VAT: zero-rated food

Food of a kind used for human consumption can be zero-rated, unless it is:

• supplied in the course of catering; or
• a supply of anything comprised in any of the excepted items… unless it is also comprised in any of the items overriding the exceptions… (Group 1, Sch 8, Value Added Tax Act 1994)

For example, excepted item number 2 is ‘Confectionery, not including cakes or biscuits other than biscuits wholly or partly covered with chocolate…’

Confectionery is an exception to the zero rate and is thus standard-rated.

However, confectionery does not include cakes or biscuits, so those are zero-rated, unless the biscuit is covered with chocolate, in which case it is standard-rated.

Cakes covered in chocolate, on the other hand, are zero-rated.

Many of you will already know exactly where I am going with this. I am almost reluctant to mention it, but it would be remiss to write an article about VAT on food and not do so.

Are Jaffa Cakes biscuits partly covered with chocolate (standard-rated), or cakes partly covered in chocolate (zero-rated)? Luckily, we have a definitive answer to this as a VAT tribunal decided in 1991 that they are, in fact, cakes. Although this may be the most famous court case surrounding VAT on food – or perhaps even the most famous court case surrounding any tax – there have been plenty more since:

• Are flapjacks cakes or biscuits? They are cakes, but with a very narrow definition of flapjack.
• Are Pringles potato crisps? Yes, as potato flour is a major ingredient – Doritos, being made of ground corn, are not.
• Does frozen yogurt have a different VAT liability to yogurt that is frozen, but is intended to be eaten at a temperature above freezing? Yes.
• Do different flavours of Nesquik milkshake powder have different VAT liabilities? Yes.

Incidentally, these are just the cases that made it to tribunal. HMRC has a lengthy public notice, Food products (VAT Notice 701/14), setting out what seem to be largely arbitrary distinctions between various types of food. For example, gingerbread men (biscuits) are allowed to have two chocolate dots for eyes and still be zero-rated, but add chocolate buttons or a belt and they become partly covered with chocolate and standard-rated.

Why does this matter? Because the tax at stake can run to millions of pounds. When it was decided by the Upper Tribunal in 2016 that strawberry and banana Nesquik should be standard-rated, even though the chocolate flavour is zero-rated, it left Nestlé with a £4m VAT bill.

Although there has been a smorgasbord of case law concerning food, there is always room for s’more…

Innovative Bites Ltd v HMRC [2022] UKFTT 00352 (TC)

In a recent case, the First-tier Tribunal (FTT) found that oversized marshmallows are not confectionery and are zero-rated for VAT purposes.

Innovative Bites Limited (IBL) is a wholesaler of ‘iconic American treats’, including Twinkies and the product in question, Mega Marshmallows. These marshmallows are mega by name and mega by nature, with a height of approximately 5cm and a diameter of 4cm.

Since launching the product in the UK, IBL has been selling them at the zero rate of VAT on the basis that they were not confectionery. However, HMRC disagreed with this treatment and issued assessments for £472,928, covering the period between June 2015 and June 2019.

There is no definition of confectionery within the legislation. Instead, the legislation states that “confectionery includes chocolates, sweets and biscuits; drained, glacé or crystallised fruits; and any item of sweetened prepared food which is normally eaten with the fingers”.

Based on this definition, IBL appealed the assessments. In summary, IBL made the following arguments:

• the product is not normally eaten with the fingers; it is roasted on a stick. Consumers would not normally use an implement to eat confectionery;
• items intended to be subject to a further cooking process would not be expected to fall within the term confectionery;
• the packaging of the product suggests it is primarily intended to be roasted. It does not appear on the confectionery shelves of supermarkets, but is placed in the world foods section and, more importantly, in the barbecue section during the summer months when most sales are made. The fact that it is a seasonal product, enjoyed more in the summer months than regular marshmallow products, demonstrates that customers do tend to roast the product;
• the size of the product indicates that it is intended to be roasted, unlike regular marshmallows. Customers wishing to purchase a sweet snack would tend to choose a regular marshmallow; and
• the depiction of a cartoon chef on the packaging suggests it is an ingredient, rather than an item of confectionery.

Ultimately, the FTT found in IBL’s favour and focused on the following arguments:

• Confectionery might not be expected to be used as an ingredient in making another product, which this product is clearly intended for.
• Mega Marshmallows were sold and purchased as a product specifically for roasting. This was confirmed by:

1. the packaging;
2. the size of the product, which has made it particularly suitable for roasting; and
3. its positioning in the barbecue section of supermarket aisles
   during the summer months.

As a result, Mega Marshmallows are not classed as confectionery. It is tempting to assume that all oversized marshmallows should be treated as zero-rated. However, it is vital to remember that VAT treatment always depends on the facts of a specific case. An even larger marshmallow may still be standard-rated if it is not intended to be roasted or used in a s’more!

To demonstrate this point, HMRC was asked during the hearing to state its policy on tiny marshmallows, which was: “The VAT liability of ‘tiny’ marshmallows will depend upon the basket of evidence which will determine whether they are to be treated as items of confectionery (taxable at the standard rate) or whether they are to be used for culinary purposes such as baking (in which case they will be zero-rated). In line with HMRC’s multifactorial approach, VAT treatment would be determined by all relevant factors including where they were placed (such as in the baking section of a supermarket aisle) and the way in which they were held out for sale, and that would include the marketing of the product and how it is labelled and packaged.”

Simplification

The VAT legislation regarding food is, you could argue, unnecessarily complicated. I could write another article on the exception for catering, titled ‘When is hot food not hot food?’.

Much of this complexity is due to legislation remaining fundamentally unchanged for nearly 50 years, since VAT was introduced in 1973. Since leaving the EU, the UK has more flexibility to change the VAT rates it applies to various goods and services.

HMRC and HMT have been tasked with placing simplification at the heart of everything they do. On that basis, is now the time for a single rate of VAT on all food? This could also free up significant resource at HMRC and provide certainty for businesses. As per ICAEW Tax Faculty’s Ten Tenets for a Better Tax System, making VAT simpler and more certain can only lead to a better tax system.

About the author

Ed Saltmarsh, VAT and Customs Manager, ICAEW