19793

VAT- ZERO-RATING – Hot food – pasties baked in oven - some placed in a heated cabinet others placed in wicker baskets and on trays – whether the pasties destined for the heated cabinet were heated for the purpose of enabling them to be consumed hot – satisfied on the evidence that the Appellant’s predominant purpose was to heat them to be consumed hot – Appeal dismissed – Note 3(b) Item 1Group 1 Schedule 8 VAT Act 1994.  

MANCHESTER TRIBUNAL CENTRE

	JANNICKE WALLACE  	Appellant
trading as
THE CORNISH PASTY

	- and -

	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

			Tribunal: MICHAEL TILDESLEY OBE	 (Chairman)
				      JOHN DAVISON 		  (Member)

Sitting in public in North Shields on 2 August 2006

The Appellant appeared in person

Andrew Noble, counsel instructed by the Acting Solicitor for HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2006

DECISION
The Appeal
1.	The Appellant was appealing against the Respondents’ decision dated 28 January 2005 and confirmed on review dated 25 May 2005 refusing the Appellant’s claim for over declared output tax in the sum of £10,062 plus interest for the period 04/01 to 01/04.
2.	The Appellant’s ground of Appeal was that
“The supply of pasties which are kept warm on a hot plate were not standard rated. The supply was of a freshly baked product, and has not been heated for the purpose of enabling it to be consumed at a temperature above the ambient air temperature. The supply is zero rated VAT Act 1994 Schedule 8 Group 1 Note (3)(b)(i). The case of John Pimblett & Sons  Ltd applies CA 1987”.
The Dispute
3.	The Appellant ran a bakery in Keswick Cumbria selling mainly Cornish pasties and cold drinks. The Appellant purchased the pasties frozen from Crantock Bakery in Cornwall. The Appellant baked batches of the frozen pasties in an oven on the shop premises. The baked pasties were put on display for sale on either baking trays or in baskets or in the heated cabinet.  
4.	In May 1999 the parties agreed that the sales of pasties would be zero-rated for VAT purposes except the sale of those pasties in the heated cabinet, which were standard rated and constituted 10 per cent of the Appellant’s sales.
5.	 In March 2004 the Appellant’s representatives contended that other traders were treating food from heated display units as zero-rated and that the Appellant was entitled to do the same. On 2 August 2004 the Appellant submitted a voluntary disclosure to recover the output tax accounted for on the sale of the pasties from the heated cabinet.
6.	The Appellant submitted that she was selling freshly baked quality products. She kept the pasties in the heated cabinet for the purposes of displaying the pasties to best effect and to control the cooling process so that the pastry remained crisp. The Respondents, however, from the facts formed a different view of the Appellant’s purpose for keeping the pasties in the heated cabinet, which was to enable the consumption of hot pasties.  In addition the Respondents contended that in any event they were not liable to repay that part of the claim relating to periods 04/01 and 07/01 because the claim was made more than three years after the end of the accounting period in question.
7.	The question for the Tribunal was whether the Appellant’s predominant purpose, subjectively construed, for heating the pasties destined for the heated cabinet was to enable them to be consumed hot? 
The Law
8.	Group 1 of Schedule 8 of the VAT Act 1994 exempts food of a kind used for human consumption from VAT subject to specified exceptions. One of the exceptions is a supply in the course of catering.
9.	Note 3(b) of Group 1 Schedule 8 includes any supply of hot food for consumption off the premises within the definition of a supply in the course of catering. Hot food means food which, or any part of which –
(i)	has been heated for the purposes of enabling it to be consumed at a temperature above the ambient temperature; and 
(ii)	is at the time of the supply above that temperature.
10.	 The Court of Appeal in John Pimblett and Sons Limited v Customs and Excise Commissioners [1988] STC 358 considered the wording of Note 3(b) and decided that it related solely to the purpose of the seller:
“…it was common ground that the test was a subjective one, and must be applied solely to the purposes of the seller; in other words, it had to be determined whether the purpose of the taxpayers was to enable the pies to be consumed at a temperature above the ambient air temperature” (per Parker LJ at page 360).
11.	The question to be determined under Note3(b):
“Were these pies, or any of them, heated for the purpose of enabling them to be consumed hot”?
12.	The customer’s reasons for purchasing the pies were not relevant to the test laid down by Note 3(b):
