20150
Supply of hot toasties and of grilled panani - was it a supply in the course of catering or was the taxpayer's purpose to enable the items to be consumed hot - Note 3 Group 1 Schedule 8 VATA 1994 - appeal dismissed.
LONDON TRIBUNAL CENTRE
COFFEE REPUBLIC PLC
- and -
THE COMMISSIONERS FOR HER MAJESTY'S
REVENUE AND CUSTOMS
Tribunal: CHARLES HELLIER (Chairman)
SHEILA EDMONDSON FCA
Sitting in public in London on 5 and 6 March 2007
Nigel Popplewell of Burges Salmon LLP for the Appellant
Jeremy Hyam Counsel instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents
© CROWN COPYRIGHT 2007
DECISION
- If food has been heated for the purpose of enabling it to be consumed at a temperature above ambient air temperature then its supply when hot may be treated as a supply in the course of catering and be standard rated.
- The Appellant supplied hot paninis and toasted sandwiches. The Respondents claim that that supply is standard rated. The Appellants claim that it is zero rated.
- The Appellant says that its purpose in heating the paninis and sandwiches was to supply these items in a crisp or toasted state, to melt the cheese where it was an ingredient, to allow the full taste of the fillings to be released; to make the products visually more appealing and to ensure the products were supplied freshly toasted. This they say was not the purpose of enabling the items to be consumed hot.
- By way of a voluntary disclosure made on 24 March 2005 the Appellant claimed that it had overpaid £234,381.85 of VAT on the supply of these items over the twelve VAT periods embracing the period from 24 December 2001 to 31 December 2004. The Respondents rejected that claim on 23 March 2006. The Appellant appeals against that rejection under section 83(t) of the VAT Act 1994.
- It is a defence to a claim for the repayment of overpaid VAT that repayment would unjustly enrich the claimant. Whether or not this was the case was not debated before us.
The Legislation
- Section 30(2) VATA 1994 provides that a supply is zero rated if it is of a description specified in Schedule 8 VATA 1994.
- Group 1 of Schedule 8 provides so far as is relevant:
"Group 1 - Food
The supply of anything comprised in the general items set out below, except -
(a) a supply in the course of catering…
General Items
Item No.
- Food of a kind used for human consumption."
- The sandwiches and paninis were food of a kind used for human consumption. Thus their supply is zero rated unless they were supplied in the course of catering.
- Note 3 to Group 1 provides:
"(3) A supply of anything in the course of catering 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;
and for the purposes of paragraph (b) above "hot food" means food which, or any part of which:
(i) has been heated for the purpose 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." [prior to 1 January 2005 this read "(ii) is at the time of the supply above that temperature."]
- This appeal concerns items sold for consumption off the premises. Thus it is only paragraph (b) which is relevant. If the items were "hot food" they would be treated as supplied in the course of catering by (b).
- Because Note (3) provides that a supply of catering includes the supplies mentioned in (i) and (ii) it is possible that a supply could be one of catering without falling within either paragraph (i) or (ii) - being a supply in the course of catering within the normal meaning of that term. It was not however argued by the Respondents that the supply of the items at issue was so made, and it did not seem to us that the normal use of the term embraced these supplies. Thus the relevant rate of tax depends solely upon the applicability of Note 3(b): was this a supply of hot food as so defined?
- The Appellants accepted that the food was, when it was provided to the customer or at the time of supply, above ambient air temperature. Thus paragraph (ii) of Note (3) was satisfied. Hence the only question for us was whether or not the items had been heated for the purpose of enabling it to be consumed "hot" (we use "hot" in the rest of this decision to mean above ambient air temperature.)
The Case Law
- John Pimblett and Sons Limited v Customs and Excise Commissioners [1988] STC 358 concerned the supply of pies. The pies were centrally prepared in a bakery where the fillings were cooked and enclosed in their pastry covers. They were then taken to the pie shops where they were baked, and after baking stacked on trays. After they had cooled down a bit, they were stacked on wooden racks whence they were sold. On the racks the pies cooled naturally but could be warm when they were sold. The question was whether the pies had been heated for the purpose of enabling them to be consumed hot for the purposes of what is now Note 3[(3)].
