Value added tax: Allocation of a total price with different tax rates

While the supply of food in the gastronomy sector is regularly subject to the reduced VAT rate, drinks are generally taxed at the standard rate. This leads to challenges when splitting the total price of combined offers that include both food and drinks, such as economy menus or some all-inclusive offers. The apportionment should generally be based on the individual sales prices, which is often complex in practice. In its decision of January 22, 2025 (case no. XI R 19/23), the German Federal Fiscal Court (BFH) took the opportunity to develop standards for applying or deviating from this basic rule.

In the case in question, two limited liability companies operate fast-food restaurants which, among other things, offer bargain-deal menus (consisting of drinks and food) at a uniform total price for consumption outside the restaurant. It is undisputed that the supplies to be separated are those of drinks at the standard tax rate (19%) and those of food at the reduced tax rate (7%). The GmbHs carry out the necessary allocation of the total price according to the respective cost of goods - the so-called food-and-paper method - i.e. the sum of all expenses for the food or for the beverage. In view of the typically higher profit margin for drinks, this tends to result in lower VAT than if the prices were broken down according to individual sales prices - which is permissible in itself because companies can structure their activities in a tax-efficient manner. In the case in question, however, the tax audit considers the food-and-paper method to be inadmissible because it is neither as simple as an allocation based on retail prices nor does it lead to appropriate results. This was confirmed by the BFH.

On the one hand, exceptions to the allocation according to individual sales prices are permitted for the supply of several items at a total sales price. On the other hand, a company does not always have to apply the simplest possible method. However, a necessary prerequisite for this is that the other method applied is at least as appropriate as the allocation based on individual selling prices, which is generally to be applied. In addition, the commercial and economic reality must be taken into account, as the allocation method must correspond to this.

For this reason, the BFH does not recognize the food-and-paper method in this specific case. In system catering in particular, this means that the price of the food (burger) with a high cost of goods in the menu would be higher than the retail price of this food. In the view of the BFH, it is contrary to economic and commercial reality that the sales price of a product in a menu sold at a discount could be higher than the retail price.

In addition, the food-and-paper method is also inappropriate insofar as changes in the purchase prices for the purchase of goods have an immediate effect on the distribution of current deliveries of combined offers, although the new goods are usually not sold in the stores until a week later. 

In the parallel dispute (decision of January 22, 2025, no. XI R 22/22), the company tried to avoid the possible unfavorable consequences of the food-and-paper method by capping the calculation of the VAT assessment bases accordingly. However, precisely this need for correction demonstrates a “breach of method”, which speaks against the appropriateness of this modified method. In addition, it ultimately represents a mixture of both methods, as it has to fall back on retail prices to calculate the cap. Overall, this is neither simpler nor can it systematically achieve appropriate results.