VAT legislation applies to what actually happens. Contracts are normally good indicators of what the parties intended to happen, but sometimes the practice is different. In such cases, the applicable VAT rules and rates might be unexpected because the application of this principle of ‘substance over legal form’ is not always clear. An example arose in the recent case of Bagel Nash Ltd v Revenue and Customs Commissioners ( UKFTT 0072 (TC), published on 16 February 2015.
The taxpayer, Bagel Nash Ltd, supplied food from a kiosk in a shopping centre food hall. The supply of food is generally zero-rated, but food which is prepared and served to customers for consumption on the ‘premises’ is standard-rated (Group 1, Schedule 8, VAT Act 1994). The First-tier Tribunal therefore had to consider the meaning of the word ‘premises’ in these circumstances.
There was a seating area in the food hall. HMRC argued that the food served by the taxpayer and consumed in the seating area adjacent to the kiosk was not takeaway food and should be standard rated. The taxpayer, however, observed that its contract gave it no rights, responsibilities or control over the seating area, which could therefore not be its premises.
The First-tier Tribunal ruled that the seating area was part of the premises of the taxpayer, reasoning that this was “a common sense view” (paragraph 61). However, by its very nature everything is taken away from a kiosk and there is no demised area other than the location of the kiosk, so is the common sense approach rather that the supplies should be zero rated as takeaways?
This decision highlights the difficulty in determining the facts when applying the VAT rules. Whilst this decision will be common sense to some, to others common sense will be that there can be no premises if the business has no control or rights.
Nor is this an isolated issue. In October 2014, we reported on a case CLP Holding Company Ltd, in which the price for a property was found to be VAT-inclusive despite a term in the contract stating that the price was VAT-exclusive.
It is difficult to predict when and how substance should be considered over legal form. Certainly, a simple common sense approach cannot provide a unique determination of the facts of a transaction. It is therefore always important to consider how the contract as a whole might be viewed in light of all the facts.