United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2004] UKVAT V18716

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Tuscan Food Ltd & Anor v Customs and Excise [2004] UK V18716 (29 July 2004)

18716

ZERO-RATING – Food – "Hot food" for consumption off premises – Quiznos Subs – Filled and toasted baguette type sandwiches – Whether heated for purpose of enabling them to be consumed warm – VATA 1994, Sch 8, Group 1, Note (3) – Pimblett [1988] STC 358 applied – Appeal allowed

LONDON TRIBUNAL CENTRE

TUSCAN FOOD LTD Appellant

and –

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

PURE ATMA LTD Appellant

and –

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: THEODORE WALLACE (Chairman)

MRS SHEILA WONG CHONG FRICS

Sitting in public in London on 29 and 30 June 2004

Alun James, counsel, instructed by Numerica, for the Appellant

George Peretz, counsel, instructed by the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2004

DECISION

These two appeals concern the VAT treatment of toasted Quiznos Sub sandwiches made to order by the Appellants and sold wrapped in greaseproof paper for consumption off the premises.

Customs have ruled that they are excepted from zero-rating being supplies of hot food within Note (3) to Group 1 of Schedule 8 to the VAT Act 1994.

The relevant provisions in Group 1 which zero-rates food are as follows –

"The supply of anything comprised in the general items set out below, except –

(a) a supply in the course of catering; …"

Note (3) provides

"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 purposes of enabling it to be consumed at a temperature above the ambient air temperature; and

(ii) is at the time of supply above that temperature."

The Appellants accepted that some parts of the sandwiches may be above the ambient air temperature at the time of supply within Note (3)(b)(ii).

The dispute turned on the application of sub-paragraph (i) as interpreted by the Court of Appeal in John Pimblett & Sons Ltd v Customs and Excise Commissioners [1988] STC 358 and in particular on the purpose of the Appellants in toasting the sandwiches.

The appeals were against assessments totalling £191,461 on Tuscan Foods Ltd ("Tuscan Food") for periods 06/01 to 09/03 and assessments totalling £35,753 on Pure Atma Ltd ("Pure Atma") for periods 11/02 to 08/03. Pure Atma is a franchisee of Tuscan Foods which itself is a franchisee, the ultimate franchisor being Quiznos' Corporation Limited, of Colorado, USA.

Mr James asked the Tribunal to give a joint decision. In their submissions neither counsel drew any distinction between the Appellants.

The evidence consisted of oral evidence by Michael Najafi, director of Tuscan Food, Jagtar Rai, director of Pure Atma, and Kevin O'Connell, of the City VAT Office.

There were agreed bundles which included coloured menus with four folds, The Quiznos' Franchise agreement, extracts from an Operations Manual with which franchisees were obliged to comply under the Franchise Agreement, publicity material, photographs and correspondence.

The Tribunal visited one of Tuscan Food's premises at The Plaza, Oxford Street on the first morning leaving at 12.45pm. Mr Najafi showed us the premises with menus exhibited and wall posters. We were taken behind the counter to where the food is stored, prepared and served. We observed sandwiches being prepared, felt the temperature both of the filling and the bread before it was wrapped and tasted a number of sandwiches. Both counsel were present and asked questions and pointed various things out.

We find the following basic facts. For the most part we use the present tense, since most of the evidence was as to the present, the method of operating being unchanged.

The menus which are broadly the same show a picture of a sandwich in the form of a section of baguette sliced in two with substantial fillings including tomato, lettuce, cheese and meat; the filling is roughly as thick as the bread. Under the picture is a trademark "Q" with "Quiznos Sub" underneath and below that "MMMM … TOASTY".

In the first section inside the menu is this text:

"All Quiznos Sub sandwiches are freshly made to order on white or brown baguette-style bread. They are then toasted to create a real taste sensation and unless otherwise stated all subs are filled with fresh lettuce, tomato, red onion and Italian seasonings. Please let us know if you have any special requirements as we can leave out or add in any ingredients of your choice."

There are pictures of three best sellers. These, with the description on the menu, are:

"Mesquite Chicken & Bacon Mesquite chicken strips,

bacon, cheddar cheese, Ranch dressing and salad.

Turkey Ranch & Swiss Turkey, Swiss cheese, Ranch dressing and salad.

Classic Italian Salami, pepperoni, capicola, honey-cured ham, mozzarella cheese, black olives, Italian dressing and salad."

