VAT’s Not Fair: Subway bread is not (tax-exempt) bread

October 20, 2020

3 min read

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What's going on here?

The Irish Supreme Court has ruled that Subway bread is not exempt from VAT because it does not fall under the definition of bread under Irish tax law.

What does this mean?

Ireland’s Value-Added Tax Act 1972 exempts certain staple foods from VAT, such as bread, tea, coffee, cocoa and milk. An Irish franchisee of Subway – Bookfinders Ltd – had applied to the Revenue Commissioners (Ireland’s equivalent of HMRC) for refunds on VAT payments made between 2004 and 2005. This was declined in 2006, so it appealed to the High Court, Court of Appeal and, after losing on both occasions, the Supreme Court.

The Act puts certain conditions on the composition of bread for it to be VAT exempt (Schedule 2). It states that fat, sugar or bread improver cannot exceed 2% of the weight of the flour used to make the bread’s dough. Sugar makes up 10% of Subway’s bread, so its sandwiches were not exempt. Instead, they were classed as heated beverages, which attracts a 13.5% VAT rate (Schedule 6).

What's the big picture effect?

This outcome is unlikely to inspire similar challenges from other fast-food outlets about whether their beverages attract VAT. Bookfinders Ltd – the appellant – had to construct a number of far-fetched arguments about the interpretation of clauses in the VAT Act 1972.

Bookfinders Ltd argued that as long as one of the three ingredients (fat, sugar and bread improver) was under the 2% threshold, then its bread was VAT-exempt. It is only possible to argue this because of the Act’s exact wording which says that the weight of “any” of these three ingredients must not exceed the 2% threshold. Bookfinders Ltd exploited the word “any”, arguing that since fat or bread improver is not over 2%, then there exists an ingredient that does not exceed the threshold for bread to be VAT-exempt. If the Act intended that VAT-exempt bread must have each and every one of these three ingredients below the 2% threshold, it should have used the word “each”, instead of “any”. 

This argument was far-fetched as it merely exploited the “precise usage and grammar” of the text. The judge was having none of it. As he stated, the fact that more precise language could be used in a statute “does not render it ambiguous”. This is more so when the interpretation sought is “unlikely and implausible”, given the purpose of the statute; arguably any vagueness must be resolved with the Act’s context in mind. Here, the judge thought it was “common sense and the clear intention of the Act” to try to limit the benefits of a 0% VAT rate to bread. Thus, the word “any” should be taken to mean “each”.

The failure of this case means that Bookfinders Ltd will not be getting any tax refunds on its sales of sandwiches, tea or coffee between 2004 and 2005. The judge’s common sense and purposive interpretation of the VAT Act 1972 sends a strong signal that any challenges to VAT definitions based on words containing a tiny amount of ambiguity is very unlikely to succeed. Thus, tax and litigation departments of law firms will not be petitioning Irish courts with similar arguments. The case won’t be directly relevant for the UK, a different jurisdiction governed by a different tax regime under the VAT Act 1994.

The fact that Subway’s bread is not classified as bread for VAT purposes is not really that surprising, given the VAT Act 1972 pretty clearly says so. The case is a blow for clever arguments based on statutory wording, and a win for legislative purpose and intent.

Report written by Arun Allen

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