VAT on Canteens

Irish Tax Review
Valerie Desirotte March 2006
Introduction
Following the European Court of Justice judgment in the Hotel Scandic case, which ruled
that VAT had to be accounted for on the consideration received from the staff for the
meals provided and not on some calculated cost figure, Revenue has finally accepted that
the manner in which VAT has been applied to subsidised staff canteens in Ireland is not in
accordance with the relevant provisions of the EU Sixth VAT Directive.
Revenue's decision opens the door for many employers to obtain a refund of VAT
overpaid to date under either the previous statutory or concessional basis for dealing with
VAT on staff canteens. In addition, going forward, most employers will have to change the
manner in which they account for VAT on their canteens. Time is of critical importance, as,
under current Irish VAT legislation, a claim for a refund of overpaid VAT must be filed
within four years from the end of the VAT period to which the claim relates.
Guidance Notes – Tax Briefing, Issue 62
In its December 2005 issue of Tax Briefing (Issue 62), Revenue outlined its view of the new
VAT treatment of subsidised canteens, categorising the possible supply structures as
follows:
a) Staff canteen operated on a profit-making basis: taxable supply, the employer is liable
for VAT on the payments made by his employees.
b) 100% subsidised staff canteen: self-supply of services, the employer is liable for VAT on
the cost of providing the service.
c) Partly subsidised staff canteen: taxable supply, the employer is liable for VAT on the
payments made by his employees only, and no longer on the cost of providing the service
(if higher than the consideration received).
d) Staff canteens operated by a commercial caterer acting as principal and receiving
payment directly from employees, i.e., consideration, and from the employer, i.e., subsidy:
the caterer is liable for VAT on all receipts (payments + subsidy). Furthermore, the
employer is liable for VAT on any additional costs incurred in providing the canteen
service to his employees, including his payment made to the caterer. (I will come back to
this scenario in more detail below.)
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e) Staff canteens operated by a commercial caterer as agent of the employer, where
payments made by staff are handled directly by the employer, who then in turn adds his
subsidy to the overall payment made by him to the caterer: the employer is liable for VAT
on payments made by his staff only.
Practicalities
Where employers have been using the statutory basis
Where employers have been accounting for VAT on the statutory basis (i.e., calculating
VAT based on the total cost of running the canteen), an overpayment will have arisen
where the amount of VAT accounted on this basis exceeds VAT due on the takings
received, i.e., where the canteen has been subsidised in part by the employer.
The repayment entitlement should be equal to the difference between the VAT accounted
for on the cost of operating the canteen and the VAT amount due on canteen takings.
Where employers have been using the concessional basis (using an outside caterer)
Where employers have been accounting for VAT on the concessional basis (i.e., denial of
an input credit on all canteen-related costs), a repayment of VAT should arise where the
VAT calculated on the takings received is less than the input credit previously denied.
Therefore, in the case of a subsidised canteen, the repayment entitlement should be
equal to the difference between the amount of VAT incurred on the cost of running the
canteen, previously not deductible, and the VAT amount due on the takings received.
Revenue has advised that claims should be submitted in writing to the local Inspector of
Taxes and supported by the appropriate schedules and computations.
Statutory time limits apply, and claims must be submitted within four years from the end
of the taxable period to which the claim relates. Where a repayment claim arises, Revenue
has indicated that statutory interest will be paid at the rate of 0.011% per day, which will
amount to approximately 4% per annum.
Where employers have been providing meals to their staff free of charge
If no charge was made to staff, the employer will not be entitled to deduct any VAT on
related costs.
Corporation tax implications
Where a repayment claim arises, a corporation tax adjustment may be required on the
basis that VAT-inclusive costs were expensed through the profit and loss account in earlier
years. Revenue has pointed out that it will not re-open corporation tax computations for
prior years, but that it will deal with any corporation tax adjustments as part of the VAT
reclaim.
Caterer Acting as a Principal or as an Agent

In Revenue’s Tax Briefing mentioned above, the latter distinguishes only between a
caterer acting as a principal and a caterer acting as an agent of the employer. In the first
instance, Revenue regards the caterer as supplying the catering services directly to the
employees, while in the second instance, the caterer is seen as acting on behalf of the
employer in an agency capacity (scenarios (d) and (e) above).
Based on the terms of the contractual agreement between the employer and the caterer
for the provision of catering services, it would seem that Revenue has rejected refund
claims on the basis that the caterer is acting as a principal. One of the arguments put
forward by Revenue inspectors was that contracts they had reviewed contained a clause
clearly stating that the caterer did not act as an agent of the employer, which made him,
by default, a principal.
This line of reasoning was reinforced by the fact that the caterer was collecting payments
directly from staff and received only the subsidised portion of the meals from the
employer rather than the entire payment for all services provided. The standard insurance
clause rendering the caterer directly responsible for any public or product liability has also
been used by Revenue to support the above argument. The logic behind why these should
be the relevant touchstones has not been explained.
The pertinent question is whose canteen it is and not what form of legal relationship
subsists between the caterer and the employer. The use of the terms “principal” and
“agent” alone in the context in question can be simplistic in that the caterer need not be
the legal agent of the employer to be regarded as providing his services to the employer
rather than to the employee. The caterer could merely be a sub-contractor.
Furthermore, most legal contracts between parties are nowadays based on a core of
standard clauses, which are used across the board by businesses entering into
agreements with their suppliers. Determining the nature of the legal relationship, or lack
thereof, which may exist between an employer and a caterer on the mere basis of one or
two standard clauses may not be appropriate.
It is worth mentioning that historic contractual relations between employers and caterers
were founded on an application of VAT finally acknowledged to be incorrect. To seek to
hold such matters out now as negative indicators and thereby use those to deny refunds
could be seen as contrary to the equitable administration of the tax.
Proposed Changes in the 2006 Finance Bill
The Finance Bill was published on Thursday, 2 February, where changes to s5(3) were
proposed as a direct result of the Scandic case. Section 5(3) of the Irish VAT Act 1972 (as
amended) deals with the VAT treatment of self-supplies of services and implements
Articles 6(2) and (3) of the EU Sixth Directive with, however, one addition relating
specifically to catering services (s5(3)(c) enforced by S.I. No. 63 of 1979, Reg. 24).
This includes the provision by the taxable person of materials or facilities in connection
with the supply of catering services made to him or his staff by an outside caterer or
towards the cost of these canteen services, i.e., subsidised canteen.

