Pour-ly draughted cider legislation

The VAT legislation underpinning the TRR relied on an existing definition of ‘alcoholic beverage’ within VAT law to exclude alcoholic drinks and have them continue to be subject to 20% VAT. However, this definition did not include cider, as, for historic reasons, the law applying VAT to cider is found elsewhere in legislation. JD Wetherspoon submitted an error correction notice to HMRC seeking to reclaim the 20% VAT paid, arguing that it should have only accounted for the reduced rate in place at the time (5% or 12.5%).

The tribunal examined three areas: whether the term ‘alcoholic beverage’ in the law should be purposively interpreted to include cider, whether the court could correct a legislative error to avoid an ‘absurd or anomalous result,’ and whether the UK interpretation of EU law for the TRR was compatible (given the timing of the TRR, the UK was required to abide by EU law at the time).

For the first issue, the court found the definition used for ‘alcoholic drink’ did not state that it included cider. The definition used was exhaustive and sensible as cider has historically been treated differently for excise and VAT purposes compared to other alcoholic drinks. Strictly, per UK law, cider was reduced rated.

For the second issue, HMRC contended that the intention was always for cider to be excluded from the TRR, giving some evidence to support this viewpoint. The court agreed, viewing the exclusion of cider as an ‘anomalous and absurd’ differentiation and that it could correct the legislative error using the Inco principle. This is an unusual and rarely applied principle that allows a court to correct an obvious legislative error. This resulted in the claim failing.

The EU law question then became redundant albeit the court opined that the claim would also have failed on this basis. This is largely because the TRR relied on an EU derogation permitting a reduced rate for hospitality services – but alcohol is excluded from that derogation. Thus any UK law that suggested otherwise would be in breach of EU law and the court could interpret UK law accordingly. Given the incompatibility with EU law, the court found that the term ‘cider’ should be added to the definition of ‘alcoholic beverages’ for the purpose of the TRR.

There was clearly an error in drafting the law in this instance and the court has found a legal mechanism to arrive at what was arguably the “right” answer. Given the subjectivity of elements of the decision and the value of VAT at stake, it is possible that JD Wetherspoon will seek to appeal this decision to the Upper Tribunal.

Some of the reduced rate period is now over four years ago but there remains a window of opportunity for businesses to review the implementation and operation of the reduced rate. As evidenced by the HMRC drafting in this instance, given the timing pressures and limitations on business at the time it is possible that mistakes or misinterpretations were made on both sides.

We often see the deep complexity within UK tax law causing issues, in particular when changes, exceptions and overrides are introduced. Care needs to be taken when changes are drafted and introduced to ensure that there are no unintended consequences.

The complexity of the UK tax system reduces business certainty, reduces innovation and willingness to invest in the UK. In our view, simplification of the VAT laws surrounding food and drink is long overdue and should be a key priority of any government.

One thing is for certain – the decision has not soothed any troubles away for the hospitality industry.