- The evidence given for the pie shops was that it was no part of the intention of those in charge that the heating which took place was to enable the pies to be eaten hot. The evidence was not rejected, but the Crown submitted that the test in Note (3) of purpose was an objective rather than a subjective test, or, that if it was subjective, the taxpayers must have known that at least some of the pies would be supplied hot.
- In the Court of Appeal Parker LJ rejected the proposition that because it was known that some of the pies would be supplied hot the taxpayers must have had unconsciously or consciously a direct or indirect purpose that to some extent the pies were heated for that purpose. So to require he said would be unjustifiably to read into the statute the words:
"or which, to the knowledge of the supplier would or might be consumed [hot]."
- He went on to say:
"…Furthermore, if one looks at the substance of the matter, it appears to me that what has happened in this case comes nowhere near any ordinary meaning of "catering". I accept that on the basis which has been held to be right by the judge, namely what was the dominant purpose of the seller disregarding any inevitable results which might flow, there may be cases where there is unfairness as between trader and trader."
- It seems to us that in this passage Parker LJ:
(i) accepts that the test is one of subjective purpose,
(ii) accepts that the test relates to the dominant purpose of the supplier, and
(iii) concurs that in determining that purpose inevitable results should be disregarded.
- Parker LJ then noted that it might well be that surrounding facts are such that a tribunal could conclude that evidence that it was no part of the relevant individuals' purpose to enable the pies to be eaten hot was unacceptable. He gave an example of a case where there were heating cabinets which kept the food hot. That might affect the weight to be given to evidence that the intention of heating the food was not to enable it to be eaten hot.
- We note that the House of Lords decision in Mallalieu v Drummond [1985] STC 665 was not referred to in Pimblett. In that case it was held that in determining a person's purpose for the purposes of section 74 TA 1988, a person's subjective intentions were not to be taken as limited to the conscious motives which were in his mind at the time of payment. , and that as Millett LJ said in Vodafone Cellular ltd v Shaw [1997]STC 734, "Some consequences are so inevitably and inextricably involved in the payment that unless incidental they must be taken to be a purpose for which the payment was made." Or as one commentator put it subjective purpose is to be determined with a dash of common sense. We have however not relied on these propositions.
- In Malik (t/a Hotline Foods) v Customs & Excise Commissioners [1998] STC 537, Mrs Malik ran a business of cooking and delivering food to order. The orders were placed by telephone and then the food was cooked. After being cooked the food was kept in tin foil containers in a heated cabinet until ready for delivery to the customer. The appellant's goal was that the food should be delivered to the customer as hot as possible. The appellant submitted that the heating which was applied during the cooking process was applied with the predominant purpose of making the food edible rather than enabling it to be consumed hot.
- In the High Court, Keene J:
(i) accepted that the question was what the dominant purpose of the taxpayer was in heating the food;
(ii) held that no distinction was to be drawn between heating the ingredients (as part of cooking them) and heating the finished product: both were embraced by the generic term "food"; and
(iii) on the basis of the evidence that Mrs Malik had two purposes: first to render the food edible, and second to enable it to be consumed hot, did not interfere with the tribunal's finding that the second was the predominant purpose.
- We were also referred to a number of tribunal decisions. We approach the evidence with the following principles in mind:
(a) we have to determine what were the subjective purposes of the Appellant in heating the items;
(b) in determining any purpose the inevitable consequences of an action should be disregarded although account may be taken of surrounding circumstances in evaluating evidence of purpose; and
(c) if the Appellant had more than one purpose we have to determine the dominant purpose.
The Evidence and Findings of Fact
- We heard oral evidence and received a witness statement from Sam Pedder who worked for Coffee Republic between June 2005 and November 2006. Whilst there she had been responsible for the development of its food business.
- We also heard oral evidence from Kath Cooper who had started working for Coffee Republic in January 2000 and in that time had held various positions including those of Bar Manager, Multi-Bar Manager, Deli Manager, Area Manager, and Franchise Support Manager.
