BFH ruling on the apportionment method for economy menus

Facts XI R 19/23 and XI R 22/22 (simplified)

In the two very similar cases, a fast food restaurant sold so-called economy menus consisting of drinks and food for a total price. When viewed in isolation, the drinks included were subject to the standard VAT rate, while the food benefited from the reduced rate when sold off-premises. When allocating the total price to the components, the fast food restaurant applied the so-called "food and paper" method, which was based on the ratio of the cost of goods sold. The recipes of the products sold and the daily purchase prices of the goods/ingredients were provided in the POS system. In case XI R 22/22, the fast food restaurant applied a so-called capping method: If the "food-and-paper" method resulted in a price for a menu component that exceeded the retail price of the component, the retail price was used. In case XI R 19/23, there was no such capping.

The tax audit demanded that the total price be allocated according to the ratio of the individual retail prices, as provided for in section 10.1 (11) UStAE (administrative guidelines to the German VAT Code). The "food-and-paper" method was not as simple as this, did not lead to appropriate results and was therefore inadmissible.

In the case XI R 22/22, a dispute also arose as to whether the net or gross prices should be set in relation to the unit price method. In addition, the tax office had estimated the basis of taxation there because the records of the fast food restaurant did not allow the subsequent breakdown of the menu components according to the individual retail price method. The reasons for this were not available to the BFH. The question was whether a safety margin was permissible on this estimated value.

BFH rulings

The BFH first determined that the economy menu was not a uniform supply. The components are neither in the relationship of main and ancillary supplies to each other, nor is there a complex supply with economically inseparable elements, the splitting of which would be artificial. This is evident from the fact that the food and drinks each had their own purpose and were also available separately.

The allocation of the total price does not necessarily have to be based on the ratio of the (possibly fictitious) individual retail prices. Rather, according to the ECJ judgement in the Card Protection Plan case and the established case law of the BFH, the simplest possible method should be used. In principle, the BFH considers the market value method to be the simplest, as an allocation according to costs would require a complex calculation. However, exceptions are not ruled out: The BFH has expressly left this open in its previous case law, the Advocate General in the ECJ proceedings MyTravel considered it possible, and the tax authorities also allow for exceptions in section 10.1 para. 11 sentence 5 UStAE.

Nevertheless, the "food-and-paper" method is not appropriate in the present case because the results do not correspond to economic and commercial reality. The reason for this is that the method sometimes leads to the price of a food item with a high cost of goods (for example, a burger) in a menu being significantly higher according to the "food-and-paper" method than the retail price of this food item. The capping applied in case XI R 22/22 did not change this. The fast food restaurant had thereby partially dispensed with the "food-and-paper" method, which already showed the inappropriateness of the method. Furthermore, mixing two methods is not "simple".

The individual retail price method should therefore be applied here. The gross retail prices of the individual components of the menu are to be set in relation to each other, not the net sales prices. This is already based on previous BFH case law, according to which retail prices and not retail remunerations are to be used. The BFH adheres to this and uses an example to show that only when allocating the gross retail prices does the percentage value share of the products in the menu remain unchanged in relation to the retail prices and therefore leads to a proper result.

Whether an estimate of the tax base was permissible due to the lack of records pursuant to section 158 AO (General Fiscal Code) was an open question, as the records were complete for the application of the chosen apportionment method. Only the deviating assessment of the apportionment key and the resulting calculation from individual sales by the tax office required an estimate because (for reasons that have not been clarified) neither the fast food restaurant nor the tax office was able to determine the basis of taxation according to the individual retail price method. Since the records corresponded to at least a justifiable legal opinion, it was not clear whether they were incorrect at all. However, the Senate did not need to decide this, as only the safety margin was in question. Since the estimate had been made by the tax office itself, the fast food restaurant had been involved in the process, and the fast food restaurant's omission, if any, was only extremely minor, a safety margin was not justified.

Practical impacts

Combinations of differently taxed components are challenging for several reasons: Firstly, it must be clarified whether there is a single supply and, if so, whether it is a main and ancillary supply or a complex supply. In the case of a complex supply, it must be determined which component characterises it. This can have an influence not only on the VAT rate, but also on the qualification as a supply of goods or supply of service, and therefore also on the place of supply.

In system catering, economy menus are a recurring issue and the breakdown is a popular area for optimisation. Drinks are taxed at 19% and therefore have a higher VAT rate than food when sold off-premises. The aim is therefore to minimise the proportion of drinks in the total price of the economy menu. At the same time, drinks have a significantly higher profit mark-up compared to food. If the cost of goods sold is taken as a basis, this results in a lower proportion of drinks in the menu than with the individual sales method. These BFH rulings are therefore disadvantageous for system catering. It is also of no use if a cap is used to ensure that the assessment basis of the food in the menu does not exceed the individual retail price.

Author: Nadia Schulte