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Ainsleys of Leeds Ltd v Revenue & Customs [2006] UKVAT V19694 (09 August 2006)

19694

VALUE ADDED TAX — zero-rating — sale from hotbeds of baked savoury product (ciabatta melts) – VATA 1994 Schedule 8 Group 1 Note 3(b)(i) — appeal allowed

MANCHESTER TRIBUNAL CENTRE

AINSLEYS OF LEEDS LIMITED Appellant

- and -

THE COMMISSIONERS FOR

HER MAJESTY'S REVENUE AND CUSTOMS Respondents

Tribunal: Elsie Gilliland (Chairman)

Gilian Pratt

Sitting in public in Manchester on 7 and 8 June 2006

Andrew Young, counsel, for the Appellant

Lisa Linklater, counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents

DECISION

The appeal before the tribunal is that of Ainsleys of Leeds Ltd. (the Appellant) against a decision of Customs on liability set out in a letter from them dated 27 June 2005. Customs refused to allow a claim by the Appellant under s.80 of the Value Added Tax Act 1994 (the Act) for a refund of overpaid VAT. The Appellant is an established family bakers dating from 1938 with a factory in Leeds and retailing in North and West Yorkshire in some 30 outlets. It produces mainly breads cakes and savouries and sells these with also crisps and minerals as a take-away business. Overall the sales are zero-rated and the Appellant is a repayment trader. Only some 5 of its outlets have eating-in facilities and it is the take-away business which is central to the appeal.

The background of the matter is that the Appellant in a letter of 12 October 2004 claimed in a voluntary disclosure that output tax had been wrongly accounted for on a bakery product known as ciabatta melts in the VAT quarters 09/01 to 08/04 whereas these items should have been treated as zero-rated. Accordingly the Appellant claimed that there had been an over-declaration of output tax in the sum of £171858.39 (with interest), which should be repaid.

1n rejecting the claim Customs went further in stating that output tax was due on certain other products namely sausage rolls and pasties which the Appellant had been treating as zero-rated and of which items the sausage rolls had been used by the Appellant as the comparison by which the ciabatta melts should be zero-rated.

The appeal before us relates to both these issues but in addition the question of the jurisdiction of the tribunal has been raised. There is no dispute that the matter arising from the voluntary disclosure as to whether the ciabatta melts should be treated as zero-rated instead of standard-rated is within the competence of the tribunal to determine under s. 83 of the Act. However Counsel expressed some doubt as to the jurisdiction of the tribunal to determine the issue as to whether the sausage rolls and pasties should be standard-rated instead of zero-rated since Customs had not issued an assessment. Both counsel supported a request that the tribunal should establish the facts with regard to these other items and based on those findings the parties would review their subsequent positions. This is the procedure that the tribunal proposes to adopt.

The legislation relevant to the supplies in the case before us is in Schedule 8 of the Act (s.30(2)) more specifically in Note (3) to Group I of the Schedule. The Schedule specifies zero-rated supplies and under the heading Group 1 - Food describes these as:

"The supply of anything comprised in the general items set out below ..."

Under the heading of General items Item No. 1 refers to:

"Food of a kind used for human consumption"

However specifically excluded from zero-rating is "a supply in the course of catering" which is further refined in Note 3 as follows:

"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."

It is accepted that all the products the subject of the appeal fall within the definition of Item 1. The appeal is not directed to Note 3(a) that is on-the-premises consumption. No issue on Note 3(b)(ii) is being taken. Neither party took any point on the use of the plural, i.e. "purposes" in Note (3)(b)(i) above and both accepted that the reference can only meaningfully refer to one purpose. The parties are however in dispute as to what is the purpose for which the products are heated (Note 3(b)(i) ) and this is central to the question of whether the supplies should be standard -rated or zero-rated.

In his witness statement confirmed in examination-in-chief Roy James Kelly stated that he had been managing director of the Appellant since 2001. This was not correct. Whilst he had joined the Appellant in 2001, he had not become Managing Director until 2004. This and some other lapses in accuracy led Counsel for Customs to question the credibility of the evidence of that witness in that, for instance, had the correction not been made the tribunal could have been led to believe that Mr Kelly was active during the whole of the period of the claim. Clearly when the ciabatta melts had been introduced a decision had been made by the Appellant that the product should be treated as standard-rated. However there has been no suggestion that the actual process of production delivery and sale has changed and we are satisfied that there was no variation in any of these matters during the period in the appeal before us. It is evident that the witness was well aware of the reasoning in previous relevant judgments and decisions and no doubt had this in mind when responding orally at the hearing but we do not find his evidence tainted.

