Chilango, a fast-food chain selling Mexican food, has had its claim for a £700,000-plus VAT refund denied at a First Tier Tribunal (FTT), which agreed with HMRC’s view that zero-rating did not apply to certain supplies of takeaway food as they were served above room temperature
Chilango has five sites in London and two outside the capital. It originally accounted for VAT on its takeaway sales which it later decided it should have zero rated. So in February 2013 it made a claim to HMRC for refund of input tax of £681,623 it said it overpaid in the period December 2008 to March 2012.
The company also ceased to account for VAT on sales of its burritos, tacos and other Mexican food items, claiming that they were intended to be eaten as a takeaway snack rather than a cooked, hot meal. HMRC assessed it as owing £59,328 in VAT on those supplies in the next VAT period (June 2012), and £28,416 for the September 2012 period, while also refusing a repayment of £20,419.
In April 2013, HMRC issued a further assessment for £257,511 in VAT for the period June 2009 to December 2012, on the basis Chilango had treated sales as zero rated when they should have been standard-rated. [Mucho Mas Ltd t/a Chilango and the Commissioners for Her Majesty’s Revenue and Customs,  UKFTT 0302 (TC) TC05071].
The FTT looked at the VAT treatment of the company’s products in two ways, as the law regarding the VAT treatment of ‘hot food’ changed on 1 October 2012, so the criteria for assessment altered. However, in both cases in order to qualify for zero-rating the food had to be below the ambient air temperature when supplied to the customer. Originally it was also standard-rated if it was heated for the purpose of enabling it to be consumed hot; after the legislation change the wording on this was changed, with items standard-rated if any part of them was delivered hot.
The tribunal heard that Chilango staff heated burritos and tacos briefly before filling them to order with items kept in boxes on a ‘food line’. In the case of the meat fillings, beans and rice, these boxes were kept at temperatures around 63°C by the use of warming plates or bowls of hot water; other items such as salad, salsa, cheese and sour cream were not heated.
Two thirds of sales were burritos, usually with at least three ingredients
Chilango reported that the majority (65%) of sales were of burritos, and usually with at least three ingredients, typically meat, beans and rice, at least one of which would have been heated. However, it claimed that it was the overall temperature of the product which should determine whether or not it was classed as ‘hot food’ and therefore liable to VAT.
The company said that the reason for keeping items on the food line hot was to comply with hygiene and food safety requirements, not to provide a hot meal. While the meat could have been cooked earlier and then cooled, Chilango said that keeping it hot in this way removed worries about possible contamination by bacteria.
The staff were trained to deliver an order quickly which was why burritos and tacos contained hot items, but they were not specifically designed to be served hot. HMRC argued that the fact the items were then served to the customer wrapped up in foil suggested an attempt to keep them warm; Chilango claimed that foil was the best medium to contain all the ingredients.
Chilango’s quality assurance manager gave evidence of the history of the burrito, in which he claimed it was prepared in the morning as a ‘packed lunch’ to be taken to work and eaten later when cold.
The FTT heard evidence that HMRC had used a thermometer to test a number of takeaway items purchased from two of Chilango’s London outlets and recorded temperatures of between 30ºC and 58ºC, on dates when the ambient temperature was around 28°C.
Chilango argued in its evidence that HMRC’s use of the thermometer was inaccurate, and that it failed to assess burritos which included items such as guacamole and sour cream, which would have reduced the overall temperature.
However, the FTT held that a significant part of each product was above the ambient air temperature when supplied. Thus, the products failed the temperature part of the test for zero-rating both before and after 1 October 2012.
In considering the issues, the FTT had to consider ‘common intention’. The tribunal examined Chilango’s advertising and decided that a customer would think that the meat had been cooked, but that it might not still be hot when eaten. Similarly, the word ‘fresh’ meant that the food was recently prepared from raw ingredients and recently cooked, but that did not necessarily imply that the cooked food was still hot.
Thus, there was no common understanding that the food was intended to be consumed hot. However, the FTT held that Chilango had not proved that every part of the products was at ambient air temperature when consumed, nor that this was the expectation. The customer, choosing a number of hot and cold items and eating them as intended soon after purchase, might expect the hot items still to be above the ambient air temperature when consumed and Chilango should have recognised this.
The FTT held that the appellant had failed to demonstrate that the products were not heated for the common purpose of enabling them, or a part of them, to be consumed at a temperature above the ambient air temperature. Thus, the appeal regarding the period before 1 October 2012 was dismissed.
Following the change in the rules after this date, the tribunal heard that Chilango had, in fact, accepted that after 30 September 2012 its supplies, except salads, were standard-rated.
However, the FTT did not accept Chilango’s view that its salads were VAT exempt, arguing that a significant element of the salads sold after 1 October 2012 included ingredients that had been kept hot after being heated. Thus, the appeal relating to the salads after 30 September 2012 was dismissed.
The FTT judge stated: ‘I have concluded the liability issue entirely against the appellant: it had in any event largely conceded its liability in the period post September 2012.’
There was one caveat to the rejection of the appeal. A customer could occasionally order one of the five products and choose only cold fillings. In so far as the appellant could show that this had happened, the FTT ruled the product was zero-rated both before and after 1 October 2012, as no part of it was above ambient air temperature at time of sale.
Stanley Dencher said: ‘The law applicable to the appellant’s sales changed with effect from 1 October 2012. The appellant accepted that all its items, except the salads, were standard-rated after 1 October 2012. To that extent, the appellant accepted that its appeal must be dismissed.’
Eric Partaker, founder and co-chief executive of Chilango, said: ‘While a ruling in our favour would have been happily received, VAT has always been priced into our burritos from day one - so the ruling will not create any change to how our business has been run to-date.
‘The real issue will be for any other companies that have not been charging and paying VAT on their burritos.’