We sampled the Mesquite Chicken and Bacon and also the following:

"Tuna Tuna salad, Swiss cheese, Italian dressing and salad.

The Traditional Roast beef, turkey, honey-cured ham, cheddar cheese, black olives, Ranch dressing and salad.

Turkey and Guacamole Turkey, guacamole, low-fat Italian

dressing and salad.

Hot Beefeater Roast beef, mushrooms, sautéed peppers & white onions

with mozzarella cheese (does not contain lettuce, tomato and red onion."

Against "Salad" on each menu entry is an asterisk indicating "All sandwiches contain red onions, lettuce and tomatoes." All are priced at £2.99 for a small size, £4.99 for regular and £6.99 for large, except Tuna which is £2.59, £4.59 and £6.59 and Hot Beefeater which is £2.89, £4.89 and £6.89.

The menu includes another eleven Sub sandwiches which we do not consider it necessary to itemise. The menu also shows salads, soups, drinks and desserts, party trays and box lunches none of which are covered by the appeals.

The Plaza shop contains three tables for customers with nine chairs in Tuscan Food's premises. Their shop is within an area of the shopping centre which is dedicated to food outlets and contains an eating area common to all shops with substantially more seating and washing and toilet facilities. There was no suggestion that this common area is part of the premises on which the food was supplied. The shop itself is around 1100 square feet including the preparation area.

The Plaza is popular with office-workers at lunch as well as shoppers and tourists. Many, although not all, office and shop workers take their food back to their workplaces. Shoppers and tourists tend to eat nearby.

Tuscan Food has premises at Wimbledon and Brighton which are also sited in shopping centres both with common eating areas. The Wimbledon shop has no seating of its own, but that at Brighton has more seating than The Plaza. The Wimbledon and Brighton shops attract more families at weekends. Brighton customers often eat on the beach which is 5 minutes away. The opening hours in the Shopping Centres are dictated by the leases, The Plaza being open from 10.00am to 6.00pm on normal days.

Tuscan Food's Marble Arch shop is a stand-alone store with seating for 25 people and remains open until 9.00pm in the summer.

Sales to customers of Tuscan Food who ask for their food on a tray are standard-rated. Wrapped sandwiches are treated by them as zero-rated. In fact some customers buying sandwiches on a tray take them to the common area, particularly at Wimbledon.

Pure Atma has three stores, two of them in shopping centres in country areas with no offices nearby, the other in Wood Green. Pure Atma offers a faxed order service under which customers can collect orders or Pure Atma will deliver, both collection and delivery being within a 20 minute time slot. If a pick-up is ordered it is ready at the start of the time slot. There is no delivery charge. At present there are 5 to 6 deliveries per week with a minimum order of £10; some orders are £40 to £50.

At present Tuscan Food makes few deliveries, that type of business not having evolved yet. Initially a large order was received in Brighton 10 minutes drive away and was followed by a repeat.

The wrapped sandwiches for delivery are put in bags with no form of heat insulation; napkins are provided. Napkins and where necessary bags are given to takeaway customers.

We now turn to the preparation.

The bread is purchased already cooked and is kept frozen. Each day frozen loaves are taken out and placed in a bin ready to use. The meat, chicken, salami are all pre-cooked and stored at 1º-4ºC so as to comply with Food Safety regulations. The other ingredients are stored at a similar temperature.

The method of production is laid down in the Operations Manual produced by the franchisor in order to standardise the products sold under the Quiznos brand. The procedure which involves three staff the "Baser", the "Finisher" and the "Wrapper" is laid down in Chapter 5 of the manual.

The Baser cuts the loaf diagonally across to give small (4½"), regular (8") or large (12") sizes as ordered by the customer and then cuts the section down the centre leaving the far edge uncut so as to create a hinge when the cut bread is opened. The Baser then applies dressing to the two open sides and adds tomatoes and onions.

The Finisher then adds meat and cheese weighing the portion on scales and sprinkling on seasoning. For some sandwiches the meat is dipped into a sauce such as mesquite or teriyaki which is maintained at a temperature above 63ºC to comply with Food Safety legislation. Apart from the sauces and the bread, all other ingredients have to be kept at 1º-4ºC before toasting to comply with the regulations. The regulations do not cover the temperature at the time of sale.

The Finisher then places the open sandwiches on with fillings onto a rack which is in turn placed onto a conveyor belt to carry it through the toaster or oven which has heated elements at the top and the bottom and is of course open at the ends, being in effect a tunnel. Although not an oven in the normal sense, the Manual produced in USA describes it as such.

