Case Report: Dip Pots Back on the Menu

Context

• The appellant operates KFC restaurants, and the point of contention is around the VAT supply of the dip pots supplied as part of a KFC takeaway meal deal.
• Until 2019, the appellant accounted for VAT on the basis that the meal deals represented a single supply, such that the dip pots were standard rated for VAT.
• However, the appellant subsequently decided that the meal deals were instead a multiple supply such that each item has its own VAT rating, i.e. the coleslaw, cookies, yoghurts, and dip pots were zero rated.
• As such, the appellant submitted error correction notices to reclaim overpaid output VAT. HMRC allowed the first error correction notice but a different HMRC officer took a different opinion on the second.
• HMRC accepted that the KFC meal deal was a multiple supply. However, their conclusion was that, while the yoghurts and cookies etc could be treated as separate supplies as they could be eaten on their own, the dip pots were part of a single supply of the hot food within the meal deal and thus standard rated.

The FTT Decision

• The appellant appealed to the First-Tier Tribunal (“FTT”) on the basis that the supply of the dip pots as part of a takeaway meal deal was a separate zero-rated supply.
• In short, the FTT held that the supply of the dip pots as part of a takeaway meal deal was part of a single standard rated supply of the hot food and dips.
• Following this, the appellant appealed to the Upper Tribunal (“UT”) primarily on the grounds that the FTT erred in law when saying that:
  There is “no reason in principle” why two or more elements of a single transaction cannot constitute a single supply whilst, at the same time, other elements of the same transaction may constitute a separate supply.
• There were other grounds of appeal. However, we have only considered the one on which the case turned.

Single Supply vs Multiple Supply

• The starting point is that every supply must normally be regarded as distinct and independent such that each supply is liable to VAT at the applicable rate.
• However, where different elements combine, a single supply may still exist. Case law has established the following circumstances:
  • One or more elements constitute a principal supply with the other element(s) being merely ancillary to the principal supply, e.g. charcoal and lighting paper supplied with a disposable barbeque. (“CPP Case”)
  • Two or more elements are so closely linked as to form a single, indivisible economic supply which it would be artificial to split, e.g. the lease of land together with a supply of water. (“Levob Case”)

• It was common ground that the relevant circumstance was the CPP case, i.e. if there is a single supply in this case, it must be on the basis that the supply of the dip pots as part of the meal deal is ancillary to the supply of other items contained within the meal deal

Discussion

• It was common ground that the KFC meal deal was a multiple supply. However, there are no domestic or European cases relating to the specific issue here, i.e. is it possible, within a multiple supply, to isolate two or more (but not all) of the elements of that transaction and say they constitute a single supply.
• As such, The UT reviewed the available case law on multiple vs single supplies, and determined that the most natural reading of “every supply of a service must normally be regarded as distinct and independent” in the CPP judgement is that:
  “Every supply (including every element in a multi-element transaction which would be a supply if provided on its own) must be regarded as distinct and independent unless it falls within one of the few exceptional cases where a derogation from that fundamental principle is permitted… these exceptions require all the elements in a single transaction to constitute a single economic supply following the principles in CPP or Levob.”
• As such, the UT held that the FTT made an error in law when it concluded that there is no reason in principle why two or more elements of a single transaction cannot constitute a single supply whilst, at the same time, other elements of the same transaction may constitute a separate supply.
• In summary, the means that the CPP/Levob exceptions apply at the level of the whole transaction, i.e. they render the whole transaction a single supply or they do not apply at all.
• As such, the appeal was allowed and the taxpayer won, i.e. the dip pots are to be treated as zero rated as there cannot be a single supply of the hot chicken and ancillary dip pots (due to CPP) within the multiple supply of the KFC meal deal.

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