United Kingdom VAT & Duties Tribunals Decisions

You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> Domino's Pizza Group Ltd v Customs and Excise [2004] UKVAT V18866 (08 December 2004)
URL: http://www.bailii.org/uk/cases/UKVAT/2004/V18866.html
Cite as: [2004] UKVAT V18866

[New search] [Printable RTF version] [Help]

Domino's Pizza Group Ltd v Customs and Excise [2004] UKVAT V18866 (08 December 2004)

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 LIMITED Appellant

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

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

DECISION

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.

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."

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.

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.

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

"HeatWave^TMis 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.

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.

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.

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.

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)

The Court of Appeal's decision was:

"We were referred to a number of authorities on the different wordings as to the meaning of 'purpose'. For my part, I find none of those authorities of any assistance. What has to be determined is what is intended by the words used in note (3); and the question which has to be asked is: Were these pies, or any of them, heated for the purpose of enabling them to be consumed hot?

The evidence was that it was not part of the purpose of the taxpayers to enable the pies to be consumed hot, but it is said that they must have had, unconsciously or consciously, a direct or indirect purpose that, to some extent at any rate, the heat was applied for that purpose.

For my part, I am unable to accept that that is the position. These pies were pies which were not capable of being sold at all until they had received their second baking. Having received their second baking, they would then be sold and no doubt, during the course of the lunch-hour, some people would buy them for their own purpose, namely, consumption hot. But I am unable to accept that, because that was the position, it must be regarded as the taxpayers' purpose to enable the pies so to be consumed.

What is in effect being advanced is that the provisions of note (3) should have read into them additional words. Instead of reading 'has been heated for the purpose of enabling it to be consumed at a temperature above the ambient air temperature', there should be added these words also—

'or which, to the knowledge of the supplier, would or might be consumed at a temperature above the ambient air temperature'.

I can see no warrant for reading into a taxing statute words that are not there. It is a first principle of revenue law that the subject shall only be taxed by clear words, and it is impermissible to look at the substance or to imply or read in anything. The words used cannot be made to cover supplies in this case, in my view, save by implication or reading in." (p.360j to 361d)

The following guidance to Tribunals in future cases was given:

"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. It might well be that the facts were such that a tribunal in one case might come to the conclusion that the asserted purpose could not be accepted—as, for example, while stoutly asserting that it was no part of their purpose in heating the pies to enable them to be consumed hot, evidence was given that there were extensive heating cabinets in the shop which kept the pies hot. Given such facts, I can well see that a tribunal might conclude that the assertion that it was no part of the sellers' purpose to enable them, or some of them, to be consumed hot was unacceptable. But that goes simply to the weight of the evidence and to nothing else." (p.361f)

Where there is more than one purpose "the tribunal has to decide which of those two purposes was the dominant one, if, indeed, there was a dominant purpose." Malik v Customs and Excise Commissioners [1988] STC 537 per Keene J at p.542h. We agree with Mr Thomas that the other cases are examples of the application of the test explained in Pimblett to different facts. But they fit into a pattern that the taxpayer can show that he did not have the purpose of enabling the food to be consumed hot where it was incidental that the food was still hot at the time of sale. These include Cornish pasties baked throughout the day and not kept hot after cooking (Lutron v Customs and Excise Commissioners (1989) VAT Decision 3,686); pies kept hot for half an hour after baking because they went soggy if put straight onto a cold surface, and then allowed to cool, also being sold cold on the following day (Greenhalgh's Craft Bakery v Customs and Excise Commissioners (1992) VAT Decision 10,955); bagels toasted and sold on a paper plate put into an ordinary paper bag (The Great American Bagel Factory Limited v Customs and Excise Commissioners (2000) VAT Decision 17,018); toasted sandwiches sold in ordinary bags (Tuscan Foods Limited v Customs and Excise Commissioners (2004) VAT Decision 18,716). But the taxpayer could not show that he did not have this purpose when meals were kept hot in order to be supplied hot (Malik and Bridgwater (1993) VAT Decision 10,491), or because savoury croissants were inedible when allowed to cool (Pret a Manger (Europe) Limited v Customs and Excise Commissioners (1999) VAT Decision 16,246). In two cases the Tribunal accepted that keeping chicken hot because of health and safety requirements was not for the purpose of enabling it to be consumed hot (The Lewis's Group Limited v Customs and Excise Commissioners (1990) VAT Decision 4,931; N M Holmes T/A The Chicken Shop v Customs and Excise Commissioners (1999) VAT Decision 16,264).

