Bakery chain Ainsleys of Leeds has won its long-running legal battle over VAT payments on its ciabatta melts and other fresh baked products, after an High Court appeal was dropped by HM Revenue and Customs (HMRC).

The 31-shop Yorkshire bakery chain has finished legal proceedings, which started in 2004, over whether these products should be subject to VAT.

Under VAT rules, food that is intended to be consumed while hot is subject to VAT. But if that is not the intention of the bakery, zero rating can apply. Ainsleys’ ciabatta melts were delivered frozen to store, baked-off and sold from hotplates. Ainsleys had paid standard-rated VAT on this product since 1996.

Following consultation with its advisors, it was decided the product was actually zero-rated. Ainsleys said the reason for keeping the melts warm was to hold them at ’optimum freshness’ and create an aroma in the shops. It had no control over whether customers chose to eat them hot or cold.

It submitted an initial claim for overpaid VAT in 2004, which HMRC refused to repay. HW Chartered Accountants of Leeds, which represented Ainsleys, appealed the matter to the VAT Tribunal on behalf of Ainsleys. On 9 August 2006 the Tribunal decided in Ainsleys’ favour (British Baker, September 1, pg 3).

Customs appealed the Tribunal decision but on legal advice withdrew its appeal in January 2007.

Terry Parkinson VAT partner of HW Chartered Accountants said any business that sells similar products to ciabatta melts should consider submitting a refund claim to the VAT department.

He said prospective claimants should bear in mind that initial claims are subject to the three-year cap and may be subject to the ’unjust enrichment’ rules.

He commented: "HMRC may consider this to be a factor where the VAT reimbursed has not been passed on to the customers of the claimant that actually bore the VAT cost. But this point is for HMRC to prove and can be challenged where there are commercial reasons. Ainsleys was not affected by this issue."

Ainsleys MD Martyn Ainsley welcomed the news but emphasised that VAT decisions are taken on a case-by-case basis and revolve around the intention of the individual company concerned. Bakers should not rely on this case as a precedent, he said. "We fought long and hard to achieve this result, which was based on our own particular circumstances."