VAT and hot food: The Subway saga continues

Posted by Sheilah Mackie on
The VAT treatment of food has always been a complex and confusing area, and many Subway franchisees now feel that it is also unfairly inconsistent.

Last November Subway lost its legal challenge with HMRC over VAT on hot food. It was decided that toasted sandwiches and meatballs are heated for the purpose to enabling them to be immediately consumed at above ambient air temperature. This means that their sale is made in the course of catering and therefore is liable for VAT.

Subway unsuccessfully argued that the toasted sandwiches and meatballs are heated for another purpose, namely to comply with health regulations, and are therefore free from VAT. Subway has now confirmed that it is taking its appeal against VAT to the Court of Appeal, which will probably be heard later this year.

In the meantime the situation is very unclear. Those franchisees who have paid VAT on their hot food could, if the Subway appeal is successful, be entitled to VAT reclaims which HMRC are understood to have estimated to be up to £1 billion. Alternatively those franchisees who have not paid VAT could face crippling demands from HMRC for unpaid VAT plus penalties with no means of recovery from their customers which may force them out of business.

Typically a franchisee will be required to follow the franchised system to the letter of the operations manual, which one could anticipate in a retail food system would have set out the VAT treatment to be applied to products sold in stores (though not the price to be charged given that setting anything other than a maximum price or giving recommended prices is prohibited under competition legislation). However, franchisors rarely oblige themselves in their franchise agreements to guarantee that the system and its operation will comply with all relevant laws.

It will be interesting to see if following the appeal hearing any franchisees attempt to pursue Subway in an attempt to recoup unpaid VAT and penalties that they may be ordered to pay to HMRC. The recent decision in Yam Seng Pte Limited v. International Trade Corporation Limited and its introduction of an implied duty of good faith in franchise agreements could provide an advantage to franchisees. .

About the Authors

Sheilah gives her clients practical commercial advice on a range of issues including IP/IT, franchising, data protection and FOI.

Sheilah Mackie
Email Sheilah
023 8085 7039

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Simon is a partner in our Corporate team and advises on the taxation of UK and international clients.

Simon Court
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023 8085 7047

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