“The evidence was that it was not part of the purpose of the taxpayers to enable the pies to be consumed hot, but it is said that they must have had, unconsciously or consciously, a direct or indirect purpose that, to some extent any rate, the heat was applied for that purpose.
For my part I am unable to accept that that is the position. These pies were pies which were not capable of being sold at all until they received their second baking. Having received their second baking, they would then be sold and no doubt, during the course of the lunch hour, some people would buy them for their own purpose, namely, consumption hot. But I am unable to accept that, because that was the position, it must be regarded as the taxpayers’ purpose to enable the pies to be consumed.
What is in effect being advanced is that the provisions of note (3) should have read into them additional words. Instead of reading “has been heated for the purpose of enabling it to be consumed at a temperature above the ambient air temperature”, there should be added these words also –
“or which to the knowledge of the supplier, would or might be consumed at a temperature above the ambient air temperature”
I can see no warrant for reading into a taxing statute words that are not there. It is a first principle of revenue law that the subject should only be taxed by clear words, and it is impermissible to look at the substance or to imply or read in anything” (per Parker LJ at page 361).
13.	The test in Note3(b) was essentially one of fact:
“The tribunal were perfectly entitled, as I see it, to look at the facts for one purpose and for one purpose only, and that is for the purpose of considering the validity of the evidence given by the taxpayers as to their purpose. It might well be that the facts were such that a tribunal in one case might come to the conclusion that the asserted purpose could not be accepted - as, for example, while stoutly asserting that it was no part of their purpose in heating the pies to enable them to be consumed hot, evidence was given that there were extensive heating cabinets in the shop which kept the pies hot. Given such facts, I can well see that a tribunal might conclude that the assertion that it was no part of the sellers’ purpose to enable them, or some of them, to be consumed hot was unacceptable. But that goes simply to the weight of the evidence and to nothing else” (per Parker LJ at page 361).
The Evidence
14.	We heard evidence from the following persons:
(1)	Jannicke Wallace, the Appellant;
(2)	John Worrell, the managing director of Crantock Bakery Northern and of the Proper Pasty Company Limited who gave evidence about the retail business for pasties including the retail outlets for the Proper Pasty Company Limited and the VAT treatment of supplies of pasties.
(3)	Linda Scott, an Officer of HM Revenue and Customs based at Kendal who carried out an assurance visit of the Appellants’ premises.
(4)	William Foster, a Senior Officer of HM Revenue and Customs based at Carlisle who refused the Appellant’s voluntary disclosure.
15.	We were provided with bundles of documents, including most helpfully colour photographs of the Appellant’s business. We also had regard to the documents sent by the Appellant on 3 August 2006, which she inadvertently failed to hand over at the end of the hearing.
16.	The Appellant realised the potential for selling Cornish pasties in Cumbria after spending a holiday in Cornwall. She researched the retail business for pasties in Cornwall, which included preparing an itinerary of the necessary equipment. In early 1999 the Appellant started her business in Cumbria, “The Cornish Pasty”, which was registered for VAT from February 1999.  She traded from two shops at Keswick and Carlisle. The Carlisle shop has now closed.
17.	 The Appellant was passionate about the product of her business. She considered the pasty to be good wholesome food, which was relatively inexpensive. The Appellant regarded her business as a bakery.
18.	The Keswick shop traded seven days a week, throughout the year. The normal opening hours were from 9.00am to 5.30pm. Trade was busy from Easter to September, and ticked over the rest of the year. The Appellant sold about 20 varieties of savoury and sweet pasties plus a small range of light bites, such as sausage and cheese turnovers, and cold drinks. The Appellant offered a discount for bulk purchases.
19.	The shop consisted of two floors. The ground floor comprised the retail area which contained a cold drinks cabinet and a counter. On top of the counter was a heating cabinet, a till and a wicker basket in which pasties were placed. The oven and a rack of trays were located behind the counter. The freezers in which the pasties were stored were located upstairs on the first floor. 