- We visited a branch of Coffee Republic where we saw how the items were displayed, offered, sold and heated. We purchased a number of items, some of which we ate there and some which we brought back to the tribunal centre. We were able to test the temperature of the items at various times. We also saw samples of the packaging and wrapping for the items, and copies of advertising materials. These related to periods which embraced the periods which are the subject of this appeal.
- In the following paragraphs we start by making findings of fact which are derived from evidence not expressly relating to the Appellant's purpose. We then discuss the oral evidence directly relating to the subjective intention of the Appellant.
- Coffee Republic runs a chain of well known coffee shops. In the period relevant to the appeal it operated about 65 shops. In addition to drinks most of the bars sold a selection of food. This included sandwiches, pastries, cakes and chocolate in addition to the toasted sandwiches ("toasties") and the paninis which are the subject of this appeal.
- The toasties and paninis were not made by the Appellant but delivered, wrapped, to its shops early each day. At the shops they were stored and displayed in chilled cabinets. The clear plastic wrappings bore writing and pictures on a label. The label identified the filling. The labels changed from time to time over the course of the period relevant to this appeal but usually carried the legend,
"Please hand to your barista to grill",
and for some but by no means all periods the words:
"EAT
HOT"
within a small panel.
- A customer deciding to buy one of those items would take it to the "barista" behind the counter. Unless the customer wished otherwise, the item would then be grilled. The grills consisted of metal plates (which were parallel when the grill was in operation) maintained at a temperature of about 200oC. The plates had raised parallel humps across the plane of the plate which produced grill line bars on the item during grilling. The items were grilled for between 3 and 5 minutes (and slightly longer for paninis than toasties). The Appellant considered that it would be sure of complying with Food Hygene Regulations if it ensured that the temperature of the inside of the items was raised to 75oC: once the food had been heated to any degree it was necessary to heat it to 63 oC to comply with those Regulations, and heating to 75oC gave a margin of safety. The time the item was required to be kept under the grill was set to achieve this result.
- The Appellant did not grill the items and then keep them hot in a hot cabinet or such like.
- After the item had been grilled it was, if it was a take away purchase, wrapped within about 1 minute of leaving the grill. No attempt however was made to keep the item hot in that period. It was put on a paper plate which was put into a small bag. In some branches opaque white plastic bags sold by their suppliers under the name Thermowrap were used. The bag might then be put into a smallish paper carrier bag.
- The toasties were available with a selection of three or four fillings. Generally each filling contained some form of cheese, but where cheese was not included bacon generally would be. Likewise the panini fillings generally contained cheese, and if not bacon.
- Immediately after purchase the internal temperature of the items was between 63o and 75o C; after about 10 minutes it would reduce to about 44o and after about 1 hour to between 30o and 35o C (in each case assuming it was kept in its wrapping).
- If the item were eaten directly after purchase it would be crisp and toasted on the outside, the cheese would be melted and inside and outside it would be hot. If eaten an hour or so after purchase it would still be edible but the cheese would be rubbery and a little oily; the crispness of the bread or panini would however remain. We found the items distinctly less palatable after they had cooled for an hour or so.
- From time to time in the relevant period various advertising materials would be displayed in the bars: posters on the walls and in the windows and cards for tables and at the counter. The material was produced for specific sales campaigns and would not generally be on display for more than two or three months at a time. There were various descriptions of the products in this material:
"Meal Deal. Any Toasted Sandwich + Tall Coffee".
"Delicious Toastie & any Hot Drink".
"Any tall coffee FREE when you choose one of our freshly grilled panini."
"Hot Panini and Cool evian".
"Hot Toastie + Tall Coffee".
"Ciabatta melts & Toasties".
"Delicious toastie & fresh coffee".
- We find it probable that these descriptions or ones like them were used in the relevant period.
- Where the material showed pictures of the inside of a toastie, the cheese looked warm and melted.
- As the cheese used in the toasties and paninis increases in temperature it melts. It will melt before 60 degree centigrade. If it is held at that temperature it begins to separate. As the cheese cools from 70 degrees or so its properties change. As it cools it becomes soggy and rubbery and some of the fat will separate out. The cheese does not rebind as it cools further or assume its former constituency or texture. As it cools it remains edible: it tastes fine between about 50 and 60 degrees, but below 50 degrees loses its "melted" texture and is not so attractive.
