Hot Takeaway Food (VAT)

Stephen Gilbert Excerpts

Wednesday 23rd May 2012 Westminster Hall

[Stephen Gilbert (St Austell and Newquay) (LD)]

It is a pleasure to serve under your chairmanship again, Mr Scott, and to welcome so many hon. Members. I place on the record my personal thanks to Mr Speaker for allowing the debate, which was originally slated for the day of Prorogation and so fell from the order of business. I am grateful to Mr Speaker for allowing it to take place today instead.

There is much to welcome in the Budget announced by my right hon. Friend the Chancellor, particularly the lifting of more than 2 million of the lowest paid out of paying income tax and the additional tax burden placed on those fortunate enough to be among the wealthiest in our society. However, I would not be doing my job as a Member of Parliament if I welcomed only the good news from the coalition Government and turned a blind eye to Government proposals that had a significant negative impact on my constituents and the country. The proposals for the extension of VAT to hot food, and in particular how they relate to baked goods, fall into that category.

I am, however, grateful to the Minister and to other colleagues in Government for the constructive way in which they have handled this issue and the concerns raised by me, my hon. Friends and the industry. I found them willing to listen and receptive to alternative solutions. It is surely in the best tradition of Government to recognise that none of us has a monopoly on wisdom. Their constructive engagement with me and others has been welcome.

I support the overall aims of the Government. It is right to seek to simplify the application of VAT rules on hot food, to close anomalies that have been exploited by supermarkets and others and raise revenue from those flouting the rules, to help tackle the national deficit and create a level playing field as between bakeries and other sellers of hot food, such as fish and chips. However, we have to do so in a way that actually creates simplicity, is enforceable by Her Majesty’s Revenue and Customs, is deliverable by businesses across the country, and, crucially, is understandable for consumers. The effect of the Government’s current proposals on the baking industry fall short in all four of those tests.

I would like to set out the practical problems and concerns with the Government’s proposals, and the likely economic impact on the baking sector if the proposals are not altered, and then present an alternative way forward that I hope will achieve the Government’s aims without any negative impact. I am not proposing, however tempting it is, to stand here and argue for an exemption for the Cornish pasty or the baking industry. I want to set out a framework that delivers the Government’s intention of consistency and simplicity.

I am delighted to have the support of my hon. Friends the Members for St Ives (Andrew George), for North Cornwall (Dan Rogerson), for Truro and Falmouth (Sarah Newton), for South East Cornwall (Sheryll Murray), and for Camborne and Redruth (George Eustice), and that of many other hon. Members from across the House and the country, including an alliance, however unlikely, with Devon.

It is understandable that the Government should seek to move away from the current situation in respect of VAT on hot food, where the basis of the test rests on the intention of the supplier. That is subjective, and has led to considerable inconsistency of application. In recent years, a plethora of case law tribunals have established significant anomalies—for example, two hours for zero-rated food, a position exploited by supermarkets in particular.

In place of that subjective and contestable test of intention, the Government’s proposals attempt to move towards a more precise test that centres on ambient air temperature, but that simply replaces one set of anomalies with another when it comes to baked products—pasties, sausage rolls, meat and potato pies and all the other savoury staples in our high street. There is little doubt that the ambient air temperature test will become the subject of significant dispute between bakeries and HMRC, with the potential for litigation. Why is that? The ambient air temperature is constantly changing. As the temperature of a naturally cooling baked product is also constantly changing, it raises the possibility of a pasty or pie at the same temperature being subject to different VAT rules in different parts of the country at the same moment. That is clearly a nonsensical position that will cause considerable difficulties in establishing a consistent ambient air temperature for every bakery in the country, a duty unlikely to be welcomed by HMRC. It will place an additional difficulty for the businesses concerned in deciding when to charge the customer VAT.

The proposed changes would be open to challenge in terms of legal certainty, and could tie up the industry and the Government in the courts for some time. The changes are contrary to the stated intention of the consultation—to simplify current rules and reduce uncertainty and costs for both businesses and HMRC. The ambient air temperature has already been found wanting by the courts. In the Court of Appeal, during the Pimblett case in 1988, Lord Justice Parker said:

“The test is a precise one. It involves a remarkable result that frozen food would be regarded as hot if the ambient temperature was one degree lower than freezing. A praiseworthy attempt to produce precision does not, in this instance, appear to me to have advanced clarity one whit”.

