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The Exchequer Secretary to the Treasury (Mr David Gauke)
It is a great pleasure to serve under your chairmanship, Mr Scott. I congratulate my hon. Friend the Member for St Austell and Newquay (Stephen Gilbert) on securing this debate and on his thoughtful and constructive speech. I thank all those who have contributed to the debate, including my hon. Friend the Member for North Cornwall (Dan Rogerson) and my hon. Friend the Member for South East Cornwall (Sheryll Murray), whom I congratulate in particular on her expertise on the matter. I am also grateful to my hon. Friend the Member for Amber Valley (Nigel Mills) for providing his expertise on tax, rather than on pasties. I also thank the hon. Member for Rochdale (Simon Danczuk) and the hon. Member for Bassetlaw (John Mann), who gave a characteristically passionate and, at times, entertaining speech.
Since the Budget, Her Majesty’s Revenue and Customs has been running a consultation on addressing a range of VAT anomalies, including the treatment of hot takeaway food. I am well aware that the changes that we have announced to the VAT treatment of hot food have attracted a considerable amount of attention. Indeed, I have had meetings with my hon. Friends the Members for St Austell and Newquay and for Camborne and Redruth (George Eustice) and representatives of the Cornish pasty industry.
Mr Rob Wilson (Reading East) (Con)
The definition of hot food has caused much uncertainty, not least for Auntie Anne’s pretzel company in my constituency, which I visited last week. The company has put on hold quite big expansion plans because having to charge VAT would put it in competition with a whole new set of fast food outlets. The pretzels are baked on the premises from a dough mixture, and the company needs some clear guidance from Her Majesty’s Treasury that it will not be liable to VAT so that it can get on with its growth plans and with creating jobs in the local area.
Mr Gauke
I am grateful for that intervention. There is a carve-out in this measure that relates to bread. My hon. Friend refers to pretzels made from a dough mixture. HMRC will provide guidance on the definition of bread, so that matter will be covered once final decisions have been made.
Before I turn to some of the arguments against the proposal, I should like to step back and remind hon. Members of why we have proposed this change. As I announced to the House on 18 April, we extended the consultation period until last Friday in the light of the responses received and I have, of course, been listening to the contributions to this debate and will ensure that they are taken into account in the Chancellor’s decisions.
Ensuring that VAT will apply to the sale of all hot food—to the extent that it does not already do so—is one of a series of VAT measures announced in the Budget designed to make the VAT system fairer to all traders, and to make it easier to administer and comply with.
The current rules on the VATability of hot takeaway food have been made particularly complex and unfair by a patchwork of different legal decisions over the decades, as my hon. Friend the Member for St Austell and Newquay pointed out. VAT has always applied to food consumed on the supplier’s premises, notably in restaurants and cafes, and was extended to hot takeaway food in 1984. The definition of hot takeaway food in the 1984 legislation is that the food
“has been heated for the purposes of enabling it to be consumed at a temperature above ambient air temperature”
and that it
“is above that temperature at the time it is provided to the customer.”
There have been repeated efforts since the 1980s to chip away at this boundary. A number of businesses have argued in litigation that, although the food they provide to their customers is hot and is taken away, it should not be taxed as “hot takeaway food”, but it should instead be zero rated.
Some have argued that, in heating the food, their intention was not to provide their customers with food to be eaten hot, but to follow rules of hygiene, to finish the cooking process, to provide evidence of freshness, to create an aroma, or to improve appearance, crispiness or texture of the product. Such arguments have not always been successful, but where they have been, they have allowed some businesses to secure VAT-free treatment for a range of hot food products such as hot rotisserie chickens, meat pies, pasties and panini. However, other businesses have continued to apply VAT to the similar hot food products that they sell. They have accepted, or the courts have ruled, that their intention is to heat their food products so that their customer can eat them hot. Under the current rules, the VAT rate applied to hot takeaway food depends on the particular supplier’s purpose in heating the food.
In reference to a point made by my hon. Friend the Member for Montgomeryshire (Glyn Davies), a small independent fish and chip shop will have to charge 20% VAT on its hot chicken, but a major supermarket will argue that its rotisserie chickens are zero rated. One baker who keeps his sausage rolls in a hot cabinet to provide his customers with a hot snack will charge tax, but the baker next door who also keeps them hot and argues that this is to maintain an appealing aroma will claim that they are zero rated.