On the production process we had the evidence of Mr Kelly going through the material including photographs attached to his witness statement in the Appellant's bundle before us and the flow-chart from raw ingredients to sale incorporated by Joan Mitchinson, the witness for Customs, in her witness statement which chart she told us (subject to some minor alteration) she had copied from an illustration supplied by Mr Kelly on her visit to the Head office. The original was not produced to us.

So far as the preparation and sale of food to the public are concerned there are Food Hygiene Regulations and Health and Safety issues and we have been referred to these also during the course of the hearing and various copies are in the bundles of documents before us Examples of shop temperature check sheets were produced for several weeks in early 2006.

The Appellant's preparation of its products for sale is carried out at its sole factory premises. It has three kinds of retail outlet; those with no "bake-off" facilities (the shops at Shadwell, Morley and the site called the caravan); those with baking ovens and in addition "hot-beds" which are of particular relevance in examining the products of the appeal; and the caravan outlet. The witness for Customs had visited Shadwell, the caravan, and in central Leeds, the Kirkgate branch, as well as attending at the Appellant's Head office. Ms Mitchinson was at pains to point out that she was not involved in any decision-making process but had been sent merely to check out the facts and report back before the matter went to the tribunal. Her attendance at the venues on 16 March 2006 was subsequent to the decision of 27 June 2005. There had been visits by other officers but there were no witness statements in respect of these before us.

It is apparent from the evidence and an inspection of the items brought to the tribunal that the ciabatta melts are in some ways different from the other savoury products namely the sausage rolls and pasties. We shall consider below how material these differences may be. The ciabatta melts are prepared at the factory. The rolls are cut in half spread with margarine and then with raw tomato paste and sprinkled with cheese. Ingredients such as pepperoni and ham are added. The items which are the subject of the appeal are then blast frozen and stored frozen raw until delivered to the shops in the freezer area of the delivery vans. They are put at once into the freezer of the shop and removed in batches as required to be baked in the shop oven to a core temperature of about 85 degrees C. (In the 7 outlets where there is no freezer they are put in the fridge). They are then transferred to hot-beds where they are kept at a temperature of 63 degrees C or above. This is thus above ambient temperature. The Appellant has referred to this as a "controlled cooling" process. The hot-bed itself is a hot-plate glassed in at the top and the sides and on the customer side but open on the shop assistant's side. It is distinct from an enclosed heated cabinet. The ciabatta melts are a bread rather than a pastry product with a topping not a filling. The reason for the layer of margarine is so that the paste will not soak into the bread. Mr Kelly was adamant and we accept his evidence on this that uncooked tomato paste is unfit for human consumption because of pathogens and therefore the melts have to be cooked to a core temperature of above 83 degrees C. He referred also to the risk of contamination from yeast spores during the production this being another reason for the baking at high temperature. It is clear that throughout the entire process temperature control is of paramount importance and that a regular check of the storage and holding facilities and the probing of the products at various stages is necessary to ensure that the temperature is correct at each stage and avoid the risk of pathogens.

The point made by Mr Kelly relevant to the operation of Note 3(b)(i) was that the Appellant's intention in using the hotbeds was to provide a quality baked product of optimum freshness and in addition the aroma of a fresh bake in the shop would be appealing to customers. So far as the ciabatta melts are concerned these are treated in the same way as all savouries that is if placed on hot beds they are destroyed within two hours if not sold, but if not placed on hot beds they can be kept until close of business. Mr Kelly acknowledged however that few melts were sold cold. The evidence was that most ciabatta melts were sold in the first hour and the remaining 5%-10% within 2 hours. At the few shops where there are no baking facilities the products are factory-baked reheated at the shop and placed in closed cabinets rather than hotbeds. VAT is accounted for at standard rate. At the four shops without hot counters the products are displayed at ambient temperature and cool naturally. The caravan has two warm cabinets.

In its notice of appeal dated 8 July 2005 the grounds of appeal given by the Appellant were:

"The ruling is wrong in law, conflicting with legal precedent in respect of these supplies".

There is a decision of the Court of Appeal namely that in John Pimblett & Sons Ltd. v Commissioners of Customs and Excise [1988] STC 358. The products the subject of that appeal were filled pies baked at the shop premises and left to cool. They remained "pleasantly warm" for about an hour. Parker L J considering the role of a tribunal in relation to the operation of Rule 3(b) stated:

"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, whilst 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 seller's purpose to enable them. or some of them. to be consumed hot was unacceptable. But that goes simply to the weight of evidence and to nothing else".

