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Self's assessment: the Blissful state of VAT?

Items exempt from VAT include cake and plain biscuits, but not chocolate or chocolate biscuits

The one tax fact that almost everybody knows is that Jaffa cakes are a cake, and not a biscuit

Biscuit factory

In the famous VAT case – now over 30 years ago – McVitie’s success meant that ever since, tax advisers have been able to enjoy a zero-rated snack with their cup of tea. But a recent case on Blissful biscuits – United Biscuits (UK) Ltd v HMRC [2023] UKFTT 864 (TC) – didn’t go so well for the company.

A Blissful biscuit consists of two biscuits, sandwiched by a layer of chocolate cream. Now, a chocolate-flavoured biscuit is zero-rated, but a biscuit which is ‘wholly or partially covered’ by chocolate is subject to VAT at 20%. McVitie argued that you had to bite into the top biscuit in order to reach the chocolate cream, so that this was similar to a bourbon biscuit, which is zero-rated. However, the issue here was that the lid of the biscuit did not fully cover the chocolate cream, so HMRC argued that if the biscuit layer did not fully cover the chocolate layer, then what is the remaining area covered by, if not chocolate? The tribunal agreed with HMRC, holding that part of the biscuit was covered in chocolate and hence it was subject to VAT.

Over the 50 years that VAT has been in existence, there have been many cases debating which side of the zero-rating line certain foodstuffs – and drinks – fall. Are Pringles a ‘potato-based snack’? (Yes, and so subject to VAT – this one went all the way to the Court of Appeal: HMRC v Procter & Gamble UK [2009] EWCA Civ 407). Is an Innocent smoothy just a drink, or is it a foodstuff? It was held ([2010] UKFTT 516 (TC)) that they are a ‘liquefied fruit salad’ rather than a beverage, and so subject to VAT. And how much chocolate is there on a gingerbread person? VAT Notice 701/14 makes clear that gingerbread men decorated with chocolate are standard-rated, ‘unless this amounts to no more than a couple of dots for eyes’.

This is all very amusing, but there is a bigger issue here. The UK’s extensive range of zero-rated items dates back to the introduction of VAT in 1973. VAT replaced purchase tax, which was at different rates by reference to whether goods were considered to be ‘luxuries’ or not. The zero-rated food items for VAT purposes therefore include cake and plain biscuits, but not chocolate or chocolate biscuits. But as food technology has developed, and the range of snacks on offer has vastly expanded, we spend endless amounts of time (and lawyers’ fees) debating just which side of the line an item falls, which consumes resources for both taxpayers and government. Surely there must be a better way forward?

Paul Johnson of the IFS reviewed the VAT system on its 50th birthday in April 2023 and pointed out that VAT is a significant contributor to government funds, raising some £160bn (about one sixth of total tax receipts). But the UK’s relatively narrow tax base, with extensive zero-rating, costs about £50bn: abolishing zero-rating would raise significant sums, which could then be spent on supporting those in poverty, with some left over to fund key services such as the NHS.

In recent years, there has been a growing trend to extend zero-rating to specific items, such as female sanitary products (the ‘tampon tax’ campaign). I wrote about this back in January 2021, and it is fair to say I was not at all convinced. Since then, we have had campaigns to bring back VAT-free shopping for tourists, and to zero-rate sun protection products. Please, can we just stop and think about what would be rational? Zero-rating individual items adds complexity (apparently specialist period underwear does not benefit from zero-rating, although tampons now do), and is not accurately targeted at those who most need it – both because a large part of any benefit will go to those who spend more, and because experience has shown that the benefits to consumers are, at best, a small part of the overall saving.

A recent article in The Telegraph suggested that, in addition to imposing VAT on private school fees, a future Labour government might go further and extend the VAT base significantly, raising funds to increase welfare benefits. Rita de la Feria, professor of tax law at the University of Leeds, commented that almost half of UK consumption is not taxed, but added that expanding the 20% charge has become an ‘elephant in the room’ for politicians.

Professor de la Feria has advised a number of overseas governments on their VAT systems and is now turning her attention to the UK. She believes that a significant expansion of the tax base, by removing much or all of the current zero-rating, could lead to the tax becoming not only simpler, but more progressive. She has even floated the idea that those who are on lower incomes could receive an immediate VAT refund in store, although I have my doubts that such a system could be made to work reliably and be protected from fraud.

The problem for politicians is that any suggestion that VAT should be increased on items such as cakes or even children’s clothes will be met with a visceral response. George Osborne’s plan in 2012 to impose VAT on food items which have been heated but then cool down was swiftly dubbed the ‘pasty tax’ and was reversed, with his Budget being dubbed the ‘omnishambles’ Budget.

If we are ever going to have a simpler, more rational, tax system, we need politicians to take decisions which may not be popular. But anyone who thinks this is at all likely in the field of VAT is, I am afraid, living in Blissful ignorance.

Would you like to know more?

If you have any questions or would like to discuss your specific circumstances, please get in touch with your usual Blick Rothenberg contact or Heather Self using the form below.

This article was originally published in the Tax Journal and is reproduced with kind permission.

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