20.	The shop had a large shop window, in which at least four wicker baskets of pasties were displayed. The shop had prominent signage.  The trading name, “The Cornish Pasty” was displayed across the front of the shop above the window and door. Above the trading name was a hanging sign which depicted a lighthouse with the words, “The Cornish Pasty”, “A Taste of Cornwall”. The Appellant considered that the smell of the pasties baking in the oven drew customers into the shop.
21.	The heating cabinet was 1.50 metres long and 70 centimetres in width. The cabinet had a glass front with narrow glass top and sides. The back was totally open allowing air circulation. The cabinet had a stainless steel bottom in which heating elements were installed. The cabinet was switched on at 8am each day providing a constant temperature of 73.7 degrees Celsius. The average air temperature in the shop was 22 degrees Celsius.
22.	The Appellant purchased the pasties deep frozen from Crantock Bakery in Cornwall. The Appellant baked the frozen pasties in an oven in the shop. The baking process took about one hour and was done in batches throughout the day. The number of batches varied between three and four each day depending upon demand. The first batch was put in the oven at 8.20am, the second at 10.20am, third at 12.20pm with the final batch at 2.20pm. 
23.	Once the pasties were baked the Appellant displayed them for sale. Some pasties were stacked in the heated cabinet which when full contained  stacks of three to four pasties with approximately eight stacks across the length of the cabinet and four stacks deep. Other pasties were placed in the wicker baskets with the pasties arranged in such a way so as to ensure that the cooling down process applied evenly to the basket’s contents. The remaining pasties were kept on the rack of baking trays with a single layer of pasties on each tray. 
24.	The pasties in the heated cabinet cooled down in a controlled heated environment. Members of staff regularly checked the temperature of the pasties by the use of a probe. When the temperature at the core of the pasty fell below 63 degrees Celsius, the pasty was taken out of the cabinet and displayed elsewhere for sale. The marker of 63 degrees Celsius was derived from the Food Hygiene Regulations, which essentially required food to be held at 63 degrees or above, if it was sold hot.
25.	 The operation of the shop was geared to ensure that the quantity of pasties baked in any one day corresponded with the number likely to be sold in that day. If pasties remained unsold at the end of the day they were placed at the back of the shop and offered for sale the following day. In the busy period (Easter to September) the Appellant baked between 500 to 600 pasties per day, whilst during the quiet period (October to Easter) between 80 to 100 pasties were baked each day. The oven cooked upto170 pasties per batch. The process of baking in batches and displaying the pasties for sale by the range of methods (tray, basket and heated cabinet) stayed the same throughout the quiet and busy periods. The quantity of pasties baked, however, rose during the busy period, and occasionally in the quiet period the Appellant missed out the last batch of baking. 
26.	The Appellant had no signage in the shop advertising hot takeaway food. When sold the pasties were handed to the customer in individual grease-proof bags and then placed in a brown carrier bag. The Appellant supplied no cutlery with the pasty but supplied napkins if specifically requested by the customer. The Appellant had no facility within the shop, such as a microwave oven, to reheat pasties. 
27.	The Appellant did not ask her customers whether they wanted the pasty hot or cold.  The Appellant stated that some of her customers requested cold pasties. When Mr Foster visited the premises on 12 May 2006 he observed a customer requesting a warm pasty which the Appellant supplied from the heated cabinet. The Appellant in response to Mr Foster’s questions advised him that if a customer asked for a cold pasty it would be provided from either the basket or the rack of trays.
28.	The Appellant stated that her purposes for placing the pasties in the heated cabinet were to control the cooling process and to display her products to best effect. The Appellant asserted that she was selling freshly baked products. By putting the pasties in the heated cabinet she ensured that the pastry remained crisp which prevented seepage of the moist contents inside. The cabinet had a glass front with a light inside which according to the Appellant was her shop window to display her goods to best advantage. The pasties in the heated cabinet, also sustained the aroma of a freshly baked product.
29.	Shortly after the Appellant commenced her business in the sale of Cornish pasties, her accountants, McCowie and Ramshaw & Co, wrote to the Respondents on 7 May 1999 about the VAT treatment of the pasties. The accountants stated that
