Appeal Number: LON/2009/0824

[2010] UKFTT 487 (TC)

TC00747

Appeal number: LON/2009/0824

VAT – ZERO RATING OF FOOD – the Appellant sold toasted sandwiches (known as Subs) and a filling, meatball marinara – was the Appellant’s dominant purpose for heating the foodstuffs to enable them to be consumed at a temperature above ambient air temperature – Yes – toasted subs and meatball marinara standard rated – Appeal dismissed – note 3(b) group 1 schedule 8 VAT Act 1994.

FIRST-TIER TRIBUNAL

TAX

SUB ONE LIMITED (t/a SUBWAY)Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMSRespondents

TRIBUNAL: MICHAEL TILDESLEY OBE (TRIBUNAL JUDGE) MARILYN CROMPTON

SUSAN STOTT FCA

Sitting in public at Alexandra House, 14-22 The Parsonage, Manchester on 19, 20 and 21 May 2010

Andrew Young counsel instructed by Dass Solicitors for the Appellant

Owain Thomas counsel instructed by the General Counsel and Solicitor to HM Revenue and Customs, for HMRC

© CROWN COPYRIGHT 2010

1

DECISION

The Appeal

1.By a re-amended Notice of Appeal dated 23 March 2010 the Appellant appeals against HMRC’s decision to treat supplies of toasted sandwiches (known as Subs) and meatballs as standard rated for the purposes of VAT. The Appellant further appeals against HMRC’s refusal to credit it with the VAT accounted for on the disputed supplies.

2.This Appeal is concerned solely with the correct VAT liability of the disputed supplies of toasted Subs and meatballs.

3.The issues to be decided are:

(1)Are any of the supplies of toasted subs and/or meatballs to be regarded as supplies of hot food within the meaning of note 3(b) group 1 schedule 8 of the VAT Act 1994, and if so

(2)What was the purpose of heating each and every sub and/or meatballs product, and

(3)What is the proper rate of tax for each item supplied.

4.The question to be determined is whether the Appellant’s dominant purpose was to enable the supplies of toasted Subs and meatballs to be consumed at a temperature above the ambient temperature. The test is a subjective one.

5.This Appeal is one of about 250 Appeals from Subway franchisees challenging the correct VAT treatment of the supplies of toasted subs and meatballs.On 1 February 2010 the Tribunal directed that the Appellant be treated as the lead Appeal for the purpose of determining the liability of the disputed supplies in accordance with rule 18(1) of the Tribunal Procedure (First Tier Tribunal) (Tax Chamber) Rules 2009. Directions have been made binding the other Appeals to the decision in this Appeal subject to the rights of the other Appellants to make representations in accordance with rule 18(4) of the 2009 Rules.

6.The VAT & Duties Tribunal in European Independent Purchasing Company and Sub-Retail Unit v HMRC[2008] UKVAT V20697 decided that supplies of toasted Subs specifically restricted to the Melt and Italian BMTvarieties were standard rated for the purposes of VAT. This decision pre-dated the changes in Tribunal rules which allowed the option of lead Appeals, and was, therefore, not binding. The Appellant argued that the decision was wrongly decided, and should be ignored for the purposes of this Appeal.

7.This decision is set out in three parts:

(1)The substantive decision on the correct VAT liability of the disputed supplies.

(2)The findings that relate to its status as a lead Appeal.

(3)The chronology of the Appeal and the connected procedural matters.

The Hearing

8.The Appeal was heard on the 19, 20 and 21 May 2010. The Appeal was adjourned part-heard to enable the Appellant to submit its final submissions in writing with rights of reply and further reply given to HMRC and the Appellant respectively. The Tribunal reconvenedin the absence of the parties on 15 June 2010 to consider the evidence and the submissions.

9.The Tribunal heard evidence for the Appellants from

(1)Mrs Kay Mulligan who was a director of the Appellant. She gave evidence on how the Appellant operated its Subway franchised stores in and around the Huddersfield area. Mrs Kay Mulligan was the controlling mind of the Appellant, and it was her intention in respect of the disputed supplies that formed the dispute in this Appeal

(2)Professor Bronislaw Leon Wedzicha of the School of Food Studies and Nutrition, The University of Leeds, gave expert evidence on the chemical changes associated with the toasting of a Subway sandwich, and with the marinating of the meatballs with the sauce.

(3)Professor Liam Blunt, Taylor Hobson Chair of Surface Metrology at the School of Engineering, University of Huddersfield, gave expert evidence on the temperature measurements of toasted sandwiches at the Appellant’s Subway store in Kings Street, Huddersfield.

