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Waterfields (Leigh) Ltd v Revenue & Customs [2008] UKVAT V20761 (06 August 2008)

20761

VALUE ADDED TAX – zero rating- sale from hot beds of savoury products (ciabatta melts) – VATA 1994 Schedule 8 Group1 Note 3 (b)(i)- appeal allowed

MANCHESTER TRIBUNAL CENTRE

WATERFIELDS (LEIGH) LIMITED Appellant

- and -

THE COMMISSIONERS FOR

HER MAJESTY'S REVENUE AND CUSTOMS Respondents

Tribunal: David S Porter

Jon Denny Member

Sitting in public in Manchester on 27 June 2008

Andrew Young, of counsel appearing for the Appellant

Richard Chapman, of counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents

DECISION

The Appellant appeals against two decisions made by the Respondents and contained in letters dated 30 October 2006 and 14 November 2007 refusing to accept the voluntary disclosure that the Appellant's Ciabatta Melts should be zero rated giving rise to repayments of £2,483.66 and £74,951 respectively. The Respondents say that the Ciabatta Melts are kept warm after baking and are therefore sold at above the ambient air temperature of the shop and should be standard rated. The two cases have been consolidated and were heard together.

Richard Chapman of counsel appeared for the Respondents and produced a bundle for the Tribunal and referred to the cases set out below. The witness statements of Heather Gibbs and Mark Crane were accepted as evidence in chief and they were not called to give evidence. Andrew Young appeared for the Appellant referred to the cases set out below and produced a skeleton argument. He also called Mr John Waterfields to give evidence.

We were referred to the following cases:

John Pimblett & Sons Ltd V Custom and Excise Commissioners [1988] STC 358

Ainsleys of Leeds Limited V19694

Coffee Republic Plc V20150

European Independent Purchasing Company

R J Warren t/a W T Warren & Son V19902

Three Cooks Limited V13352

Tuscan Food Ltd :Pure Atma Ltd V18716

The Great American Bagel Factory Ltd V17018

Stewarts Supermarkets Limited V13338

The Lewis's Group Ltd V4931

The facts

The facts in this case are in all essential particulars similar to the facts in Ainsleys of Leeds Limited V19694. Mr Watersfields, the Managing Director of the Appellant and Martin Ainsley, of Ainsleys of Leeds, are business colleagues, they are both members of the British Confectionary Network. Mr Watersfields has been round Martin Ainsley's factory to see how Ainsley's make their product. The Appellant started in business in 1926 and has 39 outlets throughout the North West of England. Mr Watersfields is a Master Baker and he won " Baker of the Year" at the 20^th Annual Baking Industry Awards in 2007. He produced various photographs showing the stages in baking the Ciabatta Melts (hereinafter referred to as the melts). Two cold half-cooked melts were also produced to the tribunal. The ciabatta dough is mixed in a large commercial mixer, the mix is slightly different from those made by Ainsleys in that the Appellants add slightly more olive oil to seal in the tomatoes paste, ham and cheese, whereas Ainsleys rely on a covering of margarine. The dough is then divided into hand - sized loaves which are partially cooked and cut in half horizontally. The fillings, consisting of tomatoes paste, ham and cheese, are added by hand and the individual melts are cellophane wrapped mechanically. They are then deep frozen in batches on plastic trays to await delivery to the shops. They are delivered to the shops in frozen chests in the delivery Vans and placed in cabinet freezers in the shops at a temperature of -18 degrees centigrade. Throughout the day, and particularly just before lunch time, a sufficient number of melts are taken out of the freezers by the staff and put in the ovens at the rear of the shop. The ovens are visible to the customers, as the Appellant is anxious to demonstrate that the food is freshly baked. The melts are baked in the ovens to a temperature of 83 degrees centigrade, which is hot enough to kill off any pathogenic bacteria that may be present as part of the manufacturing process. Intermittent baking continues throughout the day but the particular quantities are a matter for the discretion of the manager and dependent on local demand. The melts are taken out of the oven and placed in a hot tray at a constant temperature of at least 63 degrees. If the melts are not sold within 2 hours they are either thrown away or eaten by the staff. They are best eaten fresh, up to half an hour after leaving the ovens and well within the period of two hours from being baked.

Under cross-examination Mr Watersfields confirmed that the Appellant also made a "Toastie Melt". These were also made of ciabatta, which was partially cooked, but consisted of a top and a bottom. The fillings were much the same, but in some cases consisted of different meat fillings. The Toasties are cooked in a grill which closes over the product. The grill toasts the tops and the bottoms and they are sold hot. Mr Watersfields did not accept that they were the same as the melts and he considered them to be a totally different product.

