18866

ZERO-RATING – food – freshly-baked pizzas – whether heated for the purposes of enabling it to be consumed hot – yes – appeal dismissed

LONDON TRIBUNAL CENTRE

DOMINO’S PIZZA GROUP LIMITEDAppellant

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISERespondents

Tribunal:DR JOHN F AVERY JONES CBE (Chairman)

SANDI O’NEILL

Sitting in public in London on 15-18 November 2004

Michael Conlon QC and Miss Sadiya Choudhury, counsel, instructed by Ernst & Young for the Appellant

Owain Thomas instructed by the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2004

1

DECISION

  1. Domino’s Pizza Group Limited appeals against a ruling in a letter dated 18 January 2002 that the supply of freshly-cooked pizzas and garlic pizza bread (together the products) collected by or delivered to customers is standard-rated. Mr Michael Conlon QC and Miss Sadiya Choudhury appeared for the Appellant; Mr Owain Thomas appeared for the Commissioners.
  2. The issue in this appeal is whether the supply by the Appellant both for take-away and for delivery of the products is zero-rated or standard-rated. In general food is zero-rated but food supplied in the course of catering is standard-rated. This is defined in Note (3) to Item 1 of Group 1 of Schedule 8 to the VAT Act 1994:

“(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 purpose 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 at the time of the supply above that temperature.”

  1. In outline, the Appellant contends that it is not its purpose in heating the products to enable them to be consumed hot (using that expression as a shorthand for above the ambient air temperature), while the Commissioners contend that it is. Mr Conlon initially raised an alternative argument that the reference at the end of Note (3) to “the time of the supply” meant that the time of supply rules had to be applied with the result that if a payment was made before the product was cooked it could not be said that it was above the ambient air temperature at the time of the supply. Mr Thomas had devoted a considerable part of his skeleton argument to countering this argument, which, if correct, would clearly have serious implications for the Commissioners. We indicated that we did not find the Appellant’s argument convincing, and we did not require Mr Thomas to elaborate on his skeleton but said we would allow him to reply to what Mr Conlon said in his reply. Mr Conlon abandoned the argument in his reply. In the circumstances we say no more about it.
  2. We had the considerable benefit of a visit to the Appellant’s premises in Milton Keynes where we saw the Appellant’s headquarters and had a tour of the commissary where the dough is produced, a tour of the franchised store at Oldbrook, Milton Keynes, and a store operated by the Appellant which includes the Appellant’s training room above. We also heard evidence from Mr Stephen Hemsley, the Chief Executive Officer of the Appellant, and also a franchisee (in a personal capacity) of the Oldbrook store that we visited.
  3. We find the following facts.

(1)Domino’s Pizza was founded in the United States in the 1960s. The Appellant holds a licence from the US company to own, operate and franchise Domino’s Pizza Stores in the UK. There are 318 stores in the UK and Ireland, of which 19 are operated by the Appellant and the remainder are franchised. No distinction need be made between the two types for the purpose of this appeal. It has about 20 per cent of the market. Collected pizzas account for about 25 per cent of the total and delivered for 75 percent. The price includes delivery but there is usually a special offer if it is collected. Stores are sited away from high street locations closer to residential areas because most deliveries are to homes, and are aimed to have 20,000 potential customers within a maximum of eight minutes drive even in busy periods. Stores are take-away only (plus delivery); there are no facilities for eating-in, but there is a bench for use by those waiting to collect their food.

(2)Unlike many of its competitors, the Appellant uses fresh dough which is mixed at the commissary in Milton Keynes (and in two other places in the UK and Ireland). Fresh vegetables and other toppings are also warehoused there and delivered by refrigerated lorries three times a week to the stores. The dough is produced from flour, water, vegetable oil, salt and yeast. It is divided and put into dough patties which are chilled to 2°C and stored for 24 hours to allow proving to begin. It is then delivered in refrigerated trucks to the stores. In the store the dough has to be proved before it can be used. The optimum days are three, four and five. After six days from the time of production the gluten in the dough starts to break down and it is more difficult to handle. By day seven it is unusable. Most of its competitors use partly baked (par-baked) dough in which the yeast is no longer active, which are delivered to stores frozen and then defrosted before use. The Appellant uses par-baked dough currently in only one of its products, “double decadence,” which comprises two thin layers of dough with cheese between and a topping.

(3)The Appellant has a menu comprising nine starters (one of which is the garlic pizza bread, one of the products), 15 varieties of pizza plus the opportunity for the customer to choose his toppings individually, five desserts and some soft drinks.

