United Kingdom VAT & Duties Tribunals Decisions

Warren (t/a W T Warren & Son) v Revenue & Customs [2006] UKVAT V19902 (22 November 2006)

19902

VAT – ZERO-RATING - sale of hot "paninis" - whether supplies in the course of catering - whether "paninis" heated for the purposes of enabling them to be consumed off the premises - no - "paninis" found to have been grilled in-shop for the purpose of completing baking process commenced elsewhere - supplies held to be zero-rated - appeal allowed

LONDON TRIBUNAL CENTRE

(1) R J WARREN T/A W T WARREN & SON

(2) W T WARREN & SON (HAYLE) LTD Appellants

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents
Tribunal: MICHAEL JOHNSON (Chairman) CHRISTOPHER PERRY

Sitting in public in Plymouth on 11 October 2006

Andrew Young, counsel instructed by Pearce Taylor Taxation, VAT Taxation Specialists for the Appellant

Anna Markham, counsel instructed by the Solicitor for H M Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2006
DECISION

Nature of the appeals

1. These consolidated appeals concern the treatment for value added tax of supplies of food products known as "paninis". The issue for decision is whether the supplies should be standard-rated or zero-rated for VAT.
2. The tribunal is concerned with group 1 of Schedule 8 of the Value Added Tax Act 1994 ("VATA") entitled "Food". Schedule 8 lists goods and services supplies of which are to be zero-rated by virtue of section 30(2) of VATA. Group 1 of Schedule 8 provides for the zero-rating of inter alia food of a kind used for human consumption, except a supply in the course of catering. Note (3) to the group 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 purpose of enabling it to be consumed at a temperature above the ambient air temperature; and

(ii) is above that temperature at the time it is provided to the customer."

3. Prior to an amendment to Note (3) which took effect from 1 January 2005, paragraph (b)(ii) of that Note read: "is at the time of supply above that temperature". Nothing turns on that amendment for the purposes of this appeal: rather, we are concerned with the scope of paragraph (b)(i) of the Note, namely the words, "has been heated for the purpose of enabling it to be consumed at a temperature above the ambient air temperature".
4. The Appellants contend that those words do not apply to the supplies of "paninis" which we are considering. The Respondents ("HMRC") contend that they do. The resolution of the issue in dispute depends upon which party is correct.

Adjournment of the hearing refused

5. We record that Anna Markham, who appeared for HMRC, applied at the outset for us to adjourn the proceedings, on the ground that the lack of liaison between the parties had meant that HMRC were not fully prepared for the hearing. We were unimpressed by this application, because it did not appear that HMRC had taken steps to contact the Appellants in good time to ensure adequate preparation. We noted that no application had been made for directions to which consent might have been given pursuant to rule 11(7) of the Value Added Tax Tribunals Rules 1986 (as amended), nor had there been any pre-trial direction made by the tribunal of its own motion with which the Appellants had failed to comply.
6. We were not inclined to accede to the application, which would have involved substantial costs thrown away. In the end Mrs Markham withdrew her application, being content for the hearing to proceed.

Background to the appeals

7. The supplies in dispute were made by the Appellants from some of their many retail outlets in the south-west of England. The Appellants are the long-established bakers trading as "Warrens". For historical reasons which were explained to us, but which are irrelevant to what we have to decide, some of the shops are operated by the First Appellant and some by the Second Appellant. The Appellants have separate VAT registrations. But so far as the public is concerned, the shops have the appearance of being a single chain.
8. A small number of the Appellants' outlets – nine of them at the date of the disputed decision appealed against – sell "paninis" over the counter. A "panin" is a particular kind of food product the characteristics of which we describe below. These products are sold hot, ie at a temperature above the ambient temperature. However the Appellants say that the "paninis" have not been heated for the purposes of enabling them to be consumed at a temperature above the ambient temperature. They have been heated, so the Appellants say, for quite different purposes.
9. We were informed that the singular of "panini" is "panin". "Panini" is really the plural. In this country, however, the plural is colloquially regarded as "paninis". For the purposes of this decision, we will treat "panin" as the singular and "paninis" as the plural.