Oral evidence as to purpose
- Samantha Pedder could not give us direct evidence relating to the period relevant to the appeal but gave evidence of continuing practices during her time at Coffee Republic and of her understanding of issues during the relevant period which she had gleaned from discussions with colleagues. We found her clear, expert and believable. She told us that as far as she was concerned the items were grilled for the following purposes:
(i) to change the texture of the outside so as to make it crisp;
(ii) to melt the cheese in the case of the cheese filled items;
(iii) to provide the smell of bacon in the case of bacon filled items;
(iv) to provide a contrast between the crisp exterior and the soft interior of the product;
(v) to develop the flavour of the cheeses used in the products: the cheeses which were used tasted very good when melted - both flavour and texture changes on melting.
- She said that if the purpose was simply to serve the items hot, that could have been achieved by putting them in a microwave. What was important was that they were grilled not just heated.
- She said that customers did not like the paninis and toasties because they were hot, but because of the texture and flavour of the cheese. The aim was to provide a crisp outside and melted cheese; it was a by product of the steps taken to achieve that aim that the items were hot.
- Kath Cooper gave direct evidence of her experiences during the relevant period. We found her very competent and believable. In relation to the question of the purpose of heating the items she said that:
(i) it changed the texture of the bread;
(ii) it changed the nature of the ingredients by melting the specially chosen cheeses;
(iii) it generated a freshness which would not be achieved by reheating or keeping already grilled products hot; and
(iv) it made them visually more appealing.
Mr Hyam challenged the witnesses' evidence as to the purpose of heating the items, putting it to them that they were mistaken, misguided or wrong. Each witness replied that the heating was a by product of providing the desired qualities.
The Parties' Arguments
- Mr Hyam for the Respondents starts by saying that the burden of proof as to the Appellant's purpose must lie on the Appellant, and that the Appellant did not discharge that burden. He points to the surrounding evidence: the words "Eat Hot" or some of the packaging, the advertising mentioned which refers to hot toasties or hot paninis, and the use of "Thermowrap" bags - the purchase of which he says show that someone had heat retaining properties in mind. All those create an initial presumption that the Appellant's purpose is to deliver a product which can be consumed by the customer hot. He says that the oral evidence advanced was unsatisfactory: only Kath Cooper could give first hand evidence directly related to the period and Sam Pedder's evidence must be seen in the light of the fact that she knew the nature of the tests to be satisfied.
- Mr Hyam asked us to look at the qualities of the product on delivery - crispness, freshness, melted cheeseness(sic), and hotness. The heating of the product must have been intended to achieve these and to enable it be eaten in that state. The dominant purpose must have been enabling it to be consumed hot.
- Mr Hyam distinguishes between an inevitable result and something which is part of the main purpose. It is wrong he says to describe the hotness of the product as a by-product of melting - the melting was indistinguishable from the heating; it was not that the heating purpose was a result of the melting purpose: in reality there was one purpose.
- Mr Popplewell reminds us that we must answer the question from the perspective of the supplier only. There is no room for looking at it "in the round". He says that the evidence of Sam Pedder and Kath Cooper as to the purpose of treating is significant. They were cross examined by Mr Hyam and there was no reason to conclude that they were not telling the truth.
- He says that Mr Hyam says that "hotness" is an essential aspect of the product, but that that is not the test. The test is what actually was the purpose of the Appellant. The witnesses were clear that hotness was a by-product.
- The speedy delivery to the customer from the grill did not suggest that the Appellant had the relevant purpose. The speed was part of proper customer service.
- So far as the marketing material goes Mr Popplewell accepts that some pieces of material used the word "hot". But importantly such a description was not an element of the purpose of the Appellant. And marketing being directed to the customer might affect the customers' perception or wants but what the customer might or might not do or want was not relevant to the subjective purpose of the Appellant.
- Each case Mr Popplewell says depends on its own facts, and in each case different weight will be given to different evidence. Here he says that the fact that the product is grilled to order and not on spec, that it is grilled rather than microwaved, and that no attempt is made to maintain its temperature outweighed any suggestion from the marketing material (which in any event could be manipulated).
