering and takeaway food sector, making the announcement eagerly anticipated.

Key Points of the Appeal

At the end of bringing the appeal, the legislation had been worded differently, with Note (3)(b) expanding on the definition of ‘hot food’ to mean:

• Food which, or any part of which,
  • i. Has been heated to enable 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 appeal argued, among other issues, three key points:

1. Whether the First-Tier Tribunal had approached the question of point (i) above in the correct manner.
2. Whether the decision amounted to a breach of fiscal neutrality.
3. Whether the supplies in question are considered goods or services.

Court of Appeal’s Judgment and Compatibility with EU Principles

Much attention was given to the Court of Appeal’s judgment in the case of John Pimblett & Sons Ltd and the question of doubt raised about that decision’s compatibility with EU principles of fiscal neutrality and objective assessment. The core issue was whether to emphasize the supplier’s intention when heating the food or the underlying purpose of heating the food.

The court concluded that the factors relied upon in Pimblett were subjective rather than objective, as required in line with EC principles. Therefore, they could not be relied upon as the correct interpretation to apply in the case of Sub One Ltd.

Tribunal’s Findings

In this case, for both toasted subs and meatball marinara, the Tribunal concluded, on an objective assessment of the facts, that the food was heated to enable it to be consumed at above ambient temperature and not for some other reason. The First-Tier Tribunal was therefore correct to conclude that they are liable to VAT at the standard rate, even though they may have applied the wrong test to reach that conclusion.

Implications and Conclusion

The fact that Pimblett had been relied upon in several cases over the years with inconsistent outcomes, and the fact that HMRC did or did not appeal them or amend guidance or legislation in light of those other cases, was not held to be a reason to conclude there had been a breach of fiscal neutrality.

On the subject of whether the supplies were goods or services, it was held to be irrelevant. Counsel for HMRC pointed out that the criteria for an exception from zero-rating under Group 1 Schedule 8 VATA94 were not that of “catering services” but of supplies “in the course of catering.”

Based on its findings, the Tribunal concluded that the food was heated to enable it to be consumed at a temperature above ambient air temperature and supplied to the consumer while still above that temperature. Thus, it met the criteria for exclusion from zero-rating, and VAT is due at the standard rate on such supplies. Consequently, the appeal was dismissed.