Although the case arose from a dispute between a KFC franchise and His Majesty's Revenue and Customs ("HMRC") over dip pots sold alongside fried chicken, this decision has much wider relevance. Any business selling goods or services in packages, bundles or promotional deals should take note: before deciding the VAT liability, it is essential to correctly identify what is being supplied and how the transaction works in practice.
The key facts
Queenscourt Limited (“Queenscourt”) operated KFC franchises and sold takeaway meal deals comprising hot food, sides, drinks and optional items such as dip pots. Historically, the company treated these meal deals as a single standard-rated supply. It later submitted VAT returns on the basis that the meal deals were a multiple supply, with the components treated separately for VAT purposes. On that analysis fried chicken and fries fell to be standard rated as hot take away food, but cold items such as coleslaw and dip pots were zero-rated, as they would be zero-rated if sold separately. Queenscourt submitted claims to recover VAT it considered it had overpaid. HMRC initially accepted one claim but later revised its view, rejecting a subsequent claim and seeking to recover part of the earlier repayment.
First-tier Tribunal decision on VAT treatment
The First-tier Tribunal ("FTT") accepted HMRC’s core argument on the VAT analysis, holding that the dip pots were ancillary to the hot food (supplied for the better enjoyment of the fried chicken) and therefore formed part of a single standard-rated supply.
However, the FTT did not treat the entire meal deal as a single composite supply. Instead, it agreed that some elements of the meal deal (such as cookies or yoghurts) could remain separate supplies, even while treating dip pots and hot food together as a composite supply.
That approach effectively created a “hybrid” category where there was a multiple supply overall, but a subset of elements within that supply (i.e. the chicken and dip pot sauce) which were grouped into a composite supply.
Upper Tribunal decision: Multiple supplies or composite supplies, but no "hybrid" model
The Upper Tribunal rejected the idea of a third “hybrid” category, restating the principle that each element in a multi-element transaction should be treated as a distinct and independent supply, unless the transaction as a whole falls within the exceptions for a single composite supply. Applying that reasoning, the Upper Tribunal concluded that the dip pots constituted a distinct supply and because they would have been zero-rated if sold separately, they remained zero-rated when included within the bundle. The Upper Tribunal therefore allowed the appeal and remade the decision in favour of Queenscourt.
What implications does the Queenscourt decision have for businesses selling bundled products?
Although the facts concern the fast-food sector, the implications of the decision are much broader. The decision is relevant to any business that sells goods or services in packages, bundles or promotional combinations that combine standard and zero/reduced rate or exempt supplies, including retailers, hospitality businesses and subscription providers.
Any businesses selling bundled goods or services - from meal deals to subscription packages and promotional offers - should take this opportunity to review their current VAT treatment with a view to identifying if VAT has been incorrectly charged on zero rated supplies within a bundle of goods or services.
It is not yet known whether HMRC intends to appeal the Upper Tribunal's decision. In the meantime, it may still be advisable, where businesses identify that they may have overpaid VAT on the basis of the decision, to submit protective repayment claims.
Co-author: Amy Beard
