12 April 2022
Many of us will remember the famous VAT dispute where a court decided that that the popular snack product, the Jaffa Cake, was a cake and not a biscuit. Countless disputes over the VAT treatment of food have followed, the latest being an appeal brought by a food manufacturer concerning the VAT position of flapjacks.
A company manufactured various nutritional sports and performance protein bars on behalf of brand owners. The products were individually wrapped rectangular bars made from oats, syrup and protein, and many of them were described as flapjacks on their packaging. When deciding on their VAT liability, the manufacturer took the view that the products were flapjacks and that these fell under the general category of cakes, which are zero-rated. Therefore, it did not charge VAT on the products when they were sold.
However, HMRC believes that only traditional flapjacks (consisting solely of oats with some minor additions like raisins, chocolate chips and/or a chocolate or yoghurt topping) are similar to cakes and consequently eligible for zero-rating, whereas it regards flapjacks made in the form of cereal bars as ‘confectionery’ and therefore subject to VAT at 20 per cent.
The tribunal has agreed with HMRC, deciding that the flapjack bars were not cakes for VAT purposes, so could not be zero-rated. In a highly detailed judgment, the tribunal thought that consumers would regard the bars as specifically designed for sports nutrition. The texture of the bars was not aerated like a cake, but instead had a chewy consistency similar to a fruit or energy bar. Nor did they have the same function as cakes, and were not typically consumed in the same circumstances; for example, the tribunal noted that the products would look ‘wholly out of place as a dessert at the end of a meal, or as the food to be consumed at an afternoon tea, or even at a casual social function.’ It therefore upheld HMRC’s decision that VAT should have been charged at the standard rate on their selling price.
The decision illustrates the VAT risks that food producers and retailers face when they launch a new product that walks the complex borderline between zero-rated food and fully VATable snacks. Often the need for speedy positioning in the marketplace means that products are already on the shelves for some time before the VAT position can be fully confirmed with HMRC, and an incorrect call on their VAT liability by the supplier can result in VAT bills for the whole supply chain.
Until now, simplification and modernisation of VAT reliefs on food has been difficult because, since 1979, the EU’s VAT rules have not permitted member states to expand the scope of any existing VAT rates below 5 per cent, meaning that countries with zero-rates have not been able to update them over time. For the UK, this has left our VAT rules on food stuck in the 1970s while the nation’s eating habits and nutritional priorities have moved on.
Now the UK has left the EU’s VAT system, the Government is free to reform the VAT rules on food; for example to simplify problem areas like the one highlighted in this dispute or to more closely align the zero-rate to healthier options. However, despite the Office of Tax Simplification’s 2017 recommendation to review the UK’s reduced and zero rates, there is no sign that HMRC has any plans to move forward with this.
Moreover, the EU has recognised the problems that its ‘standstill’ rules have caused and has just approved legislation to give its member states more autonomy to set reduced rates of VAT. As our EU neighbours begin to enjoy the flexibility this will bring to their domestic markets, the UK could soon find itself behind the curve. While HMRC is certainly overstretched by the many challenges and changes brought about by Brexit and the coronavirus pandemic, we believe it should put a comprehensive review of VAT on food firmly on its to do list.