Accordingly we apply a wholly subjective test but we are not bound by the asserted purpose, which should be tested by the facts. We regard it as significant that although the statutory purpose is the purpose of heating the food, many of the facts on which the Court of Appeal relied related to what happened after the food had been heated. Indeed we are encouraged by the example in the last paragraph quoted to test the evidence of purpose by considering evidence of heating cabinets to keep the product hot after heating. The same point was made by Keene J in Malik at p.542f: "Keeping it hot may not have amounted to 'heating' as such, but it was none the less relevant to her purpose when heating the food in the first place." We consider that the important facts are that the operation of the Appellant's stores is based on being able to deliver products within 30 minutes of ordering, of which perhaps one minute is required for making-up the pizza, six to seven minutes to cook it, less than a minute to put it in the box and cut it, and eight minutes to deliver it, which allows some 13 additional minutes for busy times. Immediately after cooking to order, it is placed on a hot-rack in a box designed to allow steam to escape. It is then available for collection or delivery. If it is delivered it is then placed in a quilted bag containing a heated disk. The advertising emphasises delivery while hot.

The question for us is whether each of the products "has been heated for the purposes of enabling it to be consumed" hot. The purposes must enable them to be consumed hot; the question is not whether the Appellant cares, or even knows, whether they are in fact consumed hot. The purpose to be considered is the purpose of heating the products. Essentially the difference between the parties is that Mr Conlon concentrates on the heating, while Mr Thomas includes what happens after heating. If one stops at the point that the products are taken out of the oven and asks this question one can say that if they had not been heated there would be no edible product, just in the same way that bread must be baked in order to be bread. Mr Hemsley concentrates on this time by saying that his purpose is to make a freshly-baked product. If, on the other hand one looks at the whole process it is clear that as soon as the heating has finished the products will be kept hot. Considerable steps are taken to keep the products as close as possible to their condition when they are taken out of the oven by putting each of them into an individual special box which is placed on a heat rack. If the product is to be delivered to the customer, it is then put into a quilted bag containing a heated element, the importance of which is emphasised in the advertising material: "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 Appellant clearly wants to keep the products hot and the purpose must be so as to enable them to be consumed hot because they are much better to eat when they are hot.

The question is therefore when considering the purpose of heating one can take into account that it is also the Appellant's purpose to keep them hot after heating. Is this part of the purpose of heating them, or the effect of heating them, rather than a purpose, just as it is an effect that freshly-baked bread can be consumed hot, or that the pies in Pimblett can be consumed while hot, without this being the purpose of heating them? The reason why in those cases it is an effect and not a purpose is that the supplier of bread or the Pimblett company can say that it is indifferent to whether or not it has enabled them to be consumed hot. Indeed with bread it is much more normal to eat it cold. Here, the Appellant cannot say that it is indifferent to whether it has enabled the products to be consumed hot. Everything the Appellant has done after heating has finished is a deliberate act to keep the products hot so that they can be consumed hot. As the advertising states "There's no point in going to all this effort if the pizza is delivered cold" (and the same could be said when it is collected by the customer). Accordingly, in the context of the heating of these products the purpose must be not only so as to create an edible product, but also so as to enable them to be consumed hot.

For this reason we do not accept that the whole purpose is what Mr Hemsley's states it is. This is not to ignore Mr Hemsley's stated purpose, or to say that we do not believe his evidence. We have already said that we accepted his evidence but we consider that in articulating his purpose, which is something in his mind, he has taken too narrow a view, one that stops when the product comes out of the oven. It is true that that is what the statute appears to say but we do not consider in the light of Pimblett and Malik that this is the correct approach. If one stops at the time of heating, it could be said of all cooked products that are not edible unless cooked, that the purpose of cooking them was to create an edible product. What happens immediately after heating is important to finding the purpose of heating. Pimblett could not have been decided the way it was without taking account of what happened after the pies were cooked. The cases where food was kept hot in compliance with food safety requirements do not fit naturally into this approach since it would seem that these are regulations needing to be complied with if one has the purpose of enabling the food to be consumed hot. In this case we do not consider that compliance with such requirements was an important purpose, particularly as they do not cover the temperature at which food is delivered and the two-hour defence would always be available to the Appellants.

If there are two purposes, one to create a freshly-baked product, and the other to enable it to be consumed hot, is the latter the dominant purpose? We consider that it is because creating a freshly-baked product is part of the larger purpose of enabling it to be consumed hot. It is not a question of purposes pointing in different directions, as for example in carrying out a commercial transaction and avoiding tax, where one may need to weigh up the purpose of each aspect.

Accordingly we dismiss the appeal.

Mr Thomas asked for costs limited to the costs relating to the second contention relating to the time of supply that Mr Conlon abandoned, which Mr Conlon did not resist. Accordingly we award costs to the Commissioners limited to this aspect to be assessed in default of agreement by a Taxing Master of the Supreme Court or a district judge of the High Court of Justice in England and Wales by way of detailed assessment.

JOHN F. AVERY JONES

CHAIRMAN

RELEASE DATE: 8 December 2004

LON/02/139 and 310