- Both parties took us to a number of decisions of the tribunal. These are listed at the end of this decision. We found in them helpful amplification and examples of the required tests but did not find in them any particular point of principle to which we need refer.
Discussion
- We find that the Appellant had the following purposes in heating the items:
(i) to enable a freshly toasted externally crisp product to be consumed;
(ii) to enable the product to be consumed when the cheese was in a melted state;
(iii) to enable the product to be consumed when the full taste of the fillings was released; and
(iv) so far as the items were heated above the temperature necessary to achieve these purposes, to heat them to a temperature which would comply with the food hygiene regulations.
However we do not find that this list exhausts the possible descriptions of the Appellant's purposes in heating the products.
- First we note that in determining what a person's purpose is we must not be blinded by words: if a person's purpose was to paint something red, he could also be said to have a purpose to paint it a colour. The words used by a person to describe his purpose do not limit the available descriptions. Using a description of a person's purpose in words different from that he himself uses is not necessarily substituting an objective for a subjective test.
- Second, we note a distinction between an inevitable result of the successful completion of a purpose and something which is necessary for or a part of a stated purpose. If with intent a person kills a fly by squashing it, it cannot be said that because his avowed purpose was "to kill the fly", it was not also to squash it. His purpose may stop short at the killing: his purpose of killing the fly by squashing does not mean that he had a purpose of leaving a mess on the window, but it must encompass the intended means of achieving the killing.
- We accept that the Appellant wished to provide a crisp product and find that it intended to enable the consumer to consume it when it was crisp. If the Appellant achieves that aim by heating the product, then it has a purpose of heating the product, but it does not have to have to enable the product to be consumed hot in order to achieve a purpose of enabling it to be concerned crisp.
- We also find that the Appellant had a purpose of enabling the cheese to be consumed in a melted state, but find that it could achieve this purpose only if the cheese was hot. In other words the means of achieving the purpose of enabling the cheese to be consumed in a melted state was and could only be to enable the cheese to be consumed hot. In our view that means that the Appellant must have had a purpose of enabling the items to be consumed hot.
- Further the weight to be attached to that purpose must be the same as the weight to be attached to the expressed purpose of enabling the cheese to be consumed in a melted state. That was in our view a major purpose of heating the items. Thus the purpose of enabling the items to be consumed hot was in our view a major purpose in heating them.
- But that conclusion is not enough to dispose of the question. We have to determine whether it was the dominant purpose of the heating.
- We have accepted that the Appellant had the purposes of enabling:-
(i) a crisp, freshly toasted, product to be consumed. This as explained above did not carry with it the purpose that it be hot when consumed;
(ii) melted cheese to be consumed. This carried with it the purpose of enabling it to be consumed hot;
(iii) the full taste of the fillings to be released. In our view this would also generally require the fillings to be hot and thus enabling the product to be consumed hot is coextensive with this purpose; and
(iv) compliance with food hygiene regulations. This in our view was ancillary to the other purposes and takes its colour from the purposes it serves.
- Taking these together we find that enabling the product to be consumed hot was the dominant purpose of the Appellant in heating it.
- We therefore found that these items were supplied in the course of catering and so fall within the exemption from zero rating. Accordingly we dismiss the appeal.
- Our decision was unanimous. The Respondents did not seek costs and we have decided not to award costs to either party.
CHARLES HELLIER
CHAIRMAN
RELEASE DATE: 18 May 2007
Authorities (and tribunal case references) referred to in argument but not in this decision:
Jannicke Wallace 19793
RJ Warren 19902
Ainsley's of Leeds Limited 19694
Domino's Pizza Group Limited 18866
Tuscan Food 18716
The Greatr American bagel Factory 17018
Pret a manger 16246
Three Cooks 13352
Greenhalgh's Craft Bakery Limited 10955
Nicola Milburn Homes 16264
Stewarts Supermarkets Limited 13338
Phillip James Bridgewater 10491
The Lewis's Group Limited 4931
LON/2006/0756