The oven has a variable speed control giving a range of times for the sandwich to pass through of 60 seconds down to 40 seconds. The time setting is faster with new elements and slower when the belt is fully loaded at peak periods.

The toasting releases the flavour in the meat and melts the cheese but leaves the tomato under the meat cold. The outside of the bread is browned becoming crisp, in particular the tips of the ends.

We felt the sandwiches immediately after coming out of the toaster. Although the outside of the bread was naturally quite warm, the middle of the filling was cool to touch and was not warm at all. The filling is of course only just above freezing temperature when passed into the oven.

The Wrapper then adds shredded lettuce and, where appropriate, tuna or guacamole, which is a form of avocado dip. All of those are 4ºC or colder when added to the sandwich.

The Wrapper places the sandwich on greaseproof paper with the Quizno logo including "MMMM … TOASTY!" wrapping both the sides and the ends. The wrapped sandwich is supplied to the customer with two paper napkins and a thin paper bag.

Paragraph 2.9 of the Manual states that the average time standard for the Baser, Finisher and Wrapper positions is 20 seconds each with 59 seconds in the oven giving no more than 1 minute 59 seconds in total.

If the customer is eating the sandwich in the premises, it is served on a small plastic tray-cum-plate. If not all of a sandwich served on a tray is eaten, the uneaten part will be wrapped for the customer on request.

The whole process is carried out in front of the customer and, since the appeals were lodged, the ovens have been replaced by a new model with glass sides so that the customer can see the sandwich being toasted.

Photographs of publicity material at one of Pure Atma's premises were produced in evidence. One poster showed an uncut unsliced baguette on a board with a reddish background and the word "Toasty" above in stylised swirly letters as if formed from the flame of a candle.

Another framed notice in capital letters was headed "FRESH" in large print in green, then stating some of the ingredients and "NO PROCESSED JUNK! IT'S ALL MADE FRESH RIGHT HERE." Then appeared "TOASTY" in red in large print, "Think popping a sub in an oven is just some cheesy marketing gimmick? Think Again!" in smaller capitals in black, "Oven toasting makes up the flavour in everything!" in red capitals, "Wine – cured salami, turkey and capicola ham scream" in black and still in capitals but in red "Eat Me", then "When you heat 'em! Savoury sauces melting cheese" in black. Below this in larger red capitals appeared "FRESH WARM BREAD" then in small black capitals "With Crisp Toasty edges … hey, if it doesn't come from Quiznos it's gonna leave you cold!"

Another picture showed speech bubbles including one with, "It's the combination of FRESH ingredients and OVEN TOASTING that makes for a prime sub."

A photograph of a sign outside the premises said "Introduce your taste buds to toasty" with a picture of a filled classic Italian sandwich.

Another sign read "Oven Toasted Tastes Better". All of the above publicity is standard for Quiznos and was provided to Pure Atma by Tuscan Food.

Mr Najafi produced the results of temperature tests carried out by him on five varieties of sandwich at the Brighton store. He took the temperature in the shop and then took readings inserting the thermometer into the top of the bread crown and onto both the top and the bottom of the meat 20-25 seconds after the sandwich came out of the oven and then again after five and ten minutes. He opened the sandwiches to carry out the tests whereas a customer would naturally bite the sandwich without opening it. Hot Beefeater, when the meat was dipped in hot sauce before toasting was 40ºC-43ºC when it came out of the oven but before wrapping; after 10 minutes when wrapped the meat was still 37-38ºC and the bread was still 27ºC compared with an ambient temperature on that day of 23ºC. Mesquite chicken and bacon was 32ºC-34ºC after 10 minutes with the bread 27ºC compared with the ambient temperature of 23ºC; this again was dipped into a hot sauce before toasting. With Traditional after 10 minutes the meat which was not dipped was 3ºC over the ambient temperature and the bread had fallen to the ambient temperature.

Turkey and Guacamole sandwich and Tuna sandwich were much cooler, cold tuna and cold guacamole having been added immediately before wrapping. Although the bread was 6ºC above the ambient temperature and the turkey was 2ºC above when they came out of the oven and before wrapping, by the time five minutes had elapsed the entire wrapped sandwich was at or below the ambient temperature. With the Tuna sandwich, the meat was below ambient temperature on all readings with the temperature rising to 22ºC to 23ºC as it absorbed heat from the bread, but the bread fell below the ambient temperature before 10 minutes elapsed.

