Is a VAT cut really on the cards?

Some relief came to the Irish catering sector on May 11 in the guise of a reduction in VAT from 13.5% to 9% for restaurant and catering services. The reduction will apply across pubs, clubs, hotels and other hospitality establishments.

The move has led to speculation about whether the same approach could or would be taken in the UK. In principle, there is nothing that could prevent the Treasury from reducing VAT on catering. However the position appears one that the government is reluctant to change.

This would naturally be disappointing for the industry, especially as several of our European neighbours have taken advantage of the chance of applying lower rates of VAT (as low as 5.5%) to certain labour-intensive services, including restaurant and catering services.

France, Belgium, Spain, the Netherlands and various other EU member states allow for a reduction in the VAT rate for these activities. Of course, the application of a reduced rate could particularly benefit the sector, which has been subjected to increasing food price rises and reduced demand as a result of the economic downturn.

However, there appears to be a reluctance by the UK government to provide a financial stimulus to this sector through a reduction in the VAT rate (and in fact, a move to quite the opposite given the recent VAT rate increase) and lobbying in this area has so far disappointingly failed to convince ministers that a reduced rate of VAT ought to apply.

Takeaway hot food update

In the anticipation of claims that could “reach into the billions” (according to the Daily Mail), HMRC has been quick to issue a Business Brief on the German cases, expressing its view that the recent ECJ judgment in the German hot food cases has no implications for UK taxpayers.

The ECJ judgment considered the concept of when the provision of goods becomes one of services. The Court suggested (in three of the four cases) that while cooking/reheating food is a service, this is not enough to make each transaction with a customer a single supply of services that would be liable to VAT at the standard rate.

Takeaway food obviously has a service component, but the key point is that the services in respect of each sale do not usually predominate, unlike in a restaurant. Put more simply, customers buy “goods” which, had they not been heated, would have been liable to the zero-rate of VAT.

The Business Brief makes the point that the form of rules that the UK was granted when it joined the EU allows the UK government discretion as to what supplies fall within those [zero-rating] provisions. The Brief adds that “since the UK has specifically legislated to exclude supplies of hot food it is clear that the intention was not to include such supplies within the zero rate.”

HMRC’s stance on this matter is neither surprising nor unexpected, given the potential amounts of revenue at stake. Taxpayers who have lodged claims will therefore need to succeed in demonstrating that the
UK VAT rules have been incorrectly implemented in the first place and that the German cases allow for a reduced rate of VAT (at the zero-rate in the UK) to apply across a wider area of catering than had been thought previously.

There is a third element to the position that is likely to be considered, namely that under the EU principle of equal treatment (“fiscal neutrality”), taxpayers are likely to argue that it is incorrect to tax what is essentially the same product, which meets the same customer need, at a different rate of VAT that is based purely on its temperature at time of supply.Therefore, there should be no difference in tax treatment between a cold takeaway sandwich and a toasted takeaway sandwich.

With the complexity of the issues at stake, it is likely that the litigation in this area will take a number of years to work themselves through the UK courts given not just their complexity but the amounts at stake.

Taxpayers who have not filed claims should consider their position in this respect, as they may be eligible for substantial reclaims, and would be advised to consider filing claims so as to not be limited by the UK’s four-year statute of limitations.

Michael Camburn is indirect tax partner with KPMG