(4)Dipak Jotangia, a partner in the firm of Dass Solicitors who provided a witness statement which related to the Appeal’s status as a lead Appeal

10.The Tribunal heard evidence for HMRC from

(1)Mrs Rachana Pancholi, a Subway franchisee, who was also a board member of the International Franchise Advertising Fund which arranged advertising on behalf of United Kingdom Subway franchisees. Mrs Pancholi was principally called to give evidence on the various advertising campaigns for Subway products in the United Kingdom. Her oral testimony, however, expanded to include her operations as a franchisee.

(2)Dr Slim Dinsdale, an independent food safety and quality consultant, who gave expert evidence on the temperature measurement of toasted sandwiches at the Appellant’s Subway store in Kings Street, Huddersfield. He also commented on Professor Wedzicha’s report with regard to the changes in the meatballs.

11.Mr Thomas counsel for HMRC explained that Mrs Pancholi gave a statement to the Appellant’s solicitors. HMRC decided to call her after being informed that the Appellant did not require her to give evidence. HMRC considered that it was right and fair that the Tribunal should hear evidence of her statement.

12.The Tribunal admitted a bundle of documents into evidence, which included a joint report of the experts’ meetings by telephone on 12 May 2010.

13.A full transcript of the proceedings was kept.

The Law

14.Group 1 of schedule 8 to the VAT Act 1994 zero rates supplies of food used for human consumption except a supply made in the course of catering which is standard rated.

15.Note 3 to group 1 provides a definition of a supply in the course of catering which 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.

16.Hot food within note 3(b) means

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 Evidence

Background

17.Doctor’s Associates Incorporated (DAI), a company based in Florida, United States of America is the owner of the intellectual property rights for a system to sell food under the Subway trademark. DAI has granted a licence to use the system outside the United States of America to Subway Systems International Ansalt (SSIA), a company established and located in Liechtenstein. SSIA has granted a sub-licence to Subway International BV (SIBV) in the Netherlands whose role is to grant franchises to third parties across the Globe.

18.There are currently almost 33,000 Subway stores worldwide in 91 countries. In the United Kingdom the stores are owned and operated by independent franchisees. The aim of the franchisees is to produce made to order high quality sandwiches using the freshest and best ingredients.

19.The Appellant operated four Subway franchise stores in and around the Huddersfield area. The Appellant was owned and run by a partnership of Mrs Mulligan, her sister and mother. The franchise agreement to the partnership was dated 17 May 2004. Under the franchise agreement the partners in their capacity as franchisees were required to attend a training programme organised by DAI before opening the restaurant. The partners were obliged to operate the restaurant in accordance with Operations Manual licensed by DAI which also set out specifications for the layout of the restaurant and the equipment to be used.

20.Mrs Mulligan had been a Subway franchisee since 2002. She undertook her training programme at a dedicated facility ran by DAI inMilford, Connecticut, USA.Mrs Mulligan opened her first Subway store in June 2003. She was also a director of another company called Subs 2 Go Ltd which was owned in partnership with two other people and ran a Subway store in Huddersfield. Mrs Mulligan was the Subway Franchisee of 2007.

21.Around 2004 DAI commissioned the development of a speed cook oven from two suppliers for exclusive use in the Subway stores. The two ovens were known as the Tornado Turbo Chef and the MerryChef 402S Series. This technological innovation enabled Subway stores to offer the option of toasted sandwiches. According to Mrs Mulligan and Mrs Pancholi toasted sandwiches were introduced in the United Kingdom sometime in 2005, in response to competition from Quiznos which was offering the option of toasted sandwiches.

22.Mrs Mulligan and Mrs Pancholi estimated that toasted Subs constituted about 80 per cent of their total sales from their Subway stores. At the time of the Appeal Subway stores in the United Kingdom offered a standard range of 17 types of Subs including two vegetarian options. Examples of the standard range were chicken and bacon ranch, tuna, Subway melt and chicken breast. Subway stores also supplied a range of breakfast Subs which were sold in the morning before 11am. The breakfast Subs formed about 2 per cent of sales and were regarded by the Subway franchisees as standard rated for VAT purposes. The Stores also sold a range of drinks, crisps and cookies which were baked on the premises.

The SandwichBuilding Process

23.The Appellant followed exactly the same procedure for the making of every sandwich. The members of staff who constructed the sandwiches were known as sandwich artists. The process for making the sandwich began at one end of the counter, known as the order point and finished at the other end of the counter, known as the payment point. The Appellant provided its members of staff with scripts for each part of the operation, and written instructions on how the sandwiches were made including the quantities of ingredients[1].

24.The first stage in the process was referred to as the meet & greet where a customer was greeted by a sandwich artist and asked to choose a sandwich from the menu, a size (six inch or foot-long), and a type of bread.A sheet of deli paper was then placed on the counter immediately in front of the sandwich artist for the selected bread, which was taken from the bread storage cabinet located immediately behind the artist. The bread was then cut in a prescribed manner. The artist then asked the customer if he wished to have his sandwich toasted.