Mr Najafi gave evidence that he had previously been involved with Burgers, the standard serving temperature for which was 63ºC to 67ºC. He said that he understood that the standard serving temperature of pizza is 82ºC to 88ºC. This evidence was not challenged.

He told us that the process of toasting releases the flavour of the meat and the cheese on top it. The tomato under the meat remains cold throughout. The dressing is absorbed by the bread before toasting. We accept this.

A sandwich prepared on that day is displayed outside at The Plaza shop from opening time to show customers.

100 to 120 customers a day are served at The Plaza, 60 per cent between 11.30am and 2.30pm. Although the Appellants want to keep waiting time down, no food is prepared or toasted in advance. The Manual does not allow this.

Evidence as to purpose

We now come to the more direct evidence as to purpose. Mr Najafi said that the purpose of toasting is not to enable the sandwiches to be eaten when warm but to release the flavour of the ingredients and to make the bread crisp. He said that the quality and taste remain good for 30 to 35 minutes after toasting but after that the freshness deteriorates whether or not wrapped. He said that the cheese is cold after 15 minutes but keeps its flavour. He said that the wrapped sandwiches are suitable to take back to an office to eat or if at Brighton to eat on the beach. He agreed that shoppers and tourists are likely to eat the sandwiches soon after purchase. It is a deliberate policy to prepare the food in front of the customers to let them see it being toasted. "MMMM … Toasty" is to convey that the sandwiches are toasted and that they are delicious, "toasty" being a play on words with "tasty". "Hot" Beefeater sandwiches refers to the spice and not to the temperature; he said that there is nothing else in the menu referring to the heat of the product. The thrust of publicity is that toasting brings out the flavour.

Mr Najafi agreed with Mr Peretz that if a customer wants a warm sandwich, a sandwich straight from the toaster is convenient. He denied a suggestion that the "Toasty" publicity described at paragraph 36 above suggests smoke or steam rising saying that it is designed to convey an aroma. He agreed that the red colour hits the person looking at it. He agreed that "popping a sub in the oven" (paragraph 37) suggests warming it up; he said that the poster is directed at the idea of "waking up" the flavour with the heat.

He said that the whole concept is that customers can see the whole preparation, toasting and wrapping done freshly for them, being toasted there and then.

Mr Najafi said that an item in the Churchill Square Shopping website, Brighton, which read,

"Quiznos classic Italian warm sandwiches made in front of your eyes –

FRESH and very tasty."

was not written by the Appellant or with its consent however he accepted that Churchill's marketing manager who was responsible for the website knew the shop well.

He said that the greaseproof paper is to stop the filling coming out and the sandwich coming apart; if the purpose was to slow down cooling, heat proof wrapping would be used although at slightly more cost.

Mr Rai confirmed Mr Najafi's evidence insofar as it was within his knowledge. He gave evidence of deliveries (see paragraph 20 above).

Submissions

Mr James, for the Appellants, said that the crucial issue under Note (3)(b)(i) is the purpose for which the sandwiches are heated. He said that on the evidence the purpose is to crisp the texture of the outer surface and to impact the flavour of the filling to the bread.

He said that the temperature referred to in (i) and (ii) of Note (3)(b) must be the same temperature and is the temperature in the shop at the time and place of supply.

Mr James said that the test is "the dominant purpose of the seller," see per Parker LJ at page 361f in Pimblett [1988] STC 358. Pimblett was applied in Greenhalgh's Craft Bakery v Customs and Excise Commissioners (1993) Decision No.10955 where hot pies were sold at 63ºC but without any view as to the temperature when they were consumed. In The Lewis's Group Ltd v Customs and Excise Commissioners (1990) Decision No. 4931, the purpose was to comply with health and safety requirements although cooked chickens were kept in heated cabinets and sold in foil-lined bags. He said that there is a clear analogy between the bagels in The Great American Bagel Factory Ltd v Customs and Excise Commissioners (2000) Decision No.17018 and the sandwiches in the present appeals; here as in the Bagel case the purpose of heating is to make the bread crisp.

He said that if the sandwiches were intended to be eaten hot or warm a different process would be needed. They are never heated to the same extent as a pizza or a burger. Although some sandwiches are hotter because of the addition of hot sauce, the purpose is to impart flavour not to heat. Unlike a pizza box, the packaging is not designed for heat retention but to protect the customer from grease and to hold the sandwich together.