The Food Safety (Temperature Control) Regulations 1995 Regulations 8 and 9 require freshly baked products to be kept at a temperature of 63 degrees centigrade or more, or cooled rapidly to 8 degrees centigrade or less. These provisions are now contained in Schedule 4, paragraph 6 and 7 of the Food Hygiene (England) Regulations 2006.

When a customer orders a product for consumption away from the outlet the food is placed in a paper bag. Mr Watersfields produced one of the paper bags to the tribunal. The bag is light weight, unlined and has on it the following:-

" Guarantee.Thank you for shopping at Watersfields. Everything we produce is made with the greatest care using the finest ingredients available.

….. Please take care, our savoury fillings may be hot"

The most recent web site states " We strongly believe that reheating a savoury product compromise the quality"

Mr Watersfields confirmed that the melts are sold as savouries. Under intense cross examination Mr Watersfields was not prepared to agree that the melts were sold hot but only that it is the Appellant's intention to a supply a quality freshly baked product in accordance with the relevant food regulations. The melts were partly cooked at the factory and delivered frozen so that they could be finished in the ovens in the outlets and sold to be eaten fresh. It must be accepted that the melts are sold above ambient room temperature as they are required to be stored in the hot tray at a temperature over 63 degrees centigrade. Mr Watersfields surprisingly stated that the melts could be eaten cold but that he had no control over the state of the melts when they were actually consumed. It is the Appellant's intention to provide a freshly baked product for consumption. He compared the production of the melts to that of bread loaves cooked on the premises which were put on the hot trays as required and sold warm. The melts were similar baked in the outlets to be of the best quality when purchased. There was no substantial challenge in cross-examination of his evidence as to the purpose of the Appellant. It was never put to him that his evidence was unrealistic, mistaken or even incorrect. Mr Chapman made it clear that he considered that the melts must be sold warm or even hot.

The Law

The legislation contained in Group 1 of Schedule 8 ,which provides that food is to be zero-rated , reads:-

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

(a) a supply in the course of catering

General items Item No

1. Food of a kind used for human consumption

Notes

3..A supply of anything in the course of catering includes –

(a) ……………..

(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 above that temperature at the time it is provided to the customer

The crucial wording is "has been heated for the purposes of enabling it to be consumed at a temperature above the ambient air temperature" which has been the subject of litigation. In John Pimblett & Sons Ltd V Custom and Excise Commissioners [1988] STC 358. The products in that case were filled pies baked on the premises and left to cool. They remained "pleasantly warm" for about an hour. Parker LJ in the court of Appeal decided that the test as to the reason for heating the products is subjective:

" The tribunal were perfectly entitled, as I see it, to look at the facts for one purpose, and 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 the 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, or some of 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 well 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 to the weight of the evidence and nothing else."

Submissions

Mr Chapman submitted that the tribunal should not be persuaded merely because the case is similar to that of Ainsleys of Leeds Limited V19694 (the Ainsley case). Each case turns on its own facts. In this case Mr Watersfields said that the melts are a freshly baked product of the highest quality. The cheese has to be melted and for food regulatory purposes are kept at a temperature of 63 degrees centigrade. If the melts are not kept warm they would deteriorate. They were not baked on demand and it was important to get the timing right if the melts were to be at their best when sold, accordingly as a result, a batch was cooked just before lunchtime. Mr Chapman submitted that the melts were the same as the Toastie Melts, which also had to be eaten hot. The question for the tribunal to consider is what the dominant purpose of the Seller was in heating the melts above the ambient air temperature? Mr Watersfields also confirmed that the ovens had been constructed so that they would be in the full view of the customers. That way the customers would be aware that the products had been freshly baked. When questioned Mr Watersfields refused to accept that the melts were sold hot and that they were better eaten hot. He insisted that they were "fresh" and "by their nature will not have gone cold". It is clear from the facts that the melts cannot be eaten cold; that they deteriorate after 1 ½ to 2 hours; that they are cooked in the shops so that they can be eaten quickly; and the presence of the ovens confirms the need for them to be hot. The dominant purpose for the melts to be cooked in the shops is so that they can be eaten hot. It is always open to an Appellant to state the reason for the products to be hot but it is for the tribunal to consider, from all the facts, what the dominant purpose is. The dominant purpose in the case was for the melts to be eaten hot. The appeal should be dismissed.

