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Subway Tastes Defeat in Epic Fast-Food VAT Dispute

In a major blow for the fast food industry – and a victory for the tax authorities worth many millions of pounds to the public purse – sandwich giants Subway have failed to convince the Court of Appeal that their ubiquitous toasted ‘subs’ should be free of VAT.

In a case which raised novel issues of European law, more than 1,000 Subway franchisees had fought a marathon campaign through the tribunal system in a bid to prove that their toasted sandwiches should be treated in the same way by HM Revenue and Customs (HMRC) as VAT-free cold snacks.

However, the Court ruled that the subs, as well as the chain’s popular ‘meatball marinara’ product, fell within Schedule 8 of the Value Added Tax Act 1994 in that they were supplied in heated form to customers ‘in the course of catering’. They were thus subject to the standard rate of 20 per cent VAT.

Subway had attacked HMRC’s approach to the issue as ‘irrational’, arguing that their policy in respect of hot take-away food was inconsistently applied in a manner that created unfairness in the market in violation of the fundamental European law principle of fiscal neutrality.

The Court acknowledged that there were inconsistencies in approach and that they had resulted in ‘significant misfortune’ for Subway in that some of its competitors enjoyed VAT zero-rating for ‘broadly comparable’ products.

However, in upholding the rationality of a policy which subjected hot meals supplied by the catering industry to VAT, whilst zero-rating other food, the Court observed, “Human beings have to eat, but they don’t have to eat in restaurants or to have their food cooked by others.” Subway’s advertising showed its toasted subs complete with melted cheese and they were clearly heated prior to sale.

Commenting on the sheer scale of the dispute, Lord Justice McCombe observed, “We are after all concerned with the question of whether hot toasted sandwiches and types of meat ball mix are, or are not, to benefit from the zero rate of VAT. That is a problem which ought to be capable of non-complex resolution.

“I should perhaps reflect upon the fact that we have been provided with no fewer than 11 volumes of legislation and case law to enable us to reach our decision on an apparently straightforward point. Such complexity in determining the fiscal status of business transactions of a common place nature does the law, and particularly the law of the European Union, no credit.”