25.The next stage involved adding the meat and cheese to the sandwich. The quantity of meat in each sandwich was pre-determined either by slices or weight. The meat was taken from plastic storage containers which were located in the chilled section of the sandwich counter, where food items were held at a temperature of 1 degree to 5 degrees centigrade. The meat slices were placed on the top half of the bread and evenly distributed along its length. The customer was then asked whether he wanted cheese and if requested, four slices of cheese[2] were placed on top of the meat.

26.If the customer asked for a toasted Sub, the sandwich was placedopen in the speed oven using a basket located on a flat metal paddle. The controls on the oven were pre-programmed by means of button presses. Mrs Mulligan used one of the two combo optionswhich toasted the sandwich for 20 seconds for a six inch Sub or 30 seconds for a foot-long Sub. The oven had the facility to toast more than one Sub at any one time. The oven was situated immediately behind the artist. The oven emitted a series of three audible beeps to signify that the Sub had been toasted. .

27.The toasted Sub was returned to the counter where the salad items, sauces and other condiments were stored at the appropriate temperature. The customer was asked which salad vegetables he wished added to the Sub. The artist would suggest a group of three vegetables, the portions of which were predetermined either by weight or by a specific number of slices. Finally the artist offereda choice of sauces which amounted to three passes of a selected sauce on either the meat or the vegetables. The customer could choose more than one sauce. Following the addition of the sauce the two sides of the sandwich were folded together to form the completed Sub, which was then wrapped in thin paper bearing the Subway logo and placed in a plastic bag before being handed to the customer. The process for wrapping and bagging was identical for all sandwiches including toasted ones.No form of insulated packaging was provided.

28.The customer was then offered extra items, such as drinks, cookies and crisps, to complement his sandwich at additional cost. After which payment was taken either by cash or card.

29.Mrs Mulligan adopted a uniform business model for operating her Subway storescharacterised by a fixed store layout and a prescribed way of making sandwiches withthe aim of getting the customers in and out of the store as quickly as possible. The process up to the time of the Sub being placed in a bag could be as quick as 30 seconds but anywhere up to two minutes if the store was particularly busy. Mrs Mulligan accepted that she deliberately placed the meat and or cheese filling and the bread together in the speed oven with the Sub open. The salad and dressings were the only ingredients not put in the oven. Mrs Mulligan would not toast the bread alone in the speed oven.

30.Mr Young and Mr Thomas, counsel, asked questions of Mrs Mulligan about possible changes to the production process and store layout. Mrs Mulligan effectively stated that it was not possible to change the operations. In response to a question by Mr Young about adding meat and sauces after the toasting process Mrs Mulligan said:

“Because we just could not work like that. The equipment follows the production line, so they get the bread on what we call head or meet-and-greet, and the equipment sits on the counter and is convenient to how we work and how the customer filters down the counter”.

31.Mrs Mulligan and her sister published an in-house operations manual and actedas mystery shoppers at their stores to ensure that members of staff adhered to the procedures and recipes for making Subs. The franchisor, Subway, conducted monthly evaluations of the Appellant’s stores to secure compliance with the franchisor’s requirements.

Marinated Meatballs

32.The meatballs were delivered to the stores partially cooked but deep frozen. Mrs Mulligan stored the meat balls in a freezer until required for use when they would be transferred to a refrigerator and allowed to thaw for 24 hours.

33.At the start of each day the staff prepared the meatballs for sale in the store. This involved mixing the thawed meatballs with chilled marinara sauce to ensure that all the balls were covered in the sauce. At this stage in the process the sauce was thick, glutinous, and unpalatable. The mixture was then heated in a microwave for three successive periods of eight minutes with the mixture being stirred at the end of each period. At the end of the microwaving the temperature of the mixture was in the range of 74 to 76 degrees centigrade, which was confirmed by the insertion of an electronic thermometer probe. The temperature of 74 to 76 degrees centigrade was critical to ensure that the marinara sauce infused the meatballs to create the sandwich filling of meatball marinara.

34.The heated meatball marinara was transferred to another container, (a bain-marie), in the hot well of the sandwich counter unit. The temperature of the meatball marinara was allowed to cool in the bain-marie to between 63 and 68 degrees centigrade. The meatball marinara was then kept and sold at that temperature. The shelf life of meatball marinara once in the hot well was four hours.

35.Mrs Mulligan accepted in cross-examination that the marination process was complete once the meatballs and the sauce had been micro-waved. Mrs Mulligankept the meatball marinara in the bain-marie so that she could sell it straightway asa freshly prepared product which could only be done if she complied with food safety legislation on the sale of hot food. The legislation required the meatball marina to be maintained at a temperature of between 63 and 68 degrees centigrade. Mrs Mulligan acknowledged that the meatball marinara when cold would not be palatable. The sauce would be thick and glutinous.Cold meatball marinara did not conform to her aim of selling freshly prepared products.