Evidence and documents received

10. We heard oral evidence from three witnesses. Andrew Young, who appeared for the Appellants, called evidence from Mr Jason Jobling, a master baker employed by the First Appellant, and Mr Donald George Briggs, a chartered accountant employed in-house by the Appellants. Each of them also provided a witness statement. Mrs Markham called evidence from Mr Robert Clayton Boobyer, an appeals officer for HMRC. He did not provide a witness statement, but the lack of such a statement has in no way influenced our decision.
11. We were also provided with bundles of documents by each of the parties, and Mr Young handed in a skeleton argument and authorities in support of the Appellants' case.
12. During the course of the evidence, we were provided with samples of a finished "panin" and of an unfinished "panin" bread base in the state in which it leaves the baking furnace.

Facts found by the tribunal

13. "Paninis" have similarities to the familiar Cornish pasties. They are both filled bread products. The Appellants bake "panin" breads in temperature-controlled blast furnaces, and they then transport the breads in a partially finished condition to the retail shops for sale. They are transported in a frozen state – the time to defrost being some 25 minutes.
14. The "panin" breads are finished for sale by being given a final grilling at the retail shop on a special grill. The grilling takes about five minutes. Before this is done, the filling is introduced into the "panin". The object of grilling is not to heat up the filling; it is to complete the baking process of the "panin" bread. Mr Jobling described the "panin" as being seven-eighths baked when it arrived at the retail shop, and said that it needed to have the baking process completed before sale. This, he told us, was achieved by grilling it at the shop.
15. The filling is heated when the "panin" is grilled, but the Appellants are not concerned with the final temperature of the filling. Rather, they wish to present the "panin" bread itself in the right condition for sale. The various kinds of fillings are kept refrigerated ready for use. The "panin" when sold may contain a barely heated filling: so far as the Appellants are concerned, it is the temperature of the bread that is the key to readiness for sale. So far as the filling is concerned, that may end up just lukewarm – though if the "panin" contains cheese (not all do), that will melt. The prior refrigeration of the fillings prevents the fillings from being hazards to health.
16. There are two reasons why the products are transported to the retail outlets in an unfinished state and baked to completion there. The first reason is to avoid waste. Unsold completed "paninis" need to be thrown away; incomplete "paninis" can still be sold later. The second reason is that the grilling of the "paninis" produces an enticing smell which contributes to the attractive environment of the Appellants' shops and encourages trade. So the baking process is completed in the presence of the customer.
17. Some of the outlets where "paninis" are sold have cafeterias attached, and some do not. If a customer wishes to sit in the cafeteria and consume his "panin" immediately, he may do so, but he is charged a higher price for the "panin" than a customer who simply takes his purchase away with him. A typical price for a "panin" to eat in would be £3.75, and for a "panin" to take away would be £2.50.
18. A grilled "panin" can be eaten cold, but we find that a customer would be unlikely to allow his "panin" to go cold before eating it. Whilst we were told that it was not unknown for grilled "paninis" to be reheated after going cold, we are not persuaded that that would happen at all often. In our view, "paninis" are food for consumption soon after the completion of the grilling process.
19. We find that an ungrilled "panin", ie in the condition it arrives at the retail shop and after thawing out, is properly not regarded as being pleasantly edible, whether or not filled.
20. The Appellants have been selling "paninis" for about three years. The correct VAT treatment of such supplies was unclear to the Appellants. From dates in 2003, the Appellants charged VAT at the standard rate on such sales. In late 2004, the Appellants became aware of the decision of the tribunal in the case of Tuscan Food Ltd and Pure Atma Ltd v The Commissioners of Customs and Excise (2004) VAT Decision 18716 ("the Tuscan case"), decided by Mr Wallace (Chairman) and Mrs Sheila Wong Chong FRICS. That decision encouraged them to believe that the correct VAT treatment was that supplies of "paninis" should be zero-rated.
21. The Appellants hold electronic point of sale ("EPOS") records of "paninis" sold at the relevant outlets. This enabled them to present to HMRC by way of voluntary disclosure two EPOS-based claims for repayment of VAT, covering (in the case of the First Appellant) the periods 09/03 to 02/05 and (in the case of the Second Appellant) the periods 11/03 to 02/05. We understand that there are also non-EPOS records which may in due course form the subject of a separate claim. We are not concerned with that in this appeal.
22. The existing claims were considered by HMRC in tandem and a single decision letter dated 16 January 2006 was issued containing a ruling that the supplies did not qualify for zero-rating. Two appeals were served against that decision by VAT consultants Pearce Taylor Taxation on behalf of the Appellants respectively, both dated 9 February 2006. On 28 March 2006, the tribunal directed that the two appeals should be consolidated.

