Tax Parity Day To Highlight VAT Cut Benefits For Hospitality Sector
On Wednesday 25th September, thousands of publicans, restaurateurs, hoteliers, brewers and foodservice providers will take the plunge in order to demonstrate their support for a cut in VAT to 5% on food served by such businesses.
Operators including JD Wetherspoon, Heineken, Subway, Road Chef, Fullers, Pizza Hut UK, Mandarin Oriental Hotel Group and Punch Taverns have joined forces as part of the VAT Club JB, headed by veteran VAT campaigner, Jacques Borel.
They are attempting to convince the Government to cut the VAT rate on food served by such businesses to 5% from the current 20% rate.
VAT was introduced in the UK on 1st April 1973, and is now the Government’s third- largest source of revenue, behind income tax and National Insurance.
Having raised approximately £1.6 trillion for the public purse since its inception, VAT is a valuable addition to the Treasury’s coffers. The standard rate of 20 percent applies to most goods and services, and there is also a reduced rate of 5 percent payable on items such as domestic gas and electricity. Finally, there is the zero rate, on which essentials such as food and drink (for human consumption) and children’s clothing are based
In general, most items used within the hospitality and catering industry are rated at 20 percent, including alcoholic drinks, confectionery, crisps and savoury snacks, hot food and supplies of food made in the course of catering (including takeaways).
However, campaigners such as VAT Club JB claim it is unfair that supermarkets benefit from a zero VAT rate on the food items, and point out that the change in VAT rate for businesses would boost economic growth and create jobs by increasing turnover, improving sales and attracting more customers.
The 7.5 percent cut in prices represents the saving which they claim would ultimately be passed to consumers as a direct result of the proposed cut in VAT. Similar days of action have already been witnessed throughout Europe, most notably in France where they benefited from a 9 percent increase in sales on the day.
Indeed, about half of the 27 EU member states have a reduced rate of VAT for the hospitality sector, with some changes a direct result of Monsieur Borel’s campaigning.
In Ireland, for example, where VAT on food-and-tourism services was cut to 9% in July 2011, the industry has claimed that employment in the sector has increased by 9,000 jobs, and recent growth is expected to continue, with the potential for another 5,000 jobs to be created over the coming five months.
This month saw nine days of campaigning in Ireland for the reduced rate to be maintained by the Government, over fears this could be reversed in the upcoming budget.
Here in the UK, the planned day of action and the Government’s recent high profile retreat on the so-called ‘pasty tax’ has once again highlighted the many anomalies and complexity of the rules which govern the imposition of VAT on food.
The main point for the hospitality industry is that catering and the provision of hot food is regarded as the supply of goods or services, and in this sense is subject to VAT, rather than the provision of grocery items such as those sold in a supermarket which attract a zero rate of VAT.
The law states that a supply of hot food is standard rated if it ‘has been heated for the purposes of enabling it to be consumed at above-ambient air temperature’.
However, after the pasty tax U-turn, the Government has said that products which are merely ‘naturally’ cooling in glass cabinets or displays will not be subject to the standard rate, but food which is being deliberately kept warm under lights or on hot plates will attract the tax. The argument is that this is part of the production process and that these items could quite as easily be enjoyed cold as they could be hot.
However, the more recent case involving sandwich franchise chain Subway is one which we will be watching with interest in the coming months. The company failed in its attempt to convince the courts that their sandwiches and meatballs were not heated ‘for the purposes of enabling them to be consumed at above-ambient air temperature’ and instead were heated due to other considerations, such as health and safety requirements.
In the meantime, the situation is very unclear, with some 1,200 franchisees that have paid VAT waiting to reclaim up to £1bn from HMRC should the appeal succeed.
However, should the appeal fail, those franchisees that have not paid VAT could face crippling demands – including added penalties – with no means of recovering them from customers.
This could ultimately force them out of business, and some have even suggested that it could lead to claims against the franchisor itself by the franchisee to recoup these sums.
That aside, there have been various other high-profile skirmishes over VAT boundaries in recent years regarding the categorisation of food items as basic or staple items which should not be subject to VAT, or those ‘luxury’ items, which should. Perhaps the most infamous of these was Jaffa Cake manufacturer McVitie’s successful claim that a Jaffa Cake was indeed a cake (a staple food which is zero- rated) rather than a biscuit (which is regarded as confectionery and therefore standard-rated).
This is in contrast to Pringles manufacturer, Procter and Gamble, who unsuccessfully claimed that the product was not a potato crisp savoury snack as the potato content was less than 50% and so should not be standard-rated.
These other cases, particularly the proposed ‘pasty tax’ u-turn, highlight that change is possible and the stronger the collective voice, the more difficult it will be for the politicians to ignore.
Indeed, Mr Borel has already successfully campaigned for VAT reductions in Germany, Belgium, Sweden, Finland and France, with Tax Parity Day further highlighting the proposed benefits of the tax cut to the UK Government.
Katie Corrigan is Head of Hospitality & Leisure at Tods Murray LLP.
Katie Corrigan outlines plans for operators to drop their prices by 7.5% this week in a day of action dubbed Tax Parity Day…
