Today’s Blog is about a recent tax tribunal (FTT) hearing concerning Morrisons Supermarkets Lid’s appeal, against a VAT demand for over £17m on their cool-down rotisserie chicken (CDRC). This case particularly intrigued me, as it had strong echoes of the ‘pasty tax’ debate from 2012.
Background; ‘The Pasty Tax’
The so-called ‘Pasty Tax’ was a controversial 2012 UK government proposal to charge 20% VAT on hot takeaway foods, including pasties, sausage rolls, and similar items, reversing their zero-rated status. The plan sparked public outrage and protests from bakers, especially Greggs.
The furore led to a significant political backlash, which resulted in the then Chancellor, George Osborne, performing a major U-turn and abandoning the idea, instead clarifying that VAT applies only if food is deliberately kept hot for the customer or heated to order.
What is different about cool-down rotisserie chicken (CDRC)
As with many liability arguments on VAT, the devil is in the detail, the treatment of hot takeaway food has been the basis of much debate over the years between taxpayers and HMRC, with most people believing that after the government action in the 2012 Budget to close off loopholes, the debate was effectively over. Unfortunately for Morrisons, His Majesty’s Customs & Excise don’t appear to have had that memo.
In 2021, HMRC issued VAT assessments for £17,034,932 to Morrisons relating to their take-away “cool-down rotisserie chicken” (CDRC), which after roasting, was put onto unheated shelves for customers take home to eat or refrigerate. Not unsurprisingly, Morrisons strongly disagreed with HMRC’s interpretation of the 2012 legislation and off to the FTT the case went.
Hot food arguments at the FTT
The tax tribunal had a number of questions to consider, the crucial one being, is CDRC “hot food” within VATA 94 Sch 8 Group 1 Note 3B? For an item to be considered hot food and liable to 20% VAT, it must be hot (above room temperature) when supplied to the customer and meet a number of conditions, as set out in Note 3B. It was agreed that the CDRCs were not heated to order or kept warm on a heated shelf, so the FTT had to consider any other factors, such as the packaging the CDRC were sold in.
The bag carried an instruction that the product needed to be eaten within two hours or refrigerated. Morrisons also produced research that demonstrated the virtually all CDRC sales were as part of a larger shop, which strongly implied that CDRC’s were not bought to be eaten hot. The FTT concluded that there was no implied bargain between Morrisons and the customer that the food was heated to enable it to be eaten hot. So, One-nil to Morrisons, but the game was not yet over!
Hot shelf arguments
Note 3B to VATA 94, considers whether the food was kept hot until sold. The CDRCs were found not to have been stored in an environment that provided or applied heat, but crucially, the inside of the paper bag the CDRC’s were sold in, was found to have some heat retaining properties. So, arguably a score-draw on this point!
Next the FTT had to consider whether or not the packaging provided retained significant heat. This gave the FTT pause for thought, as when considering this it was found that pretty much all packaging had some level of heat retention properties, which implied that all food above ambient temperatures supplied in a bag would be standard rated, including the CDRCs. So, another point to Morrisons.
The next argument to consider was the sales description of the CDRCs at the point-of-sale. The FTT found that the chickens were described as “oven fresh” and “roasted in store”, which was found not to meet the Act’s requirement for the food to be advertised as hot. Any mention of the food being hot was restricted to warning labels, with the CDRCs being kept separate to the hot food counters. So, yet another point to Morrisons, but HMRC had one final killer argument.
The clincher!
HMRC’s final argument, which proved to be the clincher, concerned the bags Morrisons used for their CDRC, take-away chicken, and crucially, did these bags differ significantly from normal food packaging. The FTT found that the bags were specifically designed to prevent leakage occurring, which meant that they were much thicker than normal bags and effectively added a greater level of heat insulation than an ordinary paper bag.
The fact that Morrisons were found to have failed to disclose information on the heat/fluid retention features of its packaging, was the decisive point on the FTT ruling in favour of HMRC. However, it seems almost certain that Morrisons will appeal this decision, as they lost the case seemingly based mainly on the thickness of a paper bag!
Accountant’s view
This was a complex case, but the FTT’s comments regarding Note 3B(d) however, are very interesting however, as they raise the question of whether any food specifically marketed to remain within the 2012 zero rating rules, such as pasties, which only happen to be hot as they are freshly baked and have yet to cool, would actually become liable to 20% VAT, just by putting them into a bag. At appeal, the supermarket is almost certain to raise this argument with regard to CDRC.
Morrisons are also likely to point out that Greggs were victorious in 2012, despite openly admitting that most of their pasties, sausage rolls et al were actually sold within a few minutes of leaving the oven and were therefore still hot when they were eaten.
Personally, I believe that Morrisons have a very good chance of reversing the FTT decision on appeal, as this decision appears to ignore the critical argument in 2012, that the hot meat product was not sold as ‘hot takeaway food’ and was not deliberately kept hot for the customer.
Morrisons are well-known for their high levels of customer care and it therefore seems iniquitous, that they have been landed with a multi-million-pound VAT bill, simply because they provided slightly thicker packaging to prevent leakage in the boots of their customers’ cars.
