This month’s Chartered Accountants Tax Case digest considers the decision of the Irish Supreme Court in the Bookfinders case, which brought a close to a 15-year dispute over VAT repayments. The issues in this case centred on whether tea and coffee, served hot, is VATable at 13.5 percent or the zero rate and if the bread produced by Subway qualifies as “bread” under the second schedule of the VAT Act 1972. In assessing the appellant’s position on the interpretation of taxation statues, the Supreme Court provided significant guidance on the reading of tax law.

The case reached the Supreme Court following the appeal of the decisions of the Tax Appeals Commission, the High Court and the Court of Appeal in favour of the Revenue Commissioners.

Background

Bookfinders Ltd (“Bookfinders”) is a franchisee of the fast-food chain, Subway, with takeaways making up 70 to 80 percent of its trade. Bookfinders alleged that much of its turnover was chargeable to VAT at the zero rate. The issues in dispute following the appeals process were narrowed by the Supreme Court to a consideration of the correct interpretation of VAT Acts, the impact of the principle of fiscal neutrality, and the application of these principles of interpretation to the provisions in question in this case.

The law in the case centred on the interpretation of two paragraphs in two schedules of the Value Added Tax Act 1972. Section 11(1)(b), paragraphs (iii)-(xx) of the Second Schedule provides for those goods and services charged at the zero rate, while section 11(1)(d) specifies that the Sixth Schedule details those goods and services charged at the 13.5 percent rate.

O’Flynn and the Interpretation Act 2005

In consideration of his observations on the issue of statutory interpretation in the O’Flynn case, Justice O’Donnell stated at paragraph 46:-

“I should not have suggested that s. 5 of the Interpretation Act 2005 allowed a “purposive interpretation” of taxation statutes.”

That is not to say that the purpose of the legislation is no longer important, but that after reading the legislation in context and according to the words used:-

“a court is genuinely in doubt as to the imposition of a liability, that the principle against doubtful penalisation should apply and the text construed given a strict construction so as to prevent a fresh and unfair imposition of liability by the use of oblique or slack language.”

The case at hand was not considered by Justice O’Donnell to be a contest between the need for clarity and a broad purposive approach, but one of “artificial interpretation of the words used, to produce an unrealistic reading of the Act”.

Tea and coffee

In addressing the question posed by the Appeal Commissioner to the High Court on whether it was correct to apply the 13.5 percent rate on heated tea and coffee, the Supreme Court considered the objective of the Second Schedule; being to ensure that certain staples are zero rated. The Second Schedule was considered a broad category of “food and drink of a kind used for human consumption”. Certain specified items were to be subtracted or excluded from this class of goods and the objective of the Sixth Schedule was to apply a reduced rate to those excluded goods, in certain cases. Most notably, the supply of hot food and beverages. The Supreme Court considered there to be a clear distinction between staple foods and those that are more discretionary indulgences.

The general terms of the Sixth Schedule, being the supply of food and drink that were heated, retained heated, or supplied when warm were to include the supply of food and drink, not by its nature, but how it is treated and consumed. The appellant’s argument that the Sixth Schedule does not apply to hot tea or coffee because those beverages are not prepared by heating a cold drink, was held by the Supreme Court as an example of how not to approach statutory interpretation. At paragraph 75, Justice O’Donnell found:-

“It is not sufficient to observe that, when looked at in isolation, and in reverse, and through the high-powered lens of litigation focused only on the facts of this case, it would have been possible to use more precise language…”

The judge continued:-

“Nor is it sufficient to suggest a contrived interpretation of the words used in isolation, and contend that this creates an ambiguity giving rise to the principle against doubtful penalisation.”

It was held that the provisions within paragraph (iv) of the Sixth Schedule refer to hot food and drink. Accordingly, the Supreme Court rejected Bookfinders’ arguments that hot tea and coffee should be zero rated where the beverage is not reheated, upholding the previous decisions.

Food and drink

The next issue pertained to the reading of the phrase “food and drink” in paragraph (iv) of the Sixth Schedule and whether a conjunctive, rather than a disjunctive meaning should be applied.

Bookfinders argued that while the ordinary meaning of the word “and” allowed for disjunctive reading on occasion, the amendment by the Finance Act 1992 to insert “and” for “or” in the phrase “food or drink” indicated deliberate legislative intent for the phrase to be read conjunctively.

The Supreme Court rejected this interpretation on the basis that it was difficult to understand why the supply of food with a drink should attract a reduced rate of VAT, when the same drink or food, sold separately by the same establishment would not. It was also found to be apparent from other provisions of the Act where the phrase has no added conjunctive significance.

Bread and sandwiches

Paragraph (xii)(d)(II) of the Second Schedule provides that in order for bread not to be classified as ‘other confectionary or baked products’ it must be made of flour and any one or more ingredients not exceeding the specified limit for each ingredient. Sugar is included in a clause with fat and bread improver, which are subject to a limit “that the weight of any ingredients specified in the sub clause shall not exceed 2 percent of the weight of the flour included in the dough”. Other limits apply to other ingredients in separate sub clauses.

The Subway dough had a sugar content of 10 percent of the weight of the flour included in the dough. Bookfinders argued that the definition of bread in the VAT Act only excludes a product where the limit for each of the ingredients specified is exceeded and to read otherwise would serve to “replace the word ‘each’ with ‘any’ in the phrase ‘specified limit for each ingredient”.

At paragraph 93, Justice O’Donnell held:-

“But the fact that an Act could be expressed more clearly or that, thereby, more precise language could be used does not render it ambiguous, still less give rise to the principle against doubtful penalisation.”

In focusing on what was intended to be captured by the legislation, the Court held that if one ingredient exceeds the limit, the product falls outside the definition of “bread” for the purpose of the Act. Through a common-sense approach and reference to the clear intention of the Act, Subway bread could not be “bread”. Accordingly, the zero rate could not be applied to supplies of Subway bread. The related argument that the supply of a hot meatball sandwich (taken as an example) should not come within the supply of food and drink which had been heated, as “bread” was expressly excluded from the Sixth Schedule, was dismissed, given the fact that the heated Subway sandwich was found not to contain “bread”.

Fiscal neutrality

The Supreme Court dismissed the appeal by Bookfinders that the exclusion of Subway bread from the definition of “bread” in the Second Schedule constitutes a breach of the principle of fiscal neutrality due to a lack of evidence. The comparison of a heated Subway sandwich to that of a hypothetical toasted sandwich was not found to be so self-evident that Bookfinders need not provide evidence on the point.

Conclusion

The Bookfinders case provides helpful clarity on the VAT rates applicable to tea and coffee, bread and sandwiches in their various forms. It also provides an interesting analysis on the principle against doubtful penalisation where legislation is unclear and will no doubt be considered in future cases dealing with the interpretation of tax law.

The full judgment, in this case, is available from:- https://www.courts.ie/acc/alfresco/fad40678-a172-44c7-9f84-66f8c102c0f0/2020_IESC_60%20(Unapproved).pdf/pdf#view=fitH