Following the Scandic case, the existing s5(3)(c) has simply been deleted from the Bill.
However, if we look at scenario (d) above, Revenue states that, when the caterer is acting
as principal, the employer should still account for VAT on the cost to him of providing the
materials or facilities to the caterer, including the subsidised payment towards his staff’s
meals.
On the other hand, the employer will be entitled to a VAT deduction on the caterer’s bill
for the subsidy payment and on the costs incurred in relation to providing the space
and/or materials. In other words, the statutory basis of accounting still stands: the
employer will still account for more VAT than he can deduct on the basis that his overall
cost contains VAT-free elements, e.g., insurance of the facilities.
However, s5(3)(c), which provided for the above, has been removed entirely from the draft
changes. Therefore, what part of the proposed legislation does it now fall under? Given
that Reg. 24 specifically referred to s5(3)(c), it is surely obsolete, hence leaving Revenue
without a regulation to enforce the new paragraph (i.e., 5(3)(b)),1 which would most likely
be replacing the current 5(3)(c)?2
We have to admit that these are early days; the way the legislation is likely to be enforced
remains to be seen.
Summary
The Scandic case has finally managed to free Irish businesses, operating a subsidised
canteen, of over 30 years of flawed VAT legislation, and has finally forced the Government
to bring Irish VAT law into line with the EU Sixth Directive.
The changes submitted in the Finance Bill will first need to be reviewed by the Dáil and
Seanad before being signed and adopted by the President in April 2006. However, in the
case of subsidised canteens, these amendments to s5(3) are a mere technicality following
on from the above ECJ judgment.
What Happens Next?
In the case of a partly subsidised staff canteen where the catering services are provided by
the employer, the latter will now be entitled to account for VAT on the actual takings,
regardless of the level of the subsidised portion. Practically, the employer will need to
separate the foods liable to VAT at 13.5% from the foods/drinks liable at 21% (e.g., soft
drinks, alcoholic drinks and some confectionery).
The ECJ clearly stated in the Scandic case that, should takings represent a nominal
amount, Member States could not implement national regulations in order to remedy a
possible VAT avoidance situation without following the procedure contained in Article 27
of the Sixth Directive.3
Based on the proposed legislation, the concessional basis of accounting (although never
legal in the strict sense of the term) seems to have now become irrelevant, as we are
faced with only two possible scenarios:

1) The employer provides the catering services directly to his staff for consideration, and is
therefore entitled to a full input VAT credit on all related costs, which includes using an
outside caterer acting as an “agent”; or
2) The catering services are being provided directly by an outside caterer to the staff. The
caterer will account for VAT on the takings and the subsidy paid by the employer, while
the employer will also be liable for VAT on his subsidised payment to the caterer, as well
as on the cost to him of providing the materials or facilities. Both the caterer and the
employer will be entitled to a full VAT input deduction on related costs.
Based on Revenue’s current view regarding the restrictive interpretation of the possible
contractual links which may exist between a caterer and a taxable person, what employer
operating a subsidised canteen with the full knowledge of the current and correct position
will not ensure his contract with a caterer will limit his liability to VAT on takings only with
a full deduction of VAT on related costs?
QUOTES
“Revenue's decision opens the door for many employers to obtain a refund of VAT
overpaid to date under either the previous statutory or concessional basis for dealing with
VAT on staff canteens.”
“Revenue has advised that claims should be submitted in writing to the local Inspector of
Taxes and supported by the appropriate schedules and computations.”
“It is worth mentioning that historic contractual relations between employers and caterers
were founded on an application of VAT finally acknowledged to be incorrect.”
“The Scandic case has finally managed to free Irish businesses operating a subsidised
canteen of over 30 years of flawed VAT legislation, and has finally forced the Government
to bring Irish VAT law into line with the EU Sixth Directive.”

of 6Irish Tax Institute - TaxFind: VAT and Canteens: The Next Instalment

VAT on Canteens

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