VAT liabilities – Food and beverage
When it comes to indirect taxes, the food and beverage industry is infamously complex. Whether it’s Jaffa Cakes justifying their status as cakes, or Pringles arguing their product is not a crisp, the liability of many food stuffs have been, and continue to be, debated across UK tribunals.
So why is it important?
While the debate of the VAT liability of a cake may seem trivial and over-egged, the outcome of such a decision could pose a large commercial risk to any business.
By default, most goods sold in the UK are liable to 20% VAT, with the exception of the food and beverages market, in which the VAT zero rate (0%) is available for certain goods. There are of course legal guidelines as to which goods are eligible for the zero rate but, as is common place with tax law, there are grey areas, which can create issues for businesses, when their current VAT treatments of their products is challenged.
Where a product is being sold at the zero rate, but is challenged by HMRC, the result may be 1/6th of the revenue due as VAT on said products. For many businesses, this 1/6th carving-out would represent significant erosion of its profit margin.
Conversely, where a business is incorrectly selling foodstuffs at the default rate of 20%, this represents a huge opportunity missed, not just again in potential profit margins, but also in their ability to price competitively.
The challenges with the VAT rules for eaten food extend also to drinks and beverages.
VAT rules for beverages
The definition of drinks vs beverages can be a very blurred line - as demonstrated in Innate-Essence Ltd (t/a The Turmeric Co) vs HMRC.
In this case the business were producing a ‘shot’ of unpasteurised turmeric and ginger. They were 60ml each and whilst the business asserted that they were a foodstuff (and therefore zero-rated) this approach was challenged by HMRC.
After much discussion the case was eventually decided in favour of the appellant and zero-rating treatment could be applied. The reasoning being that whilst the product is indeed a drinkable liquid it is not designed to slake the thirst. The tribunal also considered if, for example, the produce might be offered to an unexpected guest!
Ultimately, emphasis was placed on its nutritional purpose and ‘medicinal’ attributes. It was not considered to be a beverage (and so standard rated for VAT) that one might enjoy as a substitute for a beer or soda.
A recent example: Flapjacks – cake or not?
Recent proof that this area of risk and opportunity is ongoing is that of the recent First Tier Tribunal case of Glanbia Milk Ltd (‘Glanbia’).
In this case, Glanbia, a manufacturer of various foods, was challenged by HMRC on the nature of their ‘flapjack’ products. Glanbia claimed that, as VAT law allows for the zero rating of cakes, which by extension should include flapjacks, that their goods should be eligible for the zero rate.
HMRC challenged this, claiming that Glanbia’s flapjacks were not what they claimed to be and, therefore, not zero rated for VAT, as they were wrongly shaped, of a different consistency, and marketed as something other than a classic cake product.
Glanbia were unsuccessful in defending their argument, meaning they now face the consequence of having to carve out from their revenue the VAT now deemed to be due on their products (subject to a further tribunal appeal by Glanbia).
The biscuit saga continues
A recent First Tier Tribunal found against McVities in relation to their ‘Blissfuls’ biscuits.
The biscuits are cup-shaped with a chocolate filling and they have a partial biscuit lid which is the source of their VAT downfall.
Biscuits that are “wholly or partly covered” in chocolate are subject to the standard rate of VAT. So the gaps in the patterned biscuit lid led the Tribunal to conclude that the product was not encased in biscuit and so was partly covered in chocolate and therefore subject to the standard rate of VAT.
What tests are there to determine which food is which?
Despite the loss for the taxpayer, the Glanbia tribunal serves as a good reminder of what to consider when classifying your food products, for VAT purposes.
- Ingredients and manufacturing technique
- What does the product in question contain?
- Would these ingredients be expected within a standard example of the food being held out for sale?
- Has the product been prepared/manufactured in a manner consistent with the intended food?
- Texture and appearance
- Does the product resemble what one would expect for the food in question?
- Are there any peculiarities in its texture, consistency or shape?
- Function and typical circumstances of consumption
- Is the food in-keeping with its intended consumption? E.g. if you are selling what is claimed to be a cake, would this look out of place if presented with an afternoon tea? (A favourite argument of HMRC’s)
- Marketing and markets
- How is the product marketed, and in what type of market? E.g. Does the item under which the zero rate is intended to be applied contradict the products’ marketing and product placement? – in Glanbia’s case, HMRC claimed that cakes were, by definition, unhealthy, whereas Glanbia’s products were marketed as healthy snacks
- Packaging and name
- Is the packaging and name of the product suggestive of what it is being claimed to be for VAT purposes? E.g. if you are selling a cake, is it packaged like one? Does the packaging state ‘cake’ anywhere?
As you can see from the above, extensive yet not exhaustive list, there is a huge range of considerations which should be considered when determining the correct treatment of foods, from a VAT perspective.
What can be done to help?
We suggest that any business involved in the selling of foods, which have not reviewed their VAT interpretation in recent years, undertake a review of the relevant considerations which would be applied by HMRC, were its products scrutinised in an inspection.
As mentioned above, this also presents opportunities for savings to be made, or retrospective claims to be filed, where VAT is found to have been overcharged.
For more information, please contact Robert Marchant or your local Crowe contact, who can arrange for a discussion on how we can help to identify the risks posed and opportunities made available by these issues.
