On September 29, 2020, in the case of Bookfinders Ltd v The Revenue Commissioners, the Irish Supreme Court held, among other issues, that the bread used in Subway sandwiches did not fall within the definition of bread as a staple food under Irish tax laws due to a high percentage of sugar and fat in the ingredients and was thus not subject to the zero percent tax rate. The case originated as a result of a decision of the Irish Revenue to refuse Bookfinders request to refund its Value Added Tax (VAT) payments for the bread, hot meatball sandwiches, tea and coffee that Bookfinders sold under the Subway franchise for the years 2004-2005.
VAT is a “consumption tax” chargeable on “the supply of goods and services effected within the State for consideration by a taxable person in the course or furtherance of any business”.The standard rate of VAT in Ireland is currently 23%, and there is a reduced rate of 13.5% for certain goods and services. An exemption also exists that enables specified goods and services to be charged a zero percent rate. The courts have determined that these exemptions are “are to be interpreted strictly, since they constitute exceptions to the general principle that turnover tax is to levied on all services supplied for consideration by a taxable person.” The reason for the zero percent tax rate on staple products, such as bread, is to help ensure they are affordable to consumers.
Bookfinders was paying a composite rate of 9.2% and argued, among other issues, that the bread used in Subway’s sandwiches was a staple food and thus it should be charged the zero percent tax rate. Bookfinders argued its case for a refund of VAT in a series of unsuccessful appeals, first to the Appeal Commissioner, the High Court, then the Court of Appeal and ultimately the Supreme Court.
At the time this case was started, VAT in Ireland was governed by the Value Added Tax Act 1972 (the 1972 Act) as amended by the Finance Act 1976. This has since been repealed by the Value-Added Tax Consolidation Act 2010, but as the issues in the case relate to the years 2004 and 2005, the provisions of the 1972 Act are applied. The 1972 Act provides that certain staple foods and certain food prepared for human consumption is chargeable at the zero percent VAT rate. Confectionary and bakery products, with the exception of bread, which is classed as a staple product in Ireland, are excluded from this zero percent rate.
The Bookfinders’ case failed as, in order to fall within the definition of bread in the Value Added Tax Act, ingredients such as sugar and fat may not be greater than 2% of the weight of the flour used in the dough. This requirement is contained in schedule 2 of the Value Added Tax Act 1972, as amended by section 60 of the Finance Act 1976, which defines bread for tax purposes as follows: “bread” means food for human consumption manufactured by baking dough composed exclusively of a mixture of cereal flour and any one or more of the ingredients mentioned in the following subclauses in quantities not exceeding the limitation, if any, specified for each ingredient—
(1) yeast or other leavening or aerating agent, salt, malt extract, milk, water, gluten,
(2) this subclause shall not exceed 2 per cent. of the weight of flour included in the dough,
(3) dried fruit, subject to the limitation that the weight thereof shall not exceed 10 per cent. of the weight of flour included in the dough,
other than food packaged for sale as a unit (not being a unit designated as containing only food specifically for babies) containing two or more slices, segments, sections or other similar pieces, having a crust over substantially the whole of their outside surfaces, being a crust formed in the course of baking or toasting[.]
Thus, the Act excludes bread from the zero percent tax rate where any specified ingredient, such as sugar or fat, exceeds 2 percent of the weight of the flour in the dough.
The case hinged on the construction of VAT legislation as the recipe for Subway’s bread requires 10% of sugar per weight of the flour. Bookfinders argued that the legislation, as written, required each of the ingredient listed in the schedule to be present before the dough was excluded from the term “bread.” The High Court held that the term “any” in the legislation meant “any one of” as the term preceded a list and thus once the percentage was exceeded for any one ingredient, the bread lost the zero percent rating. This finding was agreed upon in the subsequent appeals, up to the Supreme Court, which stated “when the entire provision is read together, it is, I think, clear that if one ingredient exceeds the limitation, the resulting product falls outside the definition of “bread” for the purposes of the Act. Again, it is not irrelevant that this interpretation is consistent with common sense and the clear intention of the Act to attempt to limit to a standard bread product the benefits of the 0% rate … Arguments like this induce some sympathy for the beleaguered draftspersons and for the tortured language to which they sometimes have to resort in order to carry into effect a reasonable statutory policy.”
Bookfinders further argued that its hot meatball sandwich should be subject to the zero percent rate as it falls within the “supply of food and drink … which is, or includes, food or drink which—(a) has been heated for the purposes of enabling it to be consumed at a temperature above the ambient air temperature” under Schedule 6 of the 1972 Act (as amended by the section 91 of the Finance Act 1976). The court held this argument had to fail as the bread used for these sandwiches did not fall within the statutory definition of bread contained in the 1972 Act.