Tax & admin · 16 May 2016

Could a taco tax become the next pastygate?

VAT on tacos
A judge visited branches of the growing chain with a thermometer to take the temperature of Tex-Mex snacks

HMRC has won a court case against crowdfunded Mexican food chain Chilango over VAT on tacos and burritos – making the Tex-Mex snack the latest in a series of sales tax victories for the taxman.

Founders of the innovative fast-food company – funded by the world’s first ever crowdfunded mini-bond in 2014 – had argued against adding VAT to their signature product because of the inclusion of cold ingredients like guacamole in the burrito. This was argument defeated by the taxman on the grounds that products containing any hot element are subject to full VAT.

Luis Castro, head of quality control at the young takeway food firm,  pointed to the origin of the burrito as a cold packed-lunch for Mexican workers to argue that being served hot was an incidental feature of the company’s signature product – but this was deemed irrelevant by a judge who had visited branches of the growing chain with a thermometer.

“While a ruling in our favour would have been happily received, VAT has always been priced into our burritos from day one – so the ruling will not create any change to how our business has been run to-date,” Chilango’s co-CEO Eric Partaker told Business Advice. “The real issue will be for any other companies that have not been charging and paying VAT on their burritos.”

Jan Rasmussen, the founder of small Tex-Mex chain Mission Burrito, was unsurprised by the ruling but is of the opinion that the tax makes it hard for his firm to garner lunchtime trade. “It does make it difficult to compete with a takeaway sandwich shop as we already have a 20 per cent surcharge.  I could introduce a truly cold option like Mexican chicken & salsa wraps which aren’t vatable, but that’s not who we are.”

The recent decision follows a plethora of recent victories by HMRC over contentious food items including Subway’s Meatball Marinara sandwich – which a franchisee went to court to fight for an exemption for in 2014 – and an “all fruit frozen dessert” which a judge ruled should be treated like ice-cream for VAT purposes in January 2016.

HMRC is far from the only tax authority to levy a tax seen as unfair on the beans and rice-filled wrap. In the US, Tex-Mex restaurant owners have long-fought against a very different tax penalty for the Mexican snack. In New York, a burrito is considered a sandwich – making the item liable for a sales tax specific to the lunchtime category.

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ABOUT THE EXPERT

Hannah Wilkinson is a reporter for Business Advice. She studied economics and management at Oxford University and prior to joining Business Advice wrote for Kensington and Chelsea Today about business and economics – as well as running a tutoring company.

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