HMRC chickens out of paying KFC VAT claim

A dispute over the VAT treatment of dips included in KFC meal deals reminds us that receiving payment of a VAT refund from HMRC is not the end of the story, and that HMRC may still be entitled to recover the money if they later decide the claim was incorrect. 

KFC dips – part of a meal or a supply in its own right? 

Queenscourt is a franchisee which operates around 50 KFC outlets in the UK. The menu used at those restaurants offers KFC food items to be purchased individually, and also various ‘meal deals’ which bundle together popular items at a discounted price.  

A dispute arose with HMRC over the VAT treatment of KFC ‘dip pots’, its range of condiments including tomato ketchup, barbecue sauce, garlic mayo and sweet chilli sauce. The dip pots are given away with some KFC meal deals, but are also available to be purchased separately, or with other food items, for 40p each. 

Historically, Queenscourt treated the dip pots as a zero-rated supply of cold takeaway food when sold on their own, but as part of a VATable supply of hot food when sold as part of a meal deal. However, in 2019, Queenscourt decided  the component parts of the meal deal that would be zero-rated if sold on their own (such as coleslaw, cookies, milkshakes and dip pots) could also be zero-rated when sold with a meal deal for takeaway. The company submitted a claim for a refund of VAT previously charged on these items. HMRC accepted and repaid the claim, but noted that the issue may be revisited on future audits. 

Queenscourt then submitted a second claim in April 2020. At that point, HMRC agreed that the cookies and yoghurts could be treated as separate supplies, but refused the claim for VAT on dip pots, taking the view that the dips were not something to be consumed on their own. Instead, they were simply a means of better enjoying the food in the meal deal, and therefore were subject to VAT as part of that meal deal. HMRC also reviewed the previous claim and issued an assessment to recover VAT of £75,000 it had previously repaid to Queenscourt on the dip pots. 

Queenscourt appealed against that decision. It argued that the dip pots were more than just a way of better enjoying the hot food but were also a popular product in their own right, and were often bought separately by customers. Indeed, one of the dips, the supercharger sauce, proved so popular that it was also sold in large bottles.  

However, the First-tier Tax Tribunal sided with HMRC. While some people might buy KFC dips on their own to use with other food, the scale of this was limited, with separate sales averaging at only four dip pots per outlet per day. Instead, the tribunal felt that dips are not typically eaten on their own, and the name ‘dip pot’ might suggest to the customer that the intention was for the hot food to be dipped into the pot to make it more enjoyable. Therefore, the dips could not be treated as separate zero-rated sales when included in a meal deal and Queenscourt was not entitled to the VAT repayment. 

Was HMRC entitled to ask for the money back after paying the claim?

The case was further complicated by the fact that HMRC had already accepted and paid the company’s initial VAT claim in 2019 before reversing its decision a year later. Queenscourt argued that HMRC’s assessment was not valid, and that HMRC’s payment of its first claim had given it a legitimate expectation that HMRC would not seek to recover that VAT. It complained that HMRC’s change of heart had a severe impact on its ability to finance the refurbishment of existing outlets and opening of new ones, which had been planned taking the availability of the VAT claim funds into account. 

The tribunal did not accept this argument either. Even once it has paid a claim, the tribunal noted HMRC has the legal right to claw it back within two years if it decides that the refund was not in fact due. That remains the case, even if HMRC is correcting its own flawed decision to approve the claim. 

The tribunal also noted that the first claim was a consolidation of several different food items, and it wasn’t until the second claim that the full breakdown and Queenscourt’s precise VAT stance on the dips was properly considered by HMRC, leading to its decision that the dips claim couldn’t be paid. HMRC had also clearly stated when paying the initial claim that it reserved the right to review the claim on future audits. 

The tribunal also found that Queenscourt had failed to prove that HMRC’s decision had been detrimental to its business. The amount of VAT at stake in this dispute was well below the cost of its planned restaurant upgrades, and Queenscourt had not submitted enough evidence to show that other market pressures, like increased energy and borrowing costs had not also been a factor. 

What does this mean for VAT claims?

This appeal has highlighted several important issues for businesses claiming overpaid VAT back from HMRC.

• Firstly, the question of whether items sold in a package should be treated as a single supply (with one VAT treatment) or separate supplies for VAT purposes (with different VAT treatments) is often very difficult to determine. Tribunal decisions on this issue are usually decided on the detailed facts of each individual case.
• Also, even if HMRC has paid a claim, there is a risk that it might come back later to recover that money, especially where it has made it clear that it may review the claim in future. The time limit for HMRC to change its mind is normally two years, although it can extend to four years if HMRC believes the facts behind the claim were not fully disclosed at the time it was made. The fact that you may have already invested the money elsewhere in your business is unlikely to be enough to invalidate an HMRC assessment to claw it back.

These risks are best addressed by making sure that a VAT claim covering more than one product or VAT issue is clearly itemised, in case HMRC accepts one part of the claim but not another. It is also vital to ensure that you have made the rationale behind your claim completely clear to HMRC at the time you submit it.