Submissions for HMRC

23. Mrs Markham referred us to the tribunal decision in Prêt-à-Manger (Europe) Ltd v The Commissioners for Customs and Excise (1997) VAT Decision 16246. That case concerned the sale of heated croissants. They were said to have been heated for the purposes of keeping them fresh and to prevent them from hardening, rather than for purposes of enabling them to be consumed hot. The tribunal saw this as an artificial distinction. It held that the appellant heated the croissants in order to render them attractive and palatable, so that its predominant purpose was indeed to enable them to be consumed hot.
24. Mrs Markham said that each case turns on its own facts. She said that the facts of the present case were that the "paninis" were heated for the dominant purpose of enabling them to be consumed hot; that they were supplied hot; and that the tribunal should not allow itself to be distracted by suggestions that the Appellants had any other purpose in so supplying the goods. Accordingly, she submitted, the supplies were correctly standard-rated and we should dismiss the appeal.

Submissions for the Appellants

25. Mr Young cited four authorities, as follows.
26. In John Pimblett & Sons Ltd v The Commissioners of Customs and Excise (1987) 3 BVC 161, the taxpayer company baked and sold hot pies. It was established in the Court of Appeal that the test as to the purpose of selling the pies hot was a subjective test. The seller might have sold the products in a hot state with a view to their being consumed hot, or the seller might have had some other purpose for selling them hot. The court held that it was the seller's purpose that was relevant, in respect of what is now Note (3) paragraph (b)(i) of VATA. The evidence was to the effect that the seller's purpose in selling the pies hot was to ensure that they were freshly baked. So the pies received an initial baking, followed by a second baking just before sale.
27. In the course of his judgment, Parker LJ said this, at pages 164-5:

"The evidence was that it was not part of the purpose of the taxpayer company 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 taxpayer company's purpose to enable the pies so to be consumed."

28. Gibson and Caulfield LJJ agreed.
29. In the tribunal decision Three Cooks Ltd v The Commissioners of Customs and Excise (1995) VAT Decision 13352, the tribunal decided that sausage rolls, pasties and pies baked by the appellant and sold in a hot condition for consumption off the premises were not sold for the purpose of enabling them to be consumed hot. The tribunal applied the Pimblett case. The tribunal referred to the implied acceptance by Parker LJ in that case of the test propounded by Taylor J – from whose decision the Commissioners had appealed – that one must have regard to the "dominant purpose of the seller, disregarding any inevitable results which might flow." The tribunal found that the taxpayer's purpose was to achieve optimum freshness and to produce an aroma in the shops where the products were sold. Accordingly the supplies were properly zero-rated.
30. In the tribunal decision in the Tuscan case (supra), baguette-type sandwiches were found to have been toasted before sale in such a way that whilst the outside of the bread was naturally quite warm, the middle of the filling was not warm at all (having been just above freezing temperature when put into the toaster). The evidence for the appellant was that the purpose of toasting was not to enable the sandwiches to be eaten when warm but to release the flavour of the ingredients and to make the bread crisp. The tribunal noted that the products when sold were no more than lukewarm; the evidence of the appellant's purpose was accepted, so that this tribunal also concluded that the supplies were properly zero-rated.
31. The final authority cited by Mr Young was the tribunal decision in Ainsleys of Leeds Ltd v The Commissioners for H M Revenue and Customs (2006) VAT Decision 19694. The taxpayer company sold hot, filled ciabatta rolls (so-called "ciabatta melts") at its shops. The rolls arrived at the shops in a raw, frozen state. They were removed from the freezer or refrigerator as required, baked in an oven in the shop to about 85 degrees centigrade, and then transferred to "hot beds" at a temperature of 63 degrees centigrade or above. That was described in evidence as "controlled cooling". The evidence for the appellant was that the intention in using the "hot beds" was to provide a quality baked product of optimum freshness, and in addition that the aroma of a fresh bake in the shop would be appealing to customers. The appellant had no interest in when and how the "ciabatta melts" would be eaten by customers. The tribunal accepted that evidence, observing that the appellant had no control over that matter once customers had left the shop. The tribunal concluded that the purpose of the appellant was "to sell a tasty product rather than a hot or even a warm one" (paragraph 17 of the decision). Again, therefore, the supplies were held to be properly zero-rated.
32. On the basis of the evidence in the present case, Mr Young submitted that the temperature of the products was directly related to the production process, so as to ensure that the finished items were freshly baked and of high quality, and that the purpose of the cooking was to finish the production process prior to sale. He submitted that this tribunal should follow the lead of the four authorities he had cited. We should decide that the "paninis" had not been heated for the purposes of enabling them to be consumed hot. He invited us to allow the appeal.