“My clients own their shop, which buys in pre-made but uncooked Cornish pasties from a supplier. These are cooked on the premises and then sold to the general public.
My clients have been keeping records and the following statistics apply:
20 per cent of pasties are sold red hot from the oven to customers in the shop.
40 per cent of pasties go on a cooling tray for resale cold.
30 per cent are put in the window and are sold cold.
10 per cent put on a hot plate and kept warm at a temperature no more than 70 degrees for sale warm”.
My client would like to know what percentage should VAT be charged upon. They have rang round other franchises in the same group and have come up with varying answers as to how the VAT is treated”.
30.	The Respondents responded on the 7 May 1999 stating that the pasties from the oven and put on the hot plate were standard rated. Following further representations from the Appellant’s accountants, the Respondents accepted that the pasties from the oven were zero-rated provided that the Appellant’s intention with respect to those pasties was not to sell the pasties hot.  They were only hot because of the cooking process. At this time the Appellant’s accountants made no representations regarding the VAT treatment of the pasties sold from the heated cabinet.
31.	 On 17 March 2004 the Appellant’s accountants, now named McCowie & Co., wrote to the Respondents requesting that the 10 per cent of pasty sales from the heated cabinet should be zero-rated. In subsequent correspondence the accountants denied that the 10 per cent had been derived from the Appellant’s records, instead they suggested that the figure of 10 per cent was forced upon the Appellant by the industry agreed figure. The Respondents denied that there was an industry agreed figure and repeated that the 10 per cent figure was supplied by the Appellant from the records she kept.
32.	The Respondents produced a record of the routine visit of the Appellant’s premises on 30 January 2002. The record noted that the Appellant agreed with the 10 per cent figure for standard rated sales and that the Appellant would keep under review the respective percentages of standard and zero-rated supplies.
33.	The Appellant when challenged with her accountant’s letter of 7 May 1999 stated that the shop procedures were different from those that operated in 1999. The changes identified by the Appellant were that she sold a greater variety of pasties and that the proportion sold from the heated cabinet was now 50 per cent.
34.	Proper Pasty Company Limited, which was under the control of Mr Worrall, sold pasties through retail outlets in the North of England. According to Mr Worrall the operation of the retail outlets were similar, if not identical, to the Appellant’s operation at her Keswick premises. Mr McClelland, a senior officer from the Respondents’ Sheffield Business Centre, was satisfied that the supplies of Cornish pasties and sausage rolls from the retail outlets for the Proper Pasty Company Limited  were zero-rated. In a letter dated 1 November 2000 to Mr Worrall, Mr McClelland stated that
“As I understand it the products that you sell are only hot because they are freshly baked and it is not your intention that they should be consumed whilst still hot. (The customer’s intention is of no relevance). Now that you have amended your trading practices so that customers are not asked if they would like a hot pasty and no pasties are reheated you are clearly demonstrating your intention to supply a freshly baked product”.
35.	Mrs Scott and Mr Foster visited the Appellant’s premises on 7 December 2004 and 10 May 2006 respectively in connection with the Appellant’s voluntary disclosure.  Following Mrs Scott’s visit, Mr Foster on 28 January 2005 refused the Appellant’s voluntary disclosure on the ground that he was satisfied after considering all the available information that the VAT liability of the pasties sold from the heated cabinet was standard rated. Mr Greenough carried out a reconsideration on 25 May 2005 and confirmed Mr Foster’s decision. Mr Foster declined to visit the retail outlets of Proper Pastry Company Limited as it was not the policy of the Respondents to visit businesses not party to the Appeal. Mr Foster had no issue with the principle as stated by Mr McClelland in his letter of 1 November 2005 but pointed out that each case was fact specific.
Reasons for Our Decision
36.	The Appellant contended that she heated the frozen pasties in order to sell quality freshly baked products. The placement of the pasties in the heated cabinet enabled  her:
(1)	 to maintain the quality of the product through the control of  the cooling process; 
(2)	to display the pasties for sale to best advantage; and 
(3)	to sustain the aroma of a freshly baked product.

