Judgment summary
This is an appeal from a decision of the First-tier Tribunal (FTT) released on 3 June 2024 ([2024] UKFTT 460 (TC)) concerning the VAT treatment of dip pots supplied as part of KFC takeaway meal deals by Queenscourt Limited (1).
The appeal raised two issues: the VAT liability issue, being whether the supply of a dip pot as part of a meal deal is a separate zero rated supply or part of a single standard rated supply, and the public law issue, being whether the FTT has jurisdiction to consider legitimate expectation arguments in an appeal under section 83(1)(t) VATA against a recovery assessment under section 80(4A) VATA (1).
The Upper Tribunal (Mrs Justice Joanna Smith DBE and Judge Mark Baldwin) allowed the appeal on Ground 1(a), holding that the FTT erred in law in concluding that two or more elements of a multi-element transaction could be treated as a single supply while other elements of the same transaction remained separate supplies (132). It dismissed Ground 1(b) (135-138) and Ground 2 on legitimate expectation (169), and found that the FTT had erred in its jurisdictional analysis but left the underlying jurisdiction question open as it did not affect the outcome (151-158).
Having found for Queenscourt on Ground 1(a), the Tribunal re-made the FTT's decision to allow Queenscourt's appeal against HMRC's refusal of the repayment claimed in ECN2 and against the recovery assessments relating to ECN1 (176).
Background
Until early 2019 Queenscourt accounted for VAT on the basis that dip pots supplied as part of a KFC takeaway meal deal formed part of a single standard rated supply. It later concluded this was wrong and that meal deals should be treated as multiple supplies, so that component parts such as coleslaw, cookies, yoghurts, milkshakes and dip pots could be zero rated where appropriate (2).
On 29 March 2019 Queenscourt submitted an error correction notice (ECN1) to reclaim VAT wrongly accounted for on meal deals between October 2015 and September 2018, including £75,502 relating to dip pots. HMRC agreed to repay this VAT after some debate over quantification (3).
Queenscourt submitted a further error correction notice (ECN2) on 22 April 2020, relating to VAT periods 12/18 to 09/19, including £30,936.64 relating to dip pots. A different HMRC officer accepted that cookies and yoghurts were separate supplies but considered that dip pots were ancillary to the hot food and part of a single supply. HMRC also considered its earlier repayment following ECN1 to have been incorrect and issued a recovery assessment under section 80(4A) VATA (4).
Queenscourt appealed against the refusal of ECN2 and against the ECN1 recovery assessments, arguing primarily that the dip pot supply was separately zero rated, and alternatively that HMRC were prevented from recovering the ECN1 repayment by legitimate expectation or estoppel by convention (5, 6).
The FTT held that the dip pots formed part of a single standard rated supply with the hot food, that it had jurisdiction to consider legitimate expectation but that HMRC's decision to resile was not 'outrageously unfair', and that there was no estoppel by convention as there had been no detrimental reliance in subsequent mutual dealings (7).
Core dispute
The VAT liability issue was whether the supply of a dip pot as part of a takeaway meal deal is a separate zero rated supply, or whether it forms part of a single standard rated composite supply with the hot food in the meal deal, notwithstanding that other cold items in the same meal deal (coleslaw, cookies, yoghurts) are accepted by HMRC to be separate supplies (1, 5, 27).
Queenscourt argued that a multi-element transaction must either be a single supply in its entirety or, if not, each item must be a separate supply; there could not be a hybrid where some elements combine into one supply while others remain separate (27, 47).
HMRC argued there was no inconsistency in treating the meal deal as a multiple supply overall while treating two or more of its elements (the dip pot and the hot food) as a single supply on a principal/ancillary basis (27, 53-57).
The public law issue was whether the FTT has jurisdiction under section 83(1)(t) VATA, in an appeal against a section 80(4A) recovery assessment, to consider a legitimate expectation argument that HMRC should not be permitted to reclaim VAT it had previously agreed to repay under ECN1, and, if so, whether HMRC's departure from its earlier acceptance was sufficiently unfair (1, 6, 10, 11).
Court findings
On Ground 1(a), the Tribunal held that every supply, including every element of a multi-element transaction that would itself be a supply if provided separately, must be regarded as distinct and independent unless the whole transaction falls within the exceptional CPP (principal/ancillary) or Levob (single economic supply) categories, or a combination of both as in P in W (131). The Tribunal reviewed CPP, Levob, Purple Parking, Field Fisher, Middle Temple, Frenetikexito, Gray & Farrar, P in W, Bophuthatswana and De Montfort, and concluded that none of these supported treating some, but not all, elements of a multi-element transaction as a single supply while other elements remain separate (78-130). The FTT therefore erred in law at paragraph 88 of the Decision (132).
On Ground 1(b), the Tribunal held that the FTT had not erred in its treatment of the relevance of consumer choice, finding that the theoretical ability to decline a dip pot without any effect on price or on the relationship between the parties meant choice carried limited weight (134-137). Ground 1(b) was not made out (138).
On the public law issue, the Tribunal held that the FTT had erred in law by following the reasoning in KSM Henryk Zeman Sp Z.o.o. v HMRC rather than undertaking a conventional purposive construction of section 80(4A) and section 83(1)(t) VATA, and could not properly have concluded that the statutory scheme did not exclude the FTT's jurisdiction to consider legitimate expectation arguments (151-156). However, because the outcome did not turn on this issue, the Tribunal declined to decide definitively whether the FTT has such jurisdiction, leaving the question open for a case where it would affect the outcome (157-158).
On Ground 2, the Tribunal held that the FTT had properly considered the relevant factors of good administration, including HMRC's duty to collect the correct tax and the public interest in not unfairly advantaging one taxpayer over others, even though it did not use the specific phrase 'good administration'. Ground 2 was not made out (166-169).
Outcome
The Upper Tribunal allowed Queenscourt's appeal under Ground 1(a), holding that the FTT made a material error of law which, if corrected, would inevitably have led to the conclusion that dip pots supplied as part of a takeaway meal deal are separate zero rated supplies (173-174).
Grounds 1(b) and 2 were dismissed (138, 169). The Tribunal found that the FTT had erred in its jurisdictional reasoning on the public law issue but left the substantive jurisdiction question undecided as it was not material to the outcome (151-158, 175).
The Tribunal set aside the FTT's decision and re-made it, allowing Queenscourt's appeal against HMRC's decision to refuse the repayment claimed in ECN2 and against the recovery assessments relating to ECN1 (176).
Major issues / areas of contention
- Whether dip pots supplied as part of a KFC takeaway meal deal constitute a separate zero rated supply or form part of a single standard rated composite supply with hot food.
- Whether, within a multi-element transaction that is accepted to be a multiple supply, two or more (but not all) elements can nonetheless be combined into a single principal/ancillary supply.
- The relevance of consumer choice, including whether an item can realistically be obtained from a third party, in determining whether a supply is ancillary.
- Whether the First-tier Tribunal has jurisdiction under section 83(1)(t) VATA to consider legitimate expectation arguments against a recovery assessment made under section 80(4A) VATA.
- Whether HMRC's decision to resile from its earlier acceptance of ECN1 and reclaim the VAT it had repaid was sufficiently unfair to be precluded by legitimate expectation.
- Whether the FTT's approach to 'good administration' in weighing legitimate expectation improperly confined itself to financial detriment.
- Whether HMRC were estopped by convention from making the recovery assessments (Ground 3, abandoned before the substantive hearing).