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Morrisons is facing a massive £17million tax demand from HMRC, arising from a dispute over the type of paper bags used for its popular rotisserie chickens.
The supermarket was issued a bill of £17,034,932 in 2021, with tax authorities claiming that birds cooked in stores were subject to 20 per cent VAT.
This decision falls under The controversial “pasty tax” ruleIntroduced by the Conservative government of David Cameron in 2012.
The high street chain initially admitted it had avoided the hot meals levy, the implementation of which sparked a widespread public and industry outcry. Supermarkets and bakers, including Greggs, warned that the extra costs would be passed on to consumers.
reaction indicated amendment in tax rulesStipulations that hot food be cooked but then allowed to cool naturally will be exempted.
Morrisons argues that a tax inspection of its rotisserie operations in 2013 concluded that its arrangement – chickens being cooked and presented to customers in paper bags some distance from the cooking area – “appears to be acceptable” for avoiding hot meals tax.
But in 2021, HMRC said that because Morrisons’ chickens were sold in greaseproof paper bags with insulating or moisture-resistant properties, they were to be taxed at the standard rate, handing the supermarket a huge bill from January 2017 to July 2020.
The chain appealed against HMRC’s decision, arguing that for tax purposes its chickens were not actual hot food but only “incidentally hot”. It claimed the 2013 inspection gave it a “legitimate expectation” that it was complying with the rules.
Lawyers argued it would be unfair for supermarkets to now be ordered to pay huge backdated tax bills for rotisserie birds.
But Judge Mark Baldwin, sitting at the Tax Tribunal, has now ruled against Morrison and said HMRC’s demands were justified.
He said: “Morrisons, which operates a well-known supermarket chain, appeals against a number of assessments … as a result of HMRC’s decision that the sale of whole cool-down rotisserie chickens in the quarterly VAT period January 2017 to July 2020 is liable for VAT at the standard rate. The total amount of VAT at issue is £17,034,932.
“Morrison argues that HMRC made clear and unambiguous decisions in 2012-2014 that cool-down rotisserie chickens were zero-rated. Morrison says that he had a legitimate expectation that he could rely on those decisions, in fact he had relied on these decisions for over a decade and for HMRC to be able to retrospectively step back from those decisions and assess previous periods was unfair and There will be misuse of power.
“Morrison [says it] By actively inviting HMRC to meetings to discuss the correct VAT rating for cool-down rotisserie chickens and explaining the background and concept behind cool-down rotisserie chickens, Morrison invited HMRC officers to consider and clarify HMRC’s position … by visiting a local store, checking out the products on sale and reviewing the signage.
During the hearing, Morrisons’ lawyers argued that it “could not have been more open” about its chickens and that an HMRC official had observed cooled-down rotisserie birds on display in the store on at least four occasions and had seen them roasted, taken off the rotisserie and packed in bags, labeled and immediately displayed.
The company claimed that since HMRC had approved them to be zero-rated, the chickens had been prepared, displayed, packaged and marketed in the same manner.
In those circumstances, attempts by HMRC to collect VAT retrospectively after a decade of compliance with rulings and guidance were “manifestly unjust” and the supermarket company argued that it “could be crippling to a low-margin business”.
But the judge said the picture painted by the supermarket giant does not absolve it of its obligation to pay its tax bill.
He said that when HMRC inspectors looked at the chicken in 2013, “their understanding … was that they were ‘packed in plain bags, left to cool naturally and made available for self-selection by customers from table type displays in the aisles”.
However, the officer importantly thought that “the chicken paper bags were plain paper, and therefore non-heat-resistant bags”, which was not the case, he continued.
“We know that chicken paper bags, although not designed to retain heat, do retain heat and, more importantly, are designed to prevent the leakage of hot liquids and grease,” he said.
“It’s not [the HMRC officer’s] Trying to work out the properties of chicken paper bags, even a non-expert can figure out how heat resistant these bags are just by looking at them.
“By the end of 2021, Morrisons was telling HMRC that chicken paper bags were not heat resistant, when, e.g. [Morrisons’ then finance Director Richard] Nicholls readily admitted in cross-examination that this was not true.
“The vast majority of hot takeaway food is standard rated. Selling hot chickens in packaging designed to retain liquids and grease is sufficient in itself for the chickens to be standard rated.
The judge upheld the tax officer’s decision and confirmed the £17m bill, concluding, “Morrisons did not fully disclose all material information. In particular, Morrisons failed to disclose the heat and grease/fluid retention features of the chicken paper bags.”
The judge said that, in addition to these proceedings, Morrison has applied to the High Court for permission to apply for judicial review over the chicken tax dispute.