Whenever the discussion turns to VAT with food and drink clients and it’s not long before someone mentions the “Jaffa cakes” case and whether it is a cake or a biscuit. Whilst it can seem to be a humorous case, the argument taken by McVities way back in 1991 serves to illustrate how complex the VAT rules can be when applied to the food and drink sector.
So what are the rules?
Like most reliefs, the zero rating on food was seen to be in the social interest, benefiting the final consumer. As a basic position, all food of a kind for human consumption is zero-rated unless supplied in the course of catering. However, there are a number of exceptions to this basic position which is designed to tax items that are considered to be non-essential. To further complicate matters, there are then items which override the exceptions bringing them back within the zero-rate.
Straight forward, right? Wrong!
A common problem is changing tastes, what was essential when VAT was introduced may no longer be in the average person’s shopping trolley today. I certainly can’t remember the last time I bought drained cherries! Conversely, for today’s consumer, as we are encouraged by medical professionals to hydrate properly and get our 5 a day, standard rated items such as bottled water or fruit juices could easily be argued to be an essential item.
These examples, whilst apparently contrary to the purpose of the relief, are still easy to apply. Where things start to get complicated is where apparently similar products have different VAT treatments. Turning back to biscuits for a moment; consider the humble gingerbread man. Give him two chocolate eyes and he is still zero rated. Give him two chocolate buttons and 20% VAT has to be added.
A point to note is that, although HMRC can’t extend the relief, they can restrict it further. Following a number of successful claims for zero rating by sports drinks manufacturers, HMRC introduced a new exception to the rules in 2012 specifically targeted at this market.
However, whilst we have the complex rules that we have today, we will still be vexed by questions about the “potatoness” of crisps, the ambient temperature of pasties, or the difference between frozen yogurt (standard rated) and yogurt that is frozen (zero rated)!
With much of the income and expenditure for food and drink businesses being zero rated, it can lead to VAT compliance receiving a lower priority. However, in our experience, this can lead to errors. AAB’s Indirect Tax team have considerable experience of assisting our clients within the food and drink sector to navigate their way through the complex rules ensuring that they do not fall foul of HMRC.
If you require further information, please contact Alistair Duncan, Indirect Tax Director (firstname.lastname@example.org) or your usual AAB contact.
And for the record the Jaffa cake was ruled to be zero rated – sometimes the VAT rules really do take the biscuit!