The humble pasty was brought to the forefront of the nation’s attention with the announcement of what many have termed the new ‘pasty tax’. No other proposal from the Chancellor’s budget last month gained as much attention in the press as the proposed imposition of 20% VAT on the price of all hot food.
The Government is proposing that the sale of all hot food – with the exception of freshly baked bread – that is above ‘ambient’ air temperature when provided to the customer, carries a VAT charge of 20%. It is intended that the measures will remove the disparity in VAT treatment between supermarkets, bakeries and suppliers of hot food and takeaway outlets. What this means in practice is that supermarkets and other retailers selling any type of hot food will be forced to start charging VAT from 1 October.
It is arguable that while George Osbourne may maintain he is removing anomalies from the VAT system, he is actually creating new ones. For example, under the chancellor’s proposals, any food that is sold ‘above ambient air temperature’ will become subject to VAT, whilst those products that are served ‘at or below ambient air temperature’ will not be. But it is not clear what will happen if food is allowed to go cold before it is supplied – will it then avoid the VAT? This could mean that some savouries will become subject to VAT depending on how long after they are taken out of the oven they happen to be sold. This will create enormous complications and confusion for businesses and customers alike.
What’s more, if the ambient temperature outside is the reference point – will there be difference in VAT treatment depending on seasons? Will this differ depending on climates in geographical regions? A lukewarm pasty would not attract the sales tax in warm weather, because it would be the same temperature as the shop. This reference point would also change daily (not to mention, throughout the day), according to the temperature, and would require sellers to check each product for its exact temperature at the point of sale.
The exception on freshly baked bread could also prove problematic, as there is currently ambiguity as to what exactly is classified as bread. Unless this is clarified, it is likely that this will be the subject of much legal challenge.
With the interpretation of the VAT legislation proving to be a well-trodden area of litigation, we predict a series of high profile court cases challenging the interpretation of what is currently an ambiguous piece of draft legislation, if enacted. However, the consultation process on these measures and possible future legal challenges will reveal whether the removal of the current anomalies simply produces anomalies elsewhere. We expect that these proposals will not be without serious challenge from those businesses that stand to lose a lot of money.
Undeniably, hot food tax is a hot topic – and it doesn’t look like it’s going to cool down any time soon. However, food companies that might be affected can voice their opinions on the matter by making representations on the proposed changes as part of the consultation process. For guidance on this, they can seek legal advice to co-ordinate the response.
Author: Sajeda Motala, solicitor in commercial tax at DWF LLP
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