37.	 The Appellant stated that the facts of this Appeal were identical to those in the VAT & Tribunal decision of Three Cooks Limited (1995) (Decision Number 13352).
38.	In the Three Cooks Appeal the Respondents did not challenge the Appellant’s evidence about its intended purpose, instead they argued on points of law. In this Appeal the Respondents disputed the Appellant’s stated purpose, contending that she with hindsight was attempting to fit the facts in line with the law.  The Respondents considered that the Appellant’s dominant purpose for heating the pasties was for them to be consumed hot. The sole purpose of keeping them in the heated cabinet was to maintain a reservoir of hot pasties.  The fact that the Appellant chose to display them in a heated cabinet rather than an ordinary glass cabinet supported their contention. Also the Respondents considered that the Appellant’s assertion about the benefits of cooling the pasties in the heated cabinet were not sustainable in view of the other methods chosen to display the pasties which appeared to maintain the integrity and quality of the pasty’s pastry by the cooling occurring naturally.
39.	We complimented the Appellant on her preparation and presentation of her case. However, it is the substance of her evidence rather than its presentation which is our sole concern for determining the outcome of her Appeal.
40.	The question for determination in this Appeal as laid down by The Court of Appeal in John Pimblett and Sons Limited: “Were these pasties, or any of them, heated for the purpose of enabling them to be consumed hot”. Further, we are concerned solely with the Appellant’s dominant purpose, subjectively construed. The customers’ reasons for purchasing the pasties are irrelevant. We are not obliged, however, to accept without question the Appellant’s evidence about her stated purpose for heating the pasties. Our role is to determine the Appellant’s subjective dominant purpose from the whole of the evidence.
41.	We find the following facts:
(1)	The accountants’ letter of 7 May 1999 was an accurate account of the Appellant’s intentions at the commencement of her business. She intended to sell the pasties from the heated cabinet so that they could be consumed warm, which we have interpreted as being above the ambient temperature.
(2)	The Appellant confirmed her intention regarding the sale and consumption of the pasties in the heated cabinet during the Respondents’ visit of 30 January 2002. She did not challenge their VAT treatment as standard rated supplies. 
(3)	There was no substantial change in Appellants’ method of operations from when she started her business in 1999.  The changes alluded to by the Appellant related to the range of pasties and the quantities sold rather than the actual processes for delivering the pasties for sale.
(4)	The Appellant’s customers were drawn into the shop by the prominent signage, the attractive display of wicker baskets of pasties in the shop window, and the aroma emanating from the oven, not by the pasties stacked in the heated cabinet which could only be properly viewed once inside the premises. Further, the heated cabinet of stacked pasties would not produce the same aroma as that from the oven, and the aroma from the cabinet would be no different from the aroma of the pasties cooling on the trays and in the baskets. The heated cabinet of stacked pasties was not the shop window for the business. 
(5)	The Appellant heated the frozen pasties in regular batches which ensured a constant flow of hot pasties throughout the day.
(6)	The Appellant applied the same process for dealing with the pasties once out of the oven regardless of the time of the year and the quantities baked, some pasties were placed in the heated cabinet, some were put in the wicker baskets and the remainder were left on the baking trays. The application of the same process regardless of the circumstances indicated that the Appellant intended for some of her pasties to be consumed hot and others to be consumed cold.
(7)	The quality of the pasties did not depend upon which process was adopted after the pasties were taken from the oven. The Appellant produced no evidence to support her contention that the pasties in the heated cabinet were of superior quality in terms of crispness of the pastry and sealing the contents than those pasties cooling naturally in the wicker baskets and on the trays.   The Appellant’s evidence demonstrated that the pasties in the wicker baskets would be of the same quality as those in the heated cabinet provided they were stacked in a particular way in the baskets.
(8)	The pasties from the heated cabinet were sold at a temperature above the ambient temperature.
(9)	The shop displayed no signage advertising hot takeaway food. There was no facility within the shop to reheat food. No cutlery was supplied to customers but paper napkins were provided on request.
