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Food and Drink

This is arguably the most well known area of VAT, in that it has given the man on the street an insight into the complexity and sometimes illogical nature of VAT.  The most notorious VAT litigation for food remains the Jaffa Cake case taken by McVities but this case is now more than 30 years old.  Nonetheless you might say that this any many subsequent cases perfectly illustrate what is wrong with UK VAT legislation for this industry.  The cases essentially produce  outcomes that are at odds with the many health related initiatives being pursued on a national level to help combat rising obesity levels.    In this article we will walk through the key areas of the VAT legislation for food and drinks and comment on relevant litigation.  In addition we will highlight the risks that can be present for businesses if their product falls into a grey area.

UK VAT Legislation

To give some background to the reason we have the current UK VAT legislation for food and drinks, the nuances are not inherited from our time in the EU as with many other areas (the UK was out of step with the rest of the EU in terms of complexity for VAT and food).  Instead it has it origins in the predecessor tax, being sales tax.  When VAT was introduced in 1972 we adopted the key principles of the sales tax put in place after the 2nd world war.  These saw zero rating being available for basic foods and drinks but with exceptions to this for ‘luxury’ (ie non essential) or ‘processed’ items.  This did not include cakes and biscuits but did include confectionery.    So without the EU provisions to restrict changes and with the passage of time since the 2nd world war and the significant amount of innovation in the snacking and confectionery sub-sector, it would surely seem feasible and necessary to revisit this area.

The Basics of VAT and Food  and Drinks

Some areas of VAT legislation for food and drinks are not complex and are relatively straightforward, with the VAT treatment of most fresh produce and cooking ingredients for human consumption etc being clear cut in the guidance.  This includes the following categories (nb this is not an exhaustive list):

  • Meat, fish, fruit, vegetables, herbs
  • Unprocessed nuts, pulses, cereals, herbs
  • Milk, coffee, tea, herbal tea
  • Cheese, yoghurt, butter
  • Flour, baking ingredients
  • Cakes, some biscuits

However even with these basic items there is immediate complexity as the following are standard rated:

  • Powders for making strawberry and banana milkshakes (but not chocolate which is zero rated)
  • Frozen yoghurt (to be eaten frozen rather than thawed)
  • Roasted or salted nuts
  • Fruit or vegetable juice or concentrates
  • Chocolate biscuits (see below)

The following are standard rated as they are specifically called out as exceptions to the zero rating:

  • Ice-cream, ice lollies, sorbet
  • Cereal bars (but not flapjacks which are zero rated but see below)
  • Bottled water

The Complex Areas of VAT and Food/Drinks

VAT and food has Further complexity arises with products in the following categories:

  • savoury snacks
  • confectionery
  • cakes and biscuits
  • smoothies/beverages
  • sports nutrition products

These categories in many cases sit in grey areas between the clear cut standard rated and zero rated products and challenges from the tax authorities have arisen in recent times as a result of significant innovation in these categories of the food and drinks industry, creating products not envisaged when the VAT legislation and guidance was drafted.

In short there is effectively a significant clash between a move within the industry, backed up by consumer demand for more healthy innovative products (which use less processed and more natural ingredients) and the old VAT legislation which was established against the backdrop of less healthy ingredients and the principle of ‘non essentials’ being taxed.  This leads to illogical outcomes in VAT litigation and guidance, producing counter-intuitive results – healthy snacking products can be subject to VAT whilst a less healthy cake with a high fat and sugar content is zero rated.

Confectionery

For a number of years now we have had litigation on snack products that are naturally sweet as a result of containing fruit, and yet these have been found to be standard rated as they sit alongside other confectionery which is compulsorily standard rated.  Confectionery is described as being:

an item of sweetened prepared food, other than cakes and non-chocolate biscuits, which is normally eaten with the fingers’.

So the courts are hamstrung  – if the product meets the definition of confectionery, effectively being a snack to be eaten with the fingers, it is standard rated.   With initiatives proposing to introduce new taxes such as sugar tax to tackle obesity, it seems inconceivable that there isn’t a partial solution in the area of VAT to help reduce the cost of healthier products, and it seems clear that an overhaul of the rules is long overdue.

Why is VAT Important to Manufacturers?

Most businesses manufacturing food and beverage products will ultimately want to see these on the shelves of High Street retailers, this being the Holy Grail to reaching a mass market and selling significant volumes of a product.  This is a hugely competitive marketplace and in order to gain agreement from the buying team at a large supermarket that they will stock the product, the supermarket must be able to recognise the product will compete well and be attractive in terms of pricing to the consumer.  With a VAT rate of 20%, there will clearly be a material impact upon pricing and the ability of a product to perform alongside similar products that may have a different VAT rate.

Leading on from above, as the marketplace for such products is ultimately B2C, having to account for 20% VAT on a product versus it being zero rated impacts on its ability to be competitive and ultimately the viability of the product can be at risk.

One of the other key areas relates to the ultimate sale of the business – where a manufacturer has a product and may look to sell the business in future or may need to seek additional funding for expansion of the business, any due diligence exercise carried out is likely to look closely at the VAT liability of products falling into the grey areas outlined above.  Any uncertainty around the VAT rate applicable to the product could have a material impact upon the value of the business and its risk profile.  It is important that the business is able to demonstrate that the VAT rate being applied is correct.  Unless the VAT treatment is clear cut, it is highly recommended businesses obtain written rulings from HMRC that zero rate of VAT can apply if they believe this may be the case.  Such a ruling can significantly add value to a business because it removes the risk from any potential purchaser or funder of the VAT standard rate being found to be due from any revenues.  Equally, if the business is currently standard rating a product that should be zero rated, an opportunity is being missed, because the bottom line is being understated to the tune of the 20% VAT amount.  The reverse is also true of course because the bottom line is being overstated by 20% in situations where the zero rate is incorrectly being applied.

HMRC’s View

As set out above, HMRC continue to be very litigious in this area and have had some degree of success against the backdrop of the existing archaic legislation.  This has led to decisions that appear at odds with the general trend towards encouraging healthy eating and tackling obesity within the population at large.

Current Topical Issues with VAT and Food

The following  products have been litigated recently or currently, giving an idea of areas being challenged:

Walkers Sensations Poppadom Crisps – are they potato crisps (standard rated)?

Giant marshmallows – are they confectionery?

Flapjacks with chocolate coating/other ingredients – are they flapjacks?

Nak’d and Organix Bars – are they confectionery?

Turmeric shots – are they standard rated beverages?

TVC’s Experience

We have a lot of experience in this area from working with manufacturers and also with supermarkets in determining the appropriate VAT rate for the products in question.  We can help you determine whether there is an opportunity for the zero rate of VAT to apply or to confirm whether the standard rate applies.  This gives you certainty of the impact of VAT on the business.  We were recently involved in the giant marshmallow case (Innovative Bites) which was successful at First Tier Tribunal we await the decision at the Upper Tier Tribunal.

If you are interested in talking to us about your Food and Drink business please click the contact us button below.

TALK TO OUR VAT EXPERTS

Julie Park

Managing Director
– VAT and Customs Duty
M: +44 781 400 4236
T: +44 203 2806902
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