To an extent, that view seems to be shared by colleagues in the Treasury. In my discussions with them, it seems that the Government’s intention is not even to enforce the letter of the proposed rules, but to make a number of assumptions based on the quantity of each bakery’s products that should be standard-rated. That is untenable.

Any apportionment scheme cannot override the basic rules on supply, consideration and liability. That is even recognised in HMRC’s guidance. Any agreement based on the temperature of cooling products will be impossible, given the size and variation in bakeries and the fact that a reference point for ambient air temperature cannot be established.

There are a number of other practical difficulties for businesses. When do they issue a VAT receipt if requested to do so by customers? They will have to re-write till software systems and determine the price on which VAT would be charged, all set against the unworkable backdrop of legislation that will be prone to confusion and challenge.

Another issue relates to products sold on a seasonal basis—perhaps we can add mince pies to the list. At what point would HMRC agree with bakeries on the apportionment scheme for seasonal products such as mince pies? I doubt whether that would be able to be done in a timely way, and it shows that the Government’s tests are unworkable. If agreement on an apportionment scheme cannot be reached, the industry will have to fall back on legislation, which would be problematic at the very least.

The Government’s current proposals are unenforceable by HMRC and undeliverable by the industry. They will be confusing to customers and open to challenge in the courts.

[Andrew George (St Ives) (LD)]

My hon. Friend has ably demolished the Government’s primary claim that the measure is a means by which they can resolve an anomaly. The Treasury knows that wherever a line is drawn, even a new line, a new anomaly is created. Does my hon. Friend agree that under all Governments the Treasury tends to use sophistry when arguing that it is resolving an anomaly and that that is simply a way of increasing tax income?

[Stephen Gilbert]

My hon. Friend puts his finger on the Treasury’s intention, but I will demonstrate that the negative effects of the measure make it unlikely that any net additional revenue would be raised, when the damage to jobs, business rates and so on is taken on board. He is right to say that the Government expect to raise money from this measure—their impact assessment suggested that £50 million would be raised in the first year, rising to £120 million annually in subsequent years—but at what cost would that be to the baking industry in particular? I am afraid that it will cost jobs and investment in an industry that we want to see more of, not less, on our high streets.

[Julian Sturdy (York Outer) (Con)]

My hon. Friend is making a powerful argument. Surely there has been unfairness in the takeaway industry, with the fish and chip shop up against the supermarket selling hot chickens, as he has already mentioned. There has to be a clear definition of what constitutes takeaway food, because that is lacking at the moment.

[Stephen Gilbert]

I share my hon. Friend’s concern. There needs to be a level playing field. I shall say how I seek to achieve that for the Government, but with a simpler test. He is right to say that there is confusion between different takeaway outlets and types of takeaway food. That is also reflected in planning law, in which takeaways selling fish and chips are in a different category from bakeries.

It has been estimated that some 2,000 jobs throughout the UK are at risk and 300 bakeries on our high streets are at risk of closure. With the impact of the ongoing recession and the significant supply side inflation of recent years, the baking industry is unable to absorb the imposition of the standard rate of VAT, and price increases are inevitable. Research from YouGov shows clearly that this proposal is unpopular with the public—69% of people have said that they do not support it—and that is also demonstrated in a petition signed by more than 50,000 people, which hon. Friends and I gave recently to Downing street. That research also suggests that the measure will change people’s behaviour, with up to one in three people saying that they will stop buying baked savouries. Consumers being able easily to swap to cheaper zero-rated alternatives will impact on the entire supply chain, but with no net additional receipts to the Exchequer.

As I said, the National Association of Master Bakers estimates that some 2,000 jobs will be lost nationally, many hundreds in Cornwall. Bakeries will close on our high streets, creating more empty units at a time when, through the Portas review and other measures, the Government are seeking to boost the high street. The overall economic costs created will undermine any additional tax from the baking industry.