In Pimblett the Court was not willing to read into the statutory provision the additional words:

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

Counsel for Customs submitted that the extent of the requisite purpose formed no part of the ratio of Court of Appeal and that case law 20 years old might not properly relate to modern conditions. This we do not accept. We are bound by this precedent which in any event deals with the specific provision before us albeit an earlier version and sets out tests which we can apply. It is our view that Lord Justice Parker accepted by implication that what was being looked at was the "dominant purpose" of the seller regardless of any results inevitably flowing from that. It is a distinguishing feature in the instant case that the products did not cool at room temperature but were placed in a form of "heating cabinet" such as that used as an example in the passage from Pimblett referred to above. In the subsequent tribunal decision in Three Cooks Ltd (LON/13352) in 1995 the savouries the subject of the appeal were sold from hotbeds for consumption off the premises. The decision of the tribunal was in favour of the then Appellant the Chairman stating that:

"Even if we had considered (which we do not) that heating for consumption warm was in reality a purpose in this case, we would not have held that it was the dominant or even the main purpose."

It is accordingly clear from the case law that the matter is one of fact on the evidence produced to the tribunal. We may draw inferences from the facts we establish. In the instant case as in The Three Cooks the products were sold off hot beds. The evidence given before us was that they were sold off within two hours or else destroyed. Having been kept on hotbeds at a temperature not meant to fall below 63 degrees C the products would be warm when sold. Although baked and kept in hotbeds in the same way as other savouries such as the sausage rolls and pies sold by the Appellant the ciabatta melts differed in various ways from those others as we have indicated above. We do not consider that these variations resulted in the supply of a different nature of product. Obviously given the name the major feature was that there was to be melted cheese as part of the topping but on the evidence before us which was not disputed the products were not cooked off quickly and individually in the oven to be eaten hot with the cheese melting but like the other savouries they were baked in batches and although reducing in temperature were sold warm from the hot beds within a recognised time frame.

Looking again at the evidence of Mr Kelly, he was clear that the hotbeds were in use to keep the ciabatta melts in good condition and smelling good until sale. We accept that evidence. Whilst he was prepared to acknowledge that the ciabatta melts might not be tasty if eaten cold he said that the Appellant as the seller had no interest in when and how the melts would be eaten by the customer. Some might eat them when they purchased them. It seems to us that the Appellant had no control over that in any event in that the customer had to leave those premises when the purchase was completed. A special paper bag slightly stronger than that for cold food but unlined and with a caution endorsed on it "filling may be hot" was provided and a paper napkin sometimes would be available if wanted by the customer. This we view as prudent. We see no reason to disbelieve the evidence of the Appellant's witness when he said that the particular quality of that paper bag was to keep leakage in.

On the question of the purpose of the Appellant in selling the ciabatta melts from the hotbeds essentially the reason in the instant case as in a line of tribunal cases such as The Three Cooks to our mind was to sell a tasty product rather than a hot or even a warm one. The melts were in reality sold at a temperature above ambient but we are satisfied and find that this was not the purpose. Counsel for both parties made submissions on the use of the words "dominant" or "predominant" or "substantial" in relation to the purpose referred to in Note (3)(b)(i). We look again at the guidance in Pimblett where the word used was "dominant". The Appellant's intention in the case before us we find was to sell the savoury product the ciabatta melts following a baking and holding process until sale which from evidence of other cases was not dissimilar to that used for similar products. As part of that process the Appellant maintained a core temperature of 63 degrees within the Food Hygiene Regulations though as the sale or destruction of the products took place within the time limit of two hours and we accept the evidence on this strictly the same did not apply.

We allow the appeal with regard to the ciabatta melts sold from the hotbeds.

The other issue before us was in respect of the sausage rolls and pies, also supplied to the customer by the Appellant from the hot beds. These are already treated as a zero-rated item and indeed no assessment has been raised on them by Customs. We find that the production process and sale of these products from the hot beds does not materially differ from that of the ciabatta melts and does not constitute 'hot food' within Note (3)(b)(i).

The Appellant had indicated to the tribunal that if successful it would seek costs. We direct that if the same cannot be agreed between the parties either party shall have liberty to apply to the tribunal to a Chairman sitting alone on the issue of costs.

ELSIE GILLILAND

CHAIRMAN
Release Date: 9 August 2006

MAN/05/0464

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