QE Tax Flash: A Saucy Victory for KFC

KFC’s dip pots, supplied as part of a meal deal, caused a hot tax controversy: whether a 40p pot of barbecue sauce should be treated as cold food in its own right or, as HMRC argued, merely ancillary – a means of better enjoying the chicken. This was key in determining whether KFC was entitled to a VAT refund as the UK taxes hot takeaway food at 20% VAT but cold food at 0%.

HMRC claimed the VAT but lost at the Upper Tribunal (Queenscourt Limited v HMRC [2026] UKUT 195 (TCC)), important principles were crystallised: Every VAT supply must be treated as distinct and independent. The only exceptions, a single composite supply or an ancillary supply, operate at the level of the entire transaction. Cookies, yoghurts and coleslaw in the same meal deal were already accepted as separate zero-rated supplies. In a saucy victory, it held that the dip pots deserved the same treatment.

Liesl Fichardt: “The Upper Tribunal has drawn a clear line: the entire analysis must be done at transaction level, not below it. Once a transaction is a bundle of separate supplies, HMRC cannot then reach inside that bundle and apply composite supply rules to elements they find inconvenient.”

Emily Au: “HMRC’s frequent changes of position are unfortunately becoming a pattern. The Upper Tribunal’s reluctance to accept the public law argument that HMRC should be bound by an agreed view of the law leaves many taxpayers with uncertainty when relying on HMRC’s communications.”

Julius Berling: “The public law dimension of the case is also worth noting. HMRC agreed a position, paid the refund and then reversed course when a different officer took a different view. The Upper Tribunal was skeptical of the existing case law that the First-tier Tribunal could even entertain a legitimate expectation argument from the taxpayer, although it decided to leave the point unresolved.”