Food for thought?
On 25 June the Telegraph published a guide to help readers avoid paying VAT on their groceries. The article referred to VAT as a tax ‘full of anomalies and complications’, a description that rings particularly true in relation to the zero-rating of food and drink in the UK. For those of you unfamiliar with the niceties of VAT, zero-rated is to all intents and purposes the same as VAT-free.
The two most famous cases in this area involved those tea-time favourites Jaffa Cakes and marshmallow teacakes. There have also been cases about the VAT liability of toffee apples, marshmallow cones, energy bars, Swedish Snowballs, wheatgrass juice, and iced tea.
A friend of mine has spent six years arguing with HMRC about whether a Pringle is excluded from tax-free status as a product ‘similar to’ a crisp, puff or stick ‘made from the potato’. In the Court of Appeal, Jacob LJ rejected what he called ‘over-elaborate, almost mind-numbing legal analysis’, describing the test as a kind of jury question: ‘Is it similar to a potato crisp etc. and made of potato?’
The uncertainty associated with the use of terms such as ‘similar’ and ‘made from’ stems from the difficulty of determining where to draw the line. In his paper for the conference in honour of John Avery-Jones, ‘Interpreting Exceptional VAT Legislation; or, Are There Principles In Pringles?’ (see April 2010 blog), Ian Roxan drew a parallel between the difficulty of making a finding of fact in a borderline case and the Sorites Paradox or the paradox of the heap. This goes as follows:
If you accept that ten thousand grains of wheat make a heap of wheat then it can be argued that one grain of wheat is still a heap, since the removal of any one grain cannot of itself make the difference between a heap and no heap.
The same can indeed be said of ‘made of potato’.
Another example of the absurdity of the UK legislation is the case of Supercook UK LLP and Dr Oetker UK Ltd which concerned a chocolate lolly-making kit. The kit contained white and milk chocolate flavour buttons, edible icing, 12 sticks and two plastic moulds, with six cavities apiece. Lollies were made by melting the buttons in the mould. HMRC argued that the shape of the moulds (Scooby Doo, Shrek, Barbie and other characters) and the theme of the kit and its packaging predominated over its food character, making it subject to VAT at the standard rate. The Tribunal found, in a 12 page judgment, that the essential feature of the lolly-making kit was that it put the customer in the position to make a product that would have been zero-rated had it been bought ready-made. Accordingly, the kit was zero-rated as food.
The June Telegraph piece recommended that shoppers avoid standard rated items such as potato crisps, ready-made popcorn, prawn crackers made from cereals, shelled roasted or salted nuts, ice cream and ice lollies, and chocolate-coated biscuits by opting instead for their zero-rated counterparts in the form of crisps made of vegetables other than potatoes, microwave popcorn, prawn crackers made from tapioca, roasted or salted nuts still in shells, frozen baked Alaska, and chocolate-chip biscuits.
Many other EU countries apply a reduced rate of VAT to food. Somewhat surprisingly, as revealed by an article in the Rheinische Post in August 2009, the German rules applying a reduced VAT rate of 7 per cent are equally illogical. The German reduced rate applies, amongst other things, to vinegar, mushrooms and truffles (unless preserved in vinegar), rabbit (unless wild), crabs, shrimps and prawns (but not lobster or crayfish), and Jerusalem artichokes (but not cassava).
While your general health might suffer if you follow the Telegraph VAT-saving diet, at least you don’t have to worry about scurvy: all fresh fruit and vegetables are mercifully zero-rated in the UK and, although the definition of food includes drink, the UK’s zero-rating for food does not include most ‘beverages’ except tea, cocoa, coffee, milk and, bizarrely, meat, yeast and egg extracts which means Bovril and Marmite, amongst others, are also VAT-free.
Tax lawyer specialising in business tax, SDLT and VAT