(4)Ordering may be by the customer visiting the store, telephoning, or on the internet (and also interactive TV, but this is not currently in operation). For telephone or personal orders a member of the staff enters the order on a computer which then is displayed on a computer screen to the member of the staff making up the pizza. The preparation area is in view of the customer. The staff member stretches the dough ball to make the pizza base and adds the topping from ingredients kept cool behind the surface on which it is being made up. The product is then cooked on a conveyor for six to seven minutes at 225ºC to 250ºC. Once removed from the oven it is placed in a box which is designed to allow steam to escape, and cut into segments in the box using a special cutter, within a target time of 15 seconds, because heat loss is rapid on leaving the oven. The box is put on a hot-rack which is heated by bulbs above it. It is then either collected by the customer or delivered. Should the customer not collect it within 12 to 15 minutes of its being put on the hot-rack it is thrown away (or may be eaten by the staff at the back of the premises out of sight of the customers, probably when it is then cold) and remade.

(5)If the product is delivered it is put into a quilted bag containing a disk which is heated by magnetic induction, known as “HeatWave.” This reduces the rate at which the product cools. The reason it was introduced was that one of the major complaints from customers was that some deliveries were not meeting expectations as to how hot the pizza should be on delivery. The delivery person logs the product out on the computer and for internal records it is considered late if it leaves more than 22 minutes (previously 24 minutes) from completion of the order. The driver is not under a time limit for delivery because safety is more important but the timing is such that it should be delivered within 30 minutes of the order.

(6)Marketing and advertising are organised centrally. The message given is that the pizza is freshly made specifically to order. Advertisements originally emphasised the freshness, such as “fresh-baked.” More recently the emphasis has been on the word “hot” to emphasise the freshly-baked element. We accept Mr Hemsley’s evidence that it is hard to advertise the consistency of the base, the aroma, and the partly-melted cheese, and “hot” or “fresh-baked” is used to imply all of these. “HeatWave” is used in advertising, being described as

“A delivery bag with a built-in heating element that ensures you get your pizza hotter than ever. It’s like a portable oven and it’s now used for every delivery from your local store.”

A recent advertisement after headings of Fresh and Tasty had a heading Red Hot followed by the words

“There’s no point in going to all this effort if the pizza is delivered cold. That’s why Domino’s invented HeatWave,TM the first technology of its kind designed to keep the pizza oven hot to your door. The great taste of a fresh-from-the-oven restaurant pizza is just a phone call away.”

Another advertisement under the heading “Domino’s—still the ‘HOTTEST’ pizzas in town” states

“HeatWaveTM is our revolutionary heated delivery system, which ensures that every pizza arrives at its destination piping-hot.”

We also viewed a number of television advertisements which also emphasised the heat of the products.

(7)The Food Safety (Temperature Control) Regulations 1995 (SI 1995 No.2200) requires a food business not to keep any food which (a) has been cooked, (b) is for service or on display for sale, and (c) needs to be kept hot in order to control the growth of pathogenic micro-organisms or the formation of toxins, at or in food premises at a temperature below 63ºC. It is a defence that the food has been kept for service for less than two hours. There are no circumstances in which the products would be kept for two hours after cooking. The Regulations do not govern the temperature while they are being delivered. We were shown a chart of the temperature of a pizza starting at 95.5ºC immediately on coming out of the oven, that it would be 65.5ºC after 12 minutes in a closed box, and 69.5ºC after 30 minutes in a hot bag. We were not given information about the circumstances of these readings and we believe that the box was not on a hot-rack. The Appellant as best practice complies with the regulations but will always have the benefit of the two hours defence.

(8)The products are best eaten straight from the oven when the cheese is partly melted, the baked base has the texture of freshly-baked bread, and the aroma is at its best. If allowed to cool it may be re-heated, and instructions for re-heating are included on the box. Re-heating will not return it to the state in which it was immediately on coming out of the oven, and in particular the cheese will not be re-melted. The products can be eaten cold. We were shown a BBC news item that a chemistry lecturer had found that the reason was that the tomato puree between the base and the cheese prevented the fat from the cheese going through to the base and making it soggy. Most of the toppings survive cooling well. We tried both hot and cold pizzas on our visit and agree with Mr Hemsley’s evidence that they are at their best immediately after cooking when they are hot but are perfectly palatable when cold.