Mr Young submitted that the facts in this case are not in dispute. The facts are identical for all practical purposes to those in the Ainsley Case. In those circumstances it is important for the tribunals to be consistent in their decisions. He accepted that this tribunal is not bound by the decisions of other tribunals but it is bound by the court of appeal decision in John Pimblett & Sons Ltd V Custom and Excise Commissioners [1988] STC 358. The dispute concerns the purpose for which the melts are heated and whether they are "heated" within the wording of Note (3) while on the hot beds notwithstanding that they are in fact cooling down all the time they are on the hot beds. Mr Young referred us to the various cases which we shall deal with in our decision. He re-iterated the test accepted by Taylor J and referred to by Parker LJ in the Pimblett case

" ..what was the dominant purpose of the seller disregarding any inevitable results which might flow

He specifically referred to Three Cooks Limited V13352 . In that case the pie fillings were pre-cooked and enclosed in, pastry and sent to the retail shops where they were baked in order to cook the pastry. The baking was done in two batches; one before the shops opened, the other shortly before lunch time. In both case the pies were stacked on trays to cool. The director in that case said that they were simply aiming to sell the pies as freshly baked not as being ready for consumption. The case is very similar to the present case

On the basis of the evidence:

The temperature of the products is directly related to the production process, which is organised ,to ensure that the finished items are freshly baked and of high quality

The purpose of the hot beds is to keep savouries at optimum freshness for up to two hours. The hot beds achieve the following:

The savouries do not come in contact with cool surfaces;

The air surrounding them is sufficiently warm to avoid condensation forming in them

The different layers of pastry are prevented from collapsing onto one another which is what would happen if they cooled down quickly

It follows that the savouries have not been heated for the purpose of enabling them to be consumed at a temperature above the ambient air temperature within Note (3) (1) to Group1 of Schedule 8 of the Value Added Tax Act 1994

Further the tribunal ought properly to follow the decided case law of Pimblett, Ainsley and Three Cooks to maintain consistency and uphold legal certainty to ensure equality of treatment. The appeal should be allowed with costs.

The decision

Having considered the facts and the law we have decided that the ciabatta melts were not cooked by the Appellant for the purposes of enabling them to be consumed at a temperature above the ambient air temperature and are therefore to be zero-rated. We have been referred to large number of cases and apart from John Pimblett & Sons Ltd V Custom and Excise Commissioners [1988] STC 358 are not bound by any of them. It is clear from reading the cases that they are all fact sensitive. We need to decide whether the Appellant intended to sell the cuiabatta melts hot or whether they were hot as a consequence of the cooking process. There is no doubt that The Food Safety (Temperature Control) Regulations 1995 Regulations complicates the matter. As a matter of law, in the case of savouries, there is a regulation to either fast freeze the product to reduce the temperature to 8 degrees centigrade or less, or to keep them at a temperature of at least 63 degrees centigrade. In those circumstances no food falling within the regulations can ever be sold at the "ambient air temperature". This makes it even more important to decide what the dominant purpose of heating the products is. We are satisfied from the evidence given by Mr Watersfields that the Appellant wishes to supply the ciabatta melts as fleshly as possible. The recipe requires that the ciabata melts should be sufficiently cooked. The Appellant achieves this by part cooking them in the bakery and sending them frozen to the shops where the final cooking process takes place. Whilst we accept that the melts are sold hot we do not accept that that is because the Appellant's intention is to sell the melts hot, but because, until they are fully cooked they are not in a fit state to be eaten. A good comparison is bread. This is usually cooked in the shops and supermarkets and left to cool down. It can be bought hot but that is only because it is cooling down not because it has to be eaten hot. Similarly whilst we accept that the ciabatta melts are often eaten, if not hot, at least warm, we do not consider that this to be the Appellant's intention, but merely a by-product of the regulations requiring savouries to be kept warm. In John Pimblett & Sons Ltd V Custom and Excise Commissioner Parker LJ suggested that if there were extensive hot trays then a tribunal might come to a different decision. In 1987 Parker LJ did not have to contend with The Food Safety (Temperature Control) Regulations 1995 Regulations. He would, however, still have required the tribunal to consider the dominant purpose which in our view is to cook the ciabatta melts. Mr Watersfields was indifferent as to whether they were eaten hot or cold.

We also accept Mr Young's proposition that it would be unfortunate if we did not come to the same conclusion as the chairman, Mrs Elsie Gilliland, and the member, Gillian Pratt, in the Ainsley case. The facts of the two case are sufficiently the same as to arrive at the same conclusion and we are surprised that the Respondents felt it was necessary to have the case heard again having decided not to appeal the Ainsley case. We therefore allow the appeal and we award costs to the Appellant, such costs to be agreed by the parties within three months of the release of this decision. If they are not agreed within that time scale then the matter of costs is to be referred back to the tribunal.

CHAIRMAN
Release Date: 6 August 2008

MAN/07/1451 and MAN/08/0659