There aren’t many areas of tax law that make the mainstream news, and there certainly isn’t much in it to make people laugh. The labyrinthine weirdness of the UK’s VAT system achieves both every now and then.[i]
“Recent VAT cases that have been argued over include whether a Jaffa Cake is a cake or a biscuit, if banana-flavoured Nesquik should attract the same rating as chocolate flavour, and whether a sleeved blanket or ‘slanket’ should be classified as an item of child’s clothing.”
Part of the fascination is the accidental but relentless British of one particular strand of the legal debate: what is a biscuit, and what is a cake?
Cakes are zero-rated, meaning that retailers don’t have to pass on a VAT charge to customers. Biscuits are zero-rated, too – unless they’re not. And it’s down this wormhole of ‘unless’ and ‘except’ that the trouble begins.
In this case, biscuits cease to be zero-rated, and become standard-rated, if they’ve got chocolate on, or “some product similar in taste and appearance”.
That’s a reminder of the days when people distinguished between normal biscuits and fancy biscuits – between essential sustenance and the luxury of confectionery – and when banoffee caramel chocolate digestives weren’t even a twinkle in some Willy-Wonka-type’s eye.
So far, so easy: Hob Nob? Zero-rated. Chocolate Hob Nob? Standard-rated. But what about those Jaffa Cakes mentioned by Herbert?
In 1991, the Government changed the classification of Jaffa Cakes, declaring them to be biscuits. McVitie’s took umbrage and the question ended up before a VAT tribunal.
This prompted a now famous existential debate about the nature of cake, and the meaning of biscuits, which has been reverberating ever since.
At the hearing, Donald Potter QC, adjudicating, came at the question from various angles. On the one hand, he observed, Jaffa Cakes are of similar dimensions to biscuits, come packaged like biscuits, and are generally found in the biscuit aisle in the supermarket. What’s more, like biscuits, they’re usually eaten with the fingers, not cake forks.
At the same time, he observed, they are described as cakes on the packaging and, unlike biscuits, are not cooked twice. (The word comes from Latin: bis coctus – twice-cooked.)
Judge Potter found in favour of McVitie’s and Jaffa Cakes have been cakes ever since.
Every few years, a new version of this debate breaks out, and some serious-minded legal super brain is forced to have an intense on-the-record discussion about whether some new-variant packaged nibble is a biscuit or a cake, and whether it is ‘normally eaten with the fingers’, as journalists look on, chuckling.
In January 2019 it was the turn of Judge Amanda Brown, who was obliged to peer closely at Pulsin Raw Choc Brownies and decide if they were cakes or confectionery.
To help with her decision she ‘closely examined’, among other sweet treats, Morrison’s brownies, Pret-a-Manger’s brownie bar, Mr Kipling’s brownies, gluten-free brownies, French Fancies and Battenberg bars. She also gave a Victoria sponge cake a long, hard stare.
In conclusion, she said:
“Put alongside a slice of traditional Victoria sponge, a French Fancie and a vanilla slice or chocolate eclair, the products may look out of place. However, put alongside a plate of brownies, or, for instance, at a cricket or sporting tea where it is more likely that bought and individually wrapped cakes will be served on a plate, the products would absolutely not stand out as unusual.”
Having passed the cricket tea test, the Pulsin bar was judged to be a cake, and thus zero-rated.
The pasty tax
Another notable VAT debate with Great British Bake-Off overtones was around the sale of hot Cornish pasties, in the wake of the introduction by then-Chancellor George Osborne of what was known as the ‘pasty tax’.
In Cornwall, people eat a lot of pasties, and they like them hot, so declaring that suddenly consumers would have the choice of either paying 20% more for what was practically considered a staple food, or eating it cold, was a political bombshell.
This time, the in-depth discussion revolved around the distinction between selling something as hot food, and that had been deliberately kept hot in a warming cabinet, and a product that just happened to be warm as a result of being fresh.
Some Cornish bakers turned off their warming cabinets and began to cook smaller batches of pasties throughout the day. Others absorbed the price rise as best they could to avoid startling customers.
A third group (and I write from first-hand experience) served lovely warm pasties at a new higher price, with a side order of bitter criticism directed at the Government.
Unfortunately, the chances of VAT becoming any less burdensome or bewildering seem slim, according to Herbert:
“Critics have labelled the tax as regressive and overly complex,” he added. “HMRC’s VAT guidance runs to thousands of pages, including a specific section on types of Bombay mix.
“However, given that VAT currently accounts for 21% of the Government’s total tax take, it’s unlikely it will be going anywhere soon.”
No guesses, no wishful thinking
There are perhaps two things to take away from all of this.
First, don’t make assumptions about what will and won’t be zero-rated, especially if your product is in any way innovative, original, or ‘a clever twist’ on some other concept. Some of the dividing lines are fine – fruit pulp is zero-rated, but fruit juice is standard-rated, for example.
Secondly, resist the urge towards wishful thinking: unless you’ve got the time, money and appetite to appeal, it doesn’t matter whether you think your product ought to be zero-rated, only whether HMRC does.
And the chances are they’ll think it’s a
[i] Reproduced from AccountingWeb