Cornwall Food and Drink estimates that at least 100 businesses in Cornwall contribute to the production of more than 170 million Cornish pasties each year. The total turnover of the industry is thought to be more than £280 million, double the estimates of 2005. It is a growing industry. At least 25% of the turnover is spent in the local economy; the industry is thought to be worth £72 million indirectly, with £15 million going to Cornish farmers.

Pasty production produces other socio-economic benefits as well as purely economic ones—supporting village shops in rural communities, for example. It is a vital part of the Cornish economy, which still languishes on European aid.

In 2011, the university of Exeter showed that keeping retail prices down while suffering strong increases in input costs, particularly fuel and other costs, would seriously affect margins in the Cornish food and drink sector. The industry is clear that it cannot afford to absorb the potential increase in VAT, which will be passed to consumers.

What does that mean for my constituents? The impact will be devastating. The producers, retailers and suppliers will lose more than £100 million a year, an estimated 1,100 jobs will be lost and scores of high street bakeries will close. These proposals come at a time when retailers, including food-to-go shops, have already been hit by an additional £350 million business rate bill this year and when the sector overall already contributes £5 billion a year in VAT—some 9% of the total VAT take—despite accounting for only 5% of gross domestic product. The British Retail Consortium tells us that consumer spending is falling and household incomes are shrinking.

Sadly, there is no evidence that HMRC has considered the impact on the cost of welfare payments resulting from job losses, the reduced amount of corporation tax that the Revenue will receive, the loss of income tax and national insurance revenue as a consequence of the bakery industry’s contracting, and the high street supply chain’s being hit, including the loss of business rate revenue to local authorities.

There is also the socio-economic consideration, pointed out by the Association of Convenience Stores, among others. This change will hit the least well off the most. The poorest households spend almost one fifth of their net household incomes on VAT, but the richest spend only 9%. The measure will compound that, hitting the lunch of hundreds of thousands of people throughout the country.

What is the alternative? The Cornish Pasty Association, the National Association of Master Bakers, Greggs, the West Cornwall Pasty Company and others have suggested in their responses to the Government’s consultation that we need to return to the original intention. VAT was first extended to hot takeaway food in 1984 by the then Chancellor of the Exchequer, Nigel Lawson, who said in his Budget speech:

“Most food is zero rated, but food served in restaurants is taxed, together with a miscellaneous range of items including ice cream, confectionery…Takeaway food clearly competes with other forms of catering, and I therefore intend to bring into tax hot take-away food and drinks”.—[Official Report, 13 March 1984; Vol. 56, c. 303.]

That relates to the point that my hon. Friend the Member for York Outer (Julian Sturdy) ably made about the need for a level playing field.

The then Chancellor elaborated that statement in a written response to the former Member of Parliament for Leeds South, Merlyn Rees:

“The VAT extension to hot take-away food which I announced in the Budget applies to food and drink which has been deliberately heated so that it can be consumed whilst still hot. It does not apply to food and drink which has cooled to room temperature by the time it is sold, or to things like pies and pasties which are sold warm because they happen to be freshly baked, and not to enable them to be consumed while still hot.”

I could not have put it better myself. That is the fundamental difference between a meal cooked to order in a fish and chip shop—or a curry or a pizza—and a baked product, which is simply hot as a result of its production, but cools naturally over time. The former Chancellor recognised that baked products are hot or warm by virtue of being baked, not because they are made to order and hot for consumption in the same way as curry or fish and chips are. His position has not been challenged by subsequent Governments and it is my view, and that of my hon. Friends, that it should be upheld while we seek to clarify the additional anomalies that have arisen since 1984.

To put it crudely, we can hit the £280 million rotisserie chicken business and provide the level playing field with fish and chips, but we must maintain the additional principle of food being hot at the time it is provided to the customer, recognising the differences that the former Chancellor recognised many years ago. The additional principle should be that baked goods are zero-rated, except where they are kept hot for consumption.

In short, we seek to amend the Government’s proposals to include the provision that VAT on baked goods should be charged only if they are kept in heated cabinets or if other paraphernalia are used to keep them hot for sale, in the same way that battered fish and chips are kept hot for sale in a cabinet in fish and chip shops. That would not interfere with the Government’s proposals to charge VAT on hot food cooked to order and provided hot to the customer for consumption.