  1. Mr Hemsley gave evidence that his purpose in heating the products was that this was necessary to cook the product so that it attains the attributes of a freshly-baked product. The freshly-baked products tasted best at the time the cheese was partly melted, there was an aroma and the base had the texture of fresh bread. The delivery arrangements were designed to ensure that the products arrive as close as possible to their state on leaving the oven. He did not expect that many customers would eat the whole of their order of products when cold but, for example, if there was a two for the price of one sale he would not be surprised if the second one was eaten cold or re-heated on a later occasion. He was an impressive witness who dealt clearly with all the questions put to him by Mr Thomas. We accept his evidence.
  2. Mr Conlon QC, who appeared for the Appellant with Miss Choudhury, contends that heat was applied to the products in order to cook them, to provide the customer with a freshly-baked product and to ensure adherence as a matter of best practice only with the relevant health and safety regulations. The Appellant’s view was neutral so far as the temperature at which the products are consumed is concerned. He relied on John Pimblett and Sons Ltd v Customs and Excise Commissioners [1988] STC 358 that what must be determined was the dominant purpose of the supplier. He referred to a number of cases in which a dominant purpose test had been applied, in particular Malik v Customs and Excise Commissioners [1998] STC 537.
  3. Mr Thomas, for the Commissioners, contends that the approach is one of testing the question of the Appellant’s asserted purpose against the broad circumstances of the nature of the supplies made. The authorities were primarily to be regarded as simply examples of the test in Pimblett to their individual facts. He points to the fact that the use of uncooked ingredients does not mean that the supplier of the product in the cooked state does not have the purpose of enabling it to be consumed hot, particularly when the products are cooked to order. The asserted purpose of supplying freshly-baked products does not preclude the purpose of enabling the products to be consumed hot. Nor does compliance with requirements of the food regulations detract from that purpose.
  4. Guidance on the construction of Note (3) has been given by the Court of Appeal in John Pimblett and Sons Ltd v Customs and Excise Commissioners [1988] STC 358 in which the test was described as a “precise one.” The facts in that case were:

“The pies are centrally prepared in the bakery. In the bakery the filling of the pies is cooked and the cooked fillings are enclosed in their pastry covers. They are then taken early in the morning to the retail shops, where the second process of heating takes place. They are baked in the shops in ovens with which the shops are equipped in order to cook the pastry covering which, in this process, re-heats the filling which had been previously cooked in the bakery. When the pies come out of the oven, properly cooked and for the first time in a condition to be sold, they are stacked on trays, and after an initial period to enable them to be cooled sufficiently to be handled, they are stacked in wooden racks stacking from the top downwards. When they are sold, they are sold also from the top downwards so that what the customer gets, short of a particular request for something else, will always be the coolest of the pies which are in the stacked rack.

There is not in any of the shops any means for keeping the pies hot; they are simply put in the racks where they cool naturally. It takes some considerable time for the pies to cool so that they are below the ambient temperature–whether one I regards that as being the temperature within or without the shop–but they remain pleasantly warm for a period of about one hour.

There are two bakings which take place in the shops. The first of them is at or before the time when the shop opens. There is a second baking shortly before the lunch-hour when demand is at its peak. This system has been in operation for a long time. It is accepted that the major purpose of the baking in the shops is because it provides a pleasant smell and atmosphere, and makes it plain to customers that what they are getting are freshly-baked pies.” (p.359j to 360d)

The appellant’s arguments in that case were recorded as follows:

“Evidence was given that it was no part of the intention of those in charge of the company that the heating which took place was to enable the pies to be eaten hot, let alone at or above the ambient temperature. It is, however, plain that during the lunch-hour some pies were purchased by customers whose purpose was to consume them off the premises relatively quickly, whilst they still had some heat in them.” (p.360d)

The Commissioners’ were then arguing that the test was objective:

“Before this court, and without objection, counsel for the Crown submits firstly that the test is not truly a subjective test but an objective test; secondly, that even if it is a subjective test, that subjective test is satisfied in the present case on the basis that it was clear to the knowledge of the taxpayers that some at least of the pies which were supplied during the lunch-hour would in fact be consumed at or above the ambient temperature, and would leave the premises in that condition. He submits that since the taxpayers were aware that some of their pies would be so eaten and because it was part of their purpose to increase their sales, they were meeting the objective of increasing their sales by supplying pies which were capable of being consumed–and I use the word ‘hot’ from now on although its meaning is somewhat doubtful.” (p.360f)