(10)	We placed no weight on Mr Worrall’s evidence. We did not hear evidence from Mr McClelland, the officer who decided to zero-rate the supplies of Cornish pasties and sausage rolls from the retail outlets of the Proper Pasty Company Limited.  At its highest Mr Worrall’s evidence implied that the Respondents’ decision making between different offices was inconsistent in respect of the VAT treatment of pasties baked on the premises. Such an inconsistency, if existed, would not be a relevant consideration in this Appeal. We are obliged to make our decision on the facts of this case, not upon how the Respondents exercise their care and management powers under the 1994 Act. In any event the Respondents did not accept that Mr McClelland’s decision was inconsistent with the decision taken by Mr Foster in respect of the Appellant’s business.
42.	The Appellant put forward a range of reasons for heating the pasties placed in the heated cabinet. They were the making of freshly baked products, maintaining the quality of the pasty in respect of the crispness of the pastry and the sealing of its contents, and acting as the shop window for her business, which included sustaining the freshly baked aroma. 
43.	We are satisfied that our findings of fact contradicted the Appellant’s reasons about the quality of the pasties and acting as the shop window. We found that the heated cabinet was not the shop window for the business and that the pasties in the heated cabinet were not of a superior quality to those kept in the wicker baskets and on the baking trays. 
44.	 Whilst we accept that the consequence of the heating process was freshly baked pasties, our findings of fact do not support the proposition that the consequence of freshly baked pasties equated with the Appellant’s predominant purpose for heating the pasties destined for the heated cabinet. The Appellant applied the same process for dealing with the pasties once out of the oven regardless of the time of the year and the quantities baked. Some pasties were put in the heated cabinet, whilst the other pasties were placed in baskets or kept on trays. The Appellant’s adoption of a uniform process undermined her stated purpose of providing freshly baked pasties, particularly during the quiet period when she had the capacity to display her cooked pasties in one place, such as the heated cabinet. The application of the same process regardless of the circumstances demonstrated that the Appellant intended for some of the heated pasties to be consumed hot and others to be consumed cold. 
45.	We conclude that the purposes put forward by the Appellant for heating the pasties destined for the heated cabinet were not supported by the facts. We agree with the Respondents’ submission that the Appellant with hindsight was attempting to fit the facts with the law.
46.	We are satisfied on the balance of the evidence that the Appellant heated the pasties destined for the heated cabinet for the purpose of enabling them to be consumed hot. We rely on the facts concerning the Appellant’s intention at the start of her business to sell hot pasties from the cabinet and the uniform process adopted by the Appellant for displaying the baked pasties. The Appellant asserted that the business had changed which meant that she no longer held the intention to sell hot pasties from the cabinet. We found no evidence to support her assertion. There was no substantial change in Appellants’ method of operations from when she started the business in 1999.   
47.	The Appellant displayed no signage that she sold hot takeaway food. The Appellant, however, relied on the aroma of freshly baked products emanating from the oven to attract her customers. In our view the aroma amounted to a subtle method of advertising hot takeaway food. 
48.	We placed no weight on the fact that the Appellant did not have the facility within the shop to reheat the pasties. The manner in which the Appellant organised her business by heating the frozen pasties in regular batches ensured that she always had hot pasties available, which obviated the need for a microwave. The fact that she did not offer cutlery was in our view insignificant. The pasties were supplied in grease-proof bags which would enable them to be consumed by hand. The Appellant supplied napkins on request.
Decision
49.	We hold for the reasons set out above that the Appellant’s predominant purpose for heating the pasties destined for the heated cabinet was to enable them to be consumed hot. We, therefore, dismiss the Appeal and make no order for costs.
50.	In view of our decision it is not necessary to determine whether the Respondents were liable to repay that part of the claim relating to periods 04/01 and 07/01.

MICHAEL TILDESLEY OBE
CHAIRMAN
RELEASE DATE: 28 September 2006

MAN/05/0712