I am sure that the Minister will want to consult Treasury counsel on the exact wording of any change and that he has a mountain of responses from the consultation to wade through. However, my view is held not only by me, but my hon. Friends and the industry. In practice, our suggestion would mean that a pasty sold in a fish and chip shop that is currently standard-rated, because it is kept hot for sale alongside some pre-cooked fish or a battered sausage, would be on the level playing field sought by the Minister and my right hon. Friend the Prime Minister.

The alternative would mean that any pasty kept hot for sale in a bakery would also be standard-rated, achieving the level playing field that the Government want in a way that is enforceable by HMRC. By closing the loopholes exploited by the supermarkets, the measure would raise at least £56 million per annum, which is equivalent to the vast bulk of the Government’s expected revenue from the changes.

The alternative provides a simple test for business: VAT on baked goods that are kept hot artificially, and no VAT on those that are hot simply as a result of their cooling process. It avoids the legal uncertainty and likely challenge to HMRC, it delivers to the customer a clear and understandable difference in pricing—VAT on a product that is kept hot, no VAT for a product that is not—it allows flexibility for businesses to adapt their models accordingly and, crucially, industry suggests, it would have none of the damaging effects that I outlined earlier.

My view and that of my hon. Friends is that the Government’s proposals are unenforceable, are undeliverable by business, replace one set of anomalies with another, are likely to be heavily contested and will do significant damage to the Cornish economy and to high streets throughout the country. By contrast, the alternative proposal put forward by me and my hon. Friends is clear and consistent, is enforceable by the Revenue, closes the loopholes exploited by the supermarkets—therefore raising the vast bulk of the revenue that the Treasury wishes to obtain—and creates the level playing field with the fish and chip shops that my right hon. Friend the Prime Minister rightly demands. It is deliverable and would be publicly welcomed by the baking industry. I hope that the Minister will say in his remarks that he is actively considering our alternative as the consultation proceeds.

[Several hon. Members]

rose—

--- Later in debate ---

[Stephen Gilbert]

The hon. Lady is making a powerful case. Does she agree that one of the interesting things about this debate is the fact that the scope of concerns has widened rather than narrowed? I have mentioned mince pies, the hon. Member for Bassetlaw (John Mann) has mentioned Bakewell puddings and the hon. Lady is now talking about samosas. Muffins, doughnuts and other products have also been thrown into the mix.

[Cathy Jamieson]

Indeed. That highlights the powerful case that, initially, the Treasury may have viewed the proposal as something that could be taken off the shelf, dusted down and presented as a way to correct some anomalies. However, as my hon. Friend the Member for Rochdale has argued, it did not consider the detail and the issue has become a problem. It has become a problem in relation not only to pasties—I am aware that we cannot deviate too far from the issue under discussion—but to the proposals for VAT on work on church buildings, on which there has been some movement.

Moreover, last night, multiple petitions were presented in relation to the caravan tax, and yesterday, I, along with a number of other Members, met representatives from the newly formed—it was formed in response to Government proposals—UK Specialist Sports Nutrition Alliance, which has pointed out that some of its members’ products do not appear to fall under the categories for which VAT was originally intended to be charged.

This series of Government proposals do not seem to have been properly thought through. Their impact on our high street has not been considered. That is important. We want to see people shopping on their high streets and spending what cash they have on local businesses in particular, and to ensure that our high streets continue to thrive. When the British Retail Consortium, the Association of Convenience Stores and the whole range of organisations that represent the baking industry, as well as ordinary people, think that the Government have got it wrong, it is time for the Government to think again.

I will not speak for much longer, because I want to allow the Minister as much time as possible to respond to the debate, but I want to return to the widening scope of things affected by the proposals. The hon. Member for St Austell and Newquay suggested during his opening speech that the Government were prepared to listen, but I am disappointed to say that I have not found that to be the case. We have raised the issue on the Floor of the House and have continued to raise it and a number of other issues in the Finance Bill Committee, but on every occasion—no matter what the subject—when we have asked the Government to go away, make another assessment, come back with a report and consider the implications, they have not done so.