Tax Commissioner was wrong in its interpretation of the VAT Legislation on restaurant and catering services – Services related to the sale of alcoholic and non-alcoholic beverages subject to reduced rate, Administrative Court decides.
In the very recent judgment of the Administrative Court LAMANE LTD v. Republic of Cyprus, through Tax Commissioner, Case no. 596/2016, dated 10/9/2019 it is finally clarified how and under what circumstances the reduced rate of VAT should be applied to restaurant and catering services and which services fall under the reduced rate.
In recent years, the Commissioner of Taxes has issued a circular interpreting the provision of article 18A of the Value Added Tax Law N. 95 (I)/2000 and its Twelfth Annex with regard to the application of the reduced rate of VAT to restaurant and catering services.
Article 18A provides the following:
Restaurant and catering services mean services consisting of the supply of prepared or unprepared food or beverages or both, for human consumption, accompanied by sufficient support services allowing for the immediate consumption thereof. The provision of food or beverages or both is only one component of the whole in which services shall predominate. Restaurant services are the supply of such services on the premises of the supplier, and catering services are the supply of such services off the premises of the supplier. The supply of prepared or unprepared food or beverages or both, whether or not including transport but without any other support services, shall not be considered restaurant or catering services
This provision is the Cyprus law equivalent and an almost exact translation of Article 6 of the Council Implementing Regulation (EU) No 282/2011 of 15 March 2011 laying down implementing measures for Directive 2006/112/EC on the common system of value added tax.
In 2011 the Tax Commissioner issued Circular 146A, dated 10.01.2011, for the interpretation of Art. 18A above which provided, among other, that only services which include the supply of food can be considered “restaurant and catering” services subject to reduced rate of VAT and as a result the services provided by pubs, bars, clubs or night clubs which do not sell food must be subject to the standard rate of VAT.
Furthermore, the Tax Commissioner went a step further in its application of the circular and considered that businesses which sell both food and drinks, such as restaurants, pubs and cafes, must apply the standard rate of VAT to their sales of drinks after the kitchen of the business is closed, because after that time they do not serve food and their services cannot be considered “restaurant and catering” services within the meaning of the circular.
Based on the above, the Tax Commissioner conducted a tax audit to a Cyprus company which owned a bar/restaurant, going back three years. The Tax Commissioner applied the circular and found that a significant amount of VAT was owed on the basis that the company was charging VAT at a reduced rate on drinks served even after the kitchen was closed.
The company challenged the legality of the decision of the Tax Commissioner claiming that the sale of drinks in their establishment should be considered a provision of restaurant and catering services at all times, since even when their kitchen was closed they continued to provide food in the form of cheese or food platters.
Despite the view of the parties, the Court took a different approach to the issue explaining that the circular constituted a false interpretation of 18A of the Value Added Tax Law N. 95 (I)/2000. The Court explained that the law does not distinguish between the sale of food and the sale of drinks for the purposes of the application of the reduced VAT rate. As per the judgment, the reduced VAT rate must be applied to the supply of drinks, even in businesses who do not sell food at all, as long as the sale is accompanied by sufficient support services allowing for the immediate consumption, such as serving the drinks at the appropriate temperature and providing glasses.
The judgment, despite not being binding for other cases, is very significant in practice, since the circular was strictly applied by the Tax Commissioner.
Based on this judgment, the reduced rate must be applied not only to the supply of drinks by restaurants selling drinks after their kitchen is closed (which was initially the subject of the case), but also to bars, cafes and clubs who do not sell food whatsoever and until now were considered to fall outside the scope of the reduced rate.
The tax authorities may have to completely change their approach to the application of the reduced rate or risk litigation with many taxpayers.