The current situation is unfair, and it is right that we seek to change it. There was some agreement on that point from at least some hon. Members. That is why we are introducing new rules to ensure a level playing field. We have proposed the removal of the subjective element of the zero-rate definition, which has led to these anomalies, to provide more consistency in the taxation of hot food. As I mentioned earlier, we are adding a simple carve-out that bread, irrespective of its temperature, will not be liable.
Simon Danczuk
Will the Minister address the point that I made about the samosa tax issue?
Mr Gauke
On that point, our proposal is that if food is sold at above ambient temperature, it is standard-rated, which is the same as takeaway food from Indian restaurants.
We have heard a number of arguments about why businesses will find it difficult to apply the test on ambient temperature. The test to determine whether takeaway food is hot is not new; it has been in place since 1984. However, I accept that, in many cases, suppliers do not need to ask themselves that question because they accept that their takeaway food is meant to be eaten hot and thus they pay tax even if, on a handful of occasions, the food may not actually be hot. They may make use of one of the other arguments about the purpose of the heating, and thus do not pay tax, even if the food is hot. However, the test is reasonably straightforward and will be policed in a pragmatic way.
Some hot food will have been kept hot or provided straight from the oven and will obviously be standard-rated under our proposals. In most other cases, people know when something is hotter than the air around it. A leading high street bakery chain, which has campaigned against these changes, said on its own website that customers who want a hot sausage roll should test whether the sausage roll is hot enough by feeling the temperature through the bag.
It is important to inject some common sense into this potentially trivial debate about food that at one moment is hot and at another is at ambient air temperature. We are not expecting staff to take detailed temperature readings every time they sell a pasty. HMRC will take a pragmatic approach and provide businesses with guidance, taking into account businesses’ responses on how to implement the change.
Dan Rogerson
I am grateful to the Minister for giving way as he sets out the Government’s thinking behind this matter. I hope there is room, following the consultation, for that thinking to develop. On the specific point of temperature, we have heard that many pasties are sold outside or through hatches and so on. Will the Minister tell us what would happen if the outside temperature is freezing or below freezing? That is the sort of issue that our constituents are raising with us.
Mr Gauke
I can assure my hon. Friend that we shall not start taxing food as hot if the outside temperature is 40°C and the item is warm only because of the air around it, or hot because the temperature is freezing. Existing simplification schemes are already available that allow businesses to calculate their VAT liability by reference to a fixed percentage of their turnover, without requiring staff to consider the temperature of every product sold. Pragmatic approaches to apportionment are, and have always been, a common feature in VAT.
Let me turn now to the proposal by my hon. Friend the Member for St Austell and Newquay. I am aware of the strength of opinion on this question, and I hear the proposal that he has made. The consultation was genuine. As it is also complicated, it would be premature of me to make a knee-jerk response to it within a few days of it closing. However, we are considering his and other constructive suggestions closely, and we are aware of the difficulties in operating a test based on ambient temperatures. As I said earlier, such a test has been in place since 1984, and it is no more than a legal definition of “hot food”. At present, it is rarely applied because businesses that accept that their food is heated in order to be eaten hot accept that it is taxable hot food, and those that argue that their food is heated for other reasons can escape VAT, even if the food is hot.
There are problems with my hon. Friend’s proposal, which potentially risks bringing hot pizza into the zero rate—I suspect that is an unintended consequence. However, it is one of many suggestions that we are considering, and we hope to be able to respond in the near future.
It has been suggested that this change could lead to business closures in the baking industry, and would disproportionately affect businesses in Cornwall, and that it should be delayed until there is stronger growth. However, it does ensure that businesses of all sizes and in all locations receive the same tax treatment for similar products and that that preferential tax treatment does not go to those with the most ingenious arguments, or the best lawyers, to support zero rating.
I accept that all taxes have an effect on growth and jobs, but VAT as a whole is less damaging than many other taxes. I hope that my comments today have provided more information on why the Government have made this proposal. The changes are designed to introduce new sensible objective tests that are less open to abuse and provide a level playing field for all businesses supplying their customers with hot food. I also hope that I have explained that we have undertaken a genuine consultation and will respond as soon as possible, and that we are listening closely to all the arguments.