Tribunal case: Are Subway ‘subs’ zero-rated?

Subway sandwiches (Subs) were the subject of a recent hearing before the tax tribunal. The appeal was concerned with the correct VAT liability of sales of Subs and meatballs in marinara sauce.

The primary issue for the tribunal was whether the toasted Subs and/or meatballs were to be regarded as hot food within the meaning of VATA 1994, Sch. 8, Grp. 1, Note (3)(b). If so, the tribunal was required to establish whether the dominant purpose of heating the product was to enable it to be consumed at a temperature above the ambient air temperature.

The appellant was franchisee for four of the UK Subway ‘stores’ and this was the lead appeal (out of 250 pending) for the purpose of determining the VAT liability of the disputed supplies.

Subway stores in the UK offer a standard range of 17 types of Sub, and toasted Subs made up approximately 80 per cent of their total sales. It was agreed that the food was for consumption off the premises. Should it be found that the supply was of hot food, it would be a supply in the course of catering and would be excluded from zero-rating.

The appellant claimed that the dominant purpose of toasting the Sub and heating the meatballs above the ambient air temperature was to firm up the bread and improve the texture and flavour of the food. It was not to supply hot food. The effects of toasting the bread were: to make the bread harder and crisper; to enhance the visual appearance; to improve the aroma; and to bring out the flavour of the bread and ingredients. The effect of heating the meatballs was to infuse them with the marinara sauce and to enhance the flavour and palatability of the product.

The question for the commissioners therefore was whether the toasting process had been carried out for the purpose of enabling the Sub to be consumed at above the ambient temperature. In the commissioners’ view, it had because of the appellant’s declared purpose of producing freshly toasted sandwiches. It was also noted that the Subs lost their distinctive characteristics and flavour if they were allowed to cool. Thus the toasting process was intimately connected with the temperature at which the toasted sandwich was eaten. And the dominant purpose in heating the toasted Sub and the meatball marinara was to enable them to be consumed while hot.

The tribunal dismissed the company’s appeal.


Case Studies

The Tax Man

Minimise the stress of an investigation and make use of our extensive experience in securing best outcome for our clients

Business Valuation in Distress

Take advantage of our impartial and rigorous due diligence procedures

FD in The Cupboard

Our innovative ideas are here to improve your business performance and secure appropriate and cost effective funding

The Tax Man

The Tax Man

A new client was introduced to us via a recommendation with whom we arranged to meet on a regular basis in order to determine a number of changes that we felt were needed to their business structure. The client was at the time operating as a husband and wife partnership. The business was flourishing and had a number of large contracts with big organisations.

At the start of the process they were still heavily immersed in their day to day operations so we can get a full flavour for their ambitions, aspirations and growth plans. We quickly recognised there were sufficient tax savings which can be achieved by changing the structure from a partnership to a corporate entity. We carried out a business valuation and disposed of the goodwill from the old to the new business. Unfortunately, as often is the case with efficient tax planning, HMRC got involved and disputed our valuation.

An HMRC investigation can be a very stressful time for any client, even for those best prepared. However, our client had minimal input in the HMRC communication as we dealt with this professionally behind the scene. As an added benefit, our client could rest on the security that all work was covered by insurance and therefore all costs and time in dealing with this enquiry were covered by the fee protection policy we had put in place.

The initial approach taken by HMRC was very aggressive and they tried to present an argument that there was no goodwill in the business. We challenged HMRC’s view that the goodwill was worthless. After lengthy correspondence and numerous telephone calls, HMRC agreed 100% with our original valuation, which preserved our original tax saving plan for the client. Tax savings on this case where in the region of £75K at the outset, with ongoing savings of £6,000 per annum. We are pleased to add another happy client to our portfolio.

Business Valuation in Distress

Business Valuation in Distress

Selling a business is never an easy process, but when disputes arise, the need for a reliable third party due diligence process is even greater.

Tearle & Carver have extensive understanding of the requirements for remaining objective when managing a potentially difficult company buyout. In one such case, we were approached by the courts to act as independent accountant for an acrimonious business sale in which one partner was exiting the business and selling shares to the other. Given the circumstances, both sides had totally polar views of what their business was worth.

After arranging an initial meeting with the company, we were thorough in ensuring we completed due diligence, validating the figures in the accounting records, carrying out adjustments where appropriate, and drafting a set of reliable management figures within the framework required by the court.

A draft version of the report detailing our findings and conclusions was submitted to both parties, giving them the opportunity to voice any queries or concerns and ensure all relevant factors had been taken into account.

Through this process, we were able to submit a final report to the courts that was both binding and acceptable to both parties, effectively resolving what could otherwise have been a time consuming and costly process for all sides.

FD in The Cupboard

FD in The Cupboard

For smaller companies, it is often not possible or cost effective to pay for a full-time Financial Director.
Many of our clients therefore make use of Tearle & Carver’s extensive expertise to provide the services of an FD as and when required.

In this case, we were approached by the management team of an organisation looking to acquire the existing business via an MBO (Management buy out). Their business plan had proved ineffective for securing funding, and what they needed was financial expertise from someone with a developed understanding of the company’s internal workings.

Tearle & Carver helped deliver the solution our clients were looking through utilising our bank contacts in order to make the MBO viable, while also building a robust business plan and preparing our client for the rigorous vetting process. To help with cash flow issues, we introduced factoring which led to improved cash flow management.

We advised on the appropriate business valuation and structure, and continued to prepare monthly accounts to track profgress once the management were fully in command of all the information they needed to move their business forward.

In order to best assist these clients through the crucial first year of ownership, we attended board meetings on a regular basis, a service that we continue to provide to date.

With our continually developing understanding of their business, this client is able to remain confident that Tearle & Carver can provide any financial support they may need, now and in the future.