VAT and zero-rated food – KFC dip pot case

The UK has a long history of debating the VAT treatment of food items. It’s due to the complex and rather strange set of rules we have that legislate for whether something is subject to VAT at 20% or 0%. It’s led to probably more time being spent on the matter than it really should, but who hasn’t enjoyed reading about what VAT rate to apply on Jaffa Cakes, Pringles, Mega Marshmallows and so on.

The Upper Tribunal has just added to this list whilst releasing its decision in the case of Queenscourt Limited [UT/2024/000112], otherwise referred to as the KFC dip pots case.  However, whilst this case does concern the VAT treatment of different foods it actually provides some insight and gives a result with greater impact on another very complex area of VAT, that being single and multiple supplies. This means it needs to be considered not just by those in the food and hospitality industry but all businesses.

Queenscourt is a franchise operator of KFC restaurants. It sells takeaway meal deals which include hot chicken, pots of dip (mayo, BBQ, etc), coleslaw, cookie and a drink. Originally it applied VAT at 20% to all the income for a meal deal but then decided that was wrong.  

Instead, it claimed that the meal deal was not a single supply but consisted of several different supplies and each should be treated separately for VAT purposes. That meant the dip pots should be zero rated along with several other items, the chicken remained standard rated.  

HMRC originally agreed with this but then decided that only some of the items (cookies, coleslaw, etc) could be treated separately for VAT purposes. Their reason was that they could be consumed on their own. For dip pots though, HMRC opined that they were ancillary to the fried chicken and not an aim in their own right but just a way to better enjoy the chicken.  Therefore, they had to follow the VAT treatment of the chicken, so 20%.  

Suffice to say Queenscourt didn’t agree and appealed the matter to the First Tier Tribunal (FTT). They agreed with HMRC though and upheld the decision to not repay VAT to Queenscourt which they had accounted for on the dip pots.  

Queenscourt was allowed to appeal to the Upper Tribunal on the basis of three reasons:

1. the FTT had “erred in law” by concluding that after determining that there is a multiple supply taking place, some components of that multiple supply can be treated as supplied separately and others can be treated as ancillary to a principal supply
2. the FTT again erred when saying that because the dip pots could not be sourced from third parties that prevented them being a single supply
3. it was unfair for HMRC to change their mind (i.e. to originally agree with Queenscourt and repay the VAT but then ask for it back because their opinion had changed).

The FTT result and the appeal grounds clearly show that HMRC and the taxpayer never disagreed about the VAT rate for the dip pots – and that is why this isn’t really a case about food.

On the second and third arguments which Queenscourt was allowed to appeal on, the Upper Tribunal rejected them. The first one was held though, and this is the point for businesses to take away from the case.

Single and multiple supply cases are subjective matters to decide on but there is useful case law to help reach the right decision. It’s a given that all supplies should be treated, as a starting point, independently but Card Protection Plan [ECJ C-349/96] states that if one is a principal supply and others ancillary to it, just one supply takes place. Levob [ECJ C-41/04) expands on this by saying that where two or more elements are so closely linked to be in effect a single economic supply then just one takes place for VAT purposes, if it would be artificial to split them.  

Cases such as Middle Temple [UKUT 0250] have then been heard since and provide very useful indicators to help decide if a single or multiple supply is taking place. For instance, how is it priced, what is the invoicing position, is one item an aim in itself, etc.

As with the VAT rates, that the meal deal was a multiple supply appears settled ground in this case. The question not answered by a court beforehand though and being contested here was whether some items could be treated as independent but others ancillary to one other item – in effect, some part of the supply is multiple but another single.

The Upper Tribunal’s conclusion was that if a single transaction is treated as a multiple supply for VAT purposes, then all elements of that transaction must be treated as such. In effect it is a binary position, and you have either: 

• a single supply with one VAT rate (following that of the principal supply) 
• multiple supplies each with their own VAT treatment and the principles from CPP do not apply.

It’s highly likely that HMRC will appeal this case but at the time of writing that isn’t confirmed.  

Supplies where one price is charged but several components are involved are always complex matters for VAT purposes. The single vs multiple supply questions won’t go away with this case, but it does help shed some more useful light on how to manage them.  

Anyone about to start making such supplies should review them beforehand and in light of this decision, anyone already trading should consider if it impacts them. It’s an area often challenged by HMRC and hence having on record a review of the VAT treatment and evidence as to how the filing position adopted was arrived at is important to help mitigate penalties should that challenge occur.     

For further guidance on above, please get in touch with your usual Crowe contact.