Mr James said that there is no control or suggestion as to the time within which the sandwiches should be eaten. They may be taken back to the office or eaten on the beach. Nothing in the Appellants' publicity suggested that they are intended to be enjoyed hot. Third party websites and publicity are not evidence of the Appellants' purpose.

Mr Peretz for Customs said that there are two limbs to the test under Note (3)(b): whether the food is warm (or above the ambient temperature) in whole or in part when supplied and whether the purpose of heating it is to enable the customer to have the choice of consuming it when all or part is warm. He said that it is irrelevant how warm it is.

He cited the Tribunal decision in Pret a Manger (Europe) Ltd v Customs and Excise Commissioners (1999) Decision No.16246 in particular the last three paragraphs.

In the present case the Appellants had said that by heating the sandwiches they become more palatable because the flavour is brought out. He submitted that fillings such as cheese and meat are more palatable when warm and that melted cheese loses its flavour when cold.

He said that the proportion of deliveries is very small. Deliveries are not the main thrust of the business. The fact that delivered sandwiches may not be warm when delivered does not affect the fact that the product is designed to be eaten when warm. On coming out of the oven the Wrapper has 20 seconds under paragraph 2.9 of the Manual to perform his task. Products are given straight to the customer. Mr Najafi had agreed that many customers eat the sandwiches soon after purchase. The seating area at the Shopping Centre is part of its attraction.

Mr Peretz relied particularly on the Quiznos publicity, citing the Toasty poster (paragraph 37) and the "Fresh" poster (paragraph 38). Anyone looking at those would assume that the sandwiches would be warm. The ovens even had glass sides to see the toasting. The word "toasty" clearly suggests warmth. He contested the submission by Mr James that nothing in the publicity suggested that they are to be eaten hot.

He said that the Manual gives a standard time of 59 seconds for toasting which is a form of heating and requires the cheese to be melted. The packaging in a wrapper is done carefully and has the effect of keeping the sandwiches warm; other material would be more expensive.

Mr Peretz said that in this case it is not possible to draw a distinction between the fact that the flavour is enhanced by heating and the heating itself. If it is more flavorous while warm and it is warmed, the purpose must be to enable it to be eaten warm.

Conclusions

Supplies in the course of catering are excepted from zero-rating of food under Group 1 of Schedule 8. Under Note (3) a supply in the course of catering includes any supply for consumption on the premises and any supply of hot food for consumption off the premises. Any supply of hot food is therefore taxable at the standard rate whether for consumption on or off the premises.

"Hot food" is given a special meaning which covers food which is anything but hot in the normal sense of the word. It is defined by reference to the ambient or surrounding air temperature; warm would be a more appropriate word. Indeed food which is only marginally above the ambient temperature would normally be regarded as cold.

Food is hot within Note (3) if any part of it is heated for the purpose of enabling that part to be eaten above the ambient temperature and it is above that temperature at the time of supply.

There are thus two elements to the test : the purpose of heating and the temperature at the time of supply. The temperature at the time of supply can only refer to the temperature at the place of supply, since otherwise the trader could not apply the test. The application of Note (3)(b)(ii) in practice is far from easy with products such as those described in paragraph 43 above which are never supplied at a temperature which exceeds the ambient temperature by very much.

The application of Note (3)(b)(i) is difficult unless the relevant temperature is also that at the time of supply. The trader does not know whether the food will be eaten outside or indoors, in a heated room or not or whether in the sun or in the shade. It would be anomalous if liability depended on proximity to an ice-rink where customers might eat the product.

Mr Najafi's temperature tests were on a similar basis to those in the Great American Bagel case at paragraph 9 and were in line with our own observations. Although the sandwiches were opened to take the temperature of the meat, this can only have had a marginal effect.

It is clear from the decision of the Court of Appeal in Pimblett that the relevant purpose for Note (3)(i) is that of the supplier as opposed to the customer. In that case a submission by Customs that the test is objective was not accepted by the Court of Appeal. Parker LJ giving the unanimous judgment of the Court endorsed the basis accepted by Taylor J, "What was the dominant purpose of the seller disregarding any inevitable results which might flow." At page 361g of Parker LJ said this,

"The Tribunal were perfectly entitled, as I see it, to look at the facts for one purpose and for one purpose only, and that is for the purpose of considering the validity of the evidence given by the taxpayers as to their purpose."