Decision of the tribunal with reasons

33. We accept without hesitation that we should apply the subjective test in the Pimblett case. In deciding this appeal we must look to the dominant purpose of the Appellants in selling the "paninis" hot.
34. We see no reason to question the evidence presented to us with regard to the production of the "paninis". We accept that the "panin" breads are not fully baked when they arrive at the Appellants' retail outlets. We further accept that the in-shop grilling of filled "paninis" constitutes the completion of the baking process. It was suggested at one point in the evidence that the grilling amounted to no more than heating. We reject that suggestion. We are satisfied that the "panin" bread itself would not be fully baked and so ready for consumption until completion of grilling.
35. Moreover, it seems to us that the "paninis" are not "cooked", in the sense that the bread and its filling are rendered hot for consumption. We have accepted as fact that the fillings may be scarcely warm when the grilling process ends. The idea behind the grilling is not, as we find, the cooking or heating of the product as a whole.
36. It may seem surprising that the preparation process of "paninis" is apparently not such as to render the entire product hot at the moment of sale, with both bread and filling raised to a good hot temperature for eating. But it is clear to us that that is not the Appellants' purpose. The purpose of the grilling is, as Mr Young submits, to complete the baking of the "panin". It is incidental, as it were, that when grilled the "panin" contains its filling.
37. We do not accept Mrs Markham's submission that the Appellants' dominant purpose in grilling the "paninis" was to enable them to be consumed hot. We have not found that to be even an incidental purpose, let alone the Appellants' dominant purpose. The hot state of the "paninis" following the grilling is a consequence of the grilling: it is not one of the purposes of the grilling.
38. If the test were an objective one, rather than subjective as established in the Pimblett case, we can see that it could reasonably be said that the sale of the "paninis", viewed in the round, must have been at least to some extent so as to enable the products to be consumed hot. But that argument has been rejected on previous occasions as irrelevant. An objective construction of Note (3) paragraph (b)(i) does not square with the words used.
39. Accordingly as we see it the Appellants are entitled to succeed, to the extent of their proven supplies of "paninis" for consumption off their premises. Those supplies are properly zero-rated. "Paninis" supplied for consumption on the premises where they are supplied are properly standard-rated, as Note (3) paragraph (a) provides. On the facts that we have found, it should be possible to distinguish between the two kinds of supply by reference to the prices charged to customers.
40. We give liberty to apply within 28 days of the release of this decision in case of any such difficulty in distinguishing between zero-rated and standard-rated supplies. No such potential difficulty was mentioned to us at the hearing. But we can see that a difficulty could arise if the Appellants' evidence of sales is regarded as deficient.
41. Subject to that, we allow this appeal for the reasons given. If the liberty to apply is not exercised within the time provided, this decision becomes final.

Costs

42. With regard to costs, we were impressed with the skilful preparation and presentation by Mr Young of the Appellants' case, which has proved successful. Mr Young has applied for costs. There appears to be no aspect of this appeal tending towards any costs outcome other than the award of the Appellants' costs in full against HMRC. We provisionally decide that HMRC is to pay the Appellants all their reasonable costs, to be summarily assessed by the Chairman on the standard basis in default of agreement. We however give liberty to apply within 28 days of the release of this decision should HMRC wish to argue against this provisional award of costs. If the liberty to apply is not exercised within the time provided, this award of costs becomes final.
43. If the Chairman is to be required to assess costs, paragraph 13.5 of the Practice Direction under Part 44 of the Civil Procedure Rules 1998 should be consulted. A signed statement of costs should be prepared by the Appellants following as closely as possible Form N260 therein referred to. This must be filed at the Tribunal Centre and a copy served on HMRC in good time before the date fixed for the summary assessment. At the hearing, the Appellants must be prepared to substantiate the statement, and HMRC must be prepared to refute the statement, to the extent that HMRC object to it. Costs consequences may ensue if the assessment hearing has to be adjourned by reason of the lack of readiness of either party.
MICHAEL JOHNSON CHAIRMAN
RELEASED: 22 November 2006

LON/06/0219