The UK supermarket chain Morrisons faces a £17m tax bill after losing a lengthy court battle against HMRC over the charging of value added tax (VAT) on rotisserie chicken.
The high court has ruled that whole cooked cool-down chickens should be subject to the standard 20% VAT rate for hot food.
The dispute relates to changes introduced by the then chancellor George Osborne’s controversial “pasty tax” of 2012, when the Treasury imposed VAT on all hot takeaway food sold by bakeries and supermarkets, such as Cornish pasties, pies and sausage rolls. This prompted a public outcry, forcing the Treasury to partially row back.
The Treasury initially said that food sold above “ambient temperature” should be subject to VAT. It later decided to apply VAT to food stored in a hot cabinet, while exempting products placed on a rack that are sold either cold, or “incidentally hot” but eaten cold.
Morrisons has argued that its rotisserie chickens should not be taxed because they are either eaten cold or reheated for dinner.
The court ruling noted that Morrisons sold the chickens in bags with foil lining labelled “caution: hot product”.
One witness said the chickens were not displayed for sale for more than two hours after they were taken out of the oven. If they had not been sold by the end of that period, they were discarded as waste.
Richard Nichols, the finance director of Morrisons until January, told the court that the company’s tax and treasury team had always cooperated with HMRC of its own initiative. He added that Morrisons “operates in a highly competitive industry sector with low profit margins” and needed certainty of tax treatment to inform pricing decisions.
He said research showed that 80% of Morrisons customers buying rotisserie chickens ate the chicken cold or for a later meal.
Nichols said the chickens were typically bought by people on lower incomes, and two-thirds of customers felt £4.50 was the maximum they would pay, above the £4.40 price at the time of the hearings.
With VAT, the price would have risen to £5.28 and “could have resulted in hundreds of thousands fewer chickens being bought every month, which would have repercussions for the whole supply chain and for balanced diets of families across the UK”, Nichols argued. It is unclear whether Morrisons will immediately increase the retail price of the chicken.
Witnesses said after two hours, chickens in a bag had a temperature of between 42C and 45C, whereas a naturally cooling chicken would be at 31.8C. The judge said this showed that the products were stored in an environment that retained heat.
The ruling concluded: “Morrisons failed to disclose the heat and grease/fluid retention features of the chicken paper bags and the fact that cool-down rotisserie chickens were taken off sale after two hours, whilst they were still well above the ambient temperature and were not on a cooling trajectory that meant that they would only be ‘incidentally hot’ when sold.”
The ruling also said: “HMRC did not give clear and unambiguous rulings in 2012-14 that cool-down rotisserie chickens were zero-rated, which Morrisons had a legitimate expectation it could rely on.”
Morrisons declined to comment on the ruling.
