Everyone knows that the real question of the festive season is not how Father Christmas visits more than 200m households in one night, it’s whether various chocolate treats consumed at Christmas are subject to VAT. Luckily, with the help of VAT Notice 701/14 and a recent court case, I am here to guide you through the intricacies of this particularly (and perhaps needlessly) complex area of VAT legislation.

Regular readers of TAXline, and those working in the tax function of Santa’s finance team, will know that food of a kind used for human consumption can be zero-rated, unless it is a supply of anything comprised in any of the excepted items, unless it is also comprised in any of the items overriding the exceptions. (Note: for the purposes of this article, we will ignore food supplied in the course of catering, which is standard-rated.)

The first indication within the legislation that some chocolate items might be standard-rated is that excepted item number two in the legislation is: “confectionery, not including cakes or biscuits other than biscuits wholly or partly covered with chocolate or some product similar in taste and appearance”. 

The notes to this group go on to tell us 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”.

So, there we have it. Confectionery is standard-rated. Confectionery includes chocolate, ergo chocolate is standard-rated. Problem solved, right? Let’s not be hasty.

When is chocolate not confectionery?

On the face of it, a bar of chocolate is standard-rated. However, as a general principle, you can zero-rate a product sold for use as an ingredient in home cooking or baking, on the basis that it is not confectionery. It must be used solely or predominantly, in the particular form in which it’s sold, in the manufacture of food. On this basis, cooking chocolate can be zero-rated. The zero rate is dependent on a number of factors, including the packaging and even where the chocolate is sold in the supermarket (ie, the home baking aisle).

For the same reason, chocolate cake decorations also tend to be zero-rated. This extends to chocolate couverture, chips, leaves and scrolls, as long as they are designed as cake decorations. The bar is set slightly higher for chocolate buttons, which are usually standard-rated, except for mini buttons held out for sale as cake decorations. 

The bar is even higher for chocolate flakes, which can only be zero-rated if sold within the bakery and ice cream industries, sold in packs of “one gross or more” and clearly labelled as “for use as cake decorations only; not for retail sale”.

Biscuits

Returning to excepted item number two, we can see that biscuits are normally zero-rated, despite being considered confectionery. However, they become standard-rated when they are wholly or partly covered in chocolate.

In some cases, this is straightforward. A chocolate digestive is clearly a biscuit partly covered in chocolate and, as such, is standard-rated. On the other hand, a chocolate chip cookie is zero-rated (on the proviso that the chips are either “included in the dough or pressed into the dough before baking”). In the eyes of HMRC, the chocolate chips do not cover the biscuit, even partly.

Gingerbread people are another source of contention. Most readers will agree that they are biscuits, but at what point do they become partly covered in chocolate? HMRC accepts that two chocolate dots for eyes are not sufficient to make the biscuit chocolate-covered. But if that gingerbread person has the audacity to have more chocolate on its body, whether that’s buttons or a belt or something else entirely, it becomes standard-rated. Incidentally, chocolate body paint is zero-rated.

Biscuit Wars 2: The Return of McVitie’s

Following the infamous Jaffa Cake case of the early 90s, which focused on the cake or biscuit element of the legislation, McVitie’s – or strictly speaking, the brand owner, United Biscuits – has recently been in the courts again. This time it was arguing over whether its ‘Blissfuls’ are partly covered in chocolate. United Biscuits considered that Blissfuls should be zero-rated. HMRC contended that Blissfuls should be standard-rated on the basis that they are partly covered with chocolate.

For those unaware of McVitie’s Blissfuls, the First-Tier Tribunal described them as consisting “of a biscuit cup with a flat bottom base, approximately 44mm in diameter and 9.5mm in height. It has a layer of chocolate hazelnut, a layer of chocolate and a McVitie’s logo made of biscuit on top, the circumference of which is smaller than the base.”

United Biscuits argued a couple of points. Perhaps the most convincing was that the chocolate filling sits below and underneath the lid and therefore does not cover the product. Rather, it is contained within it. They went on to argue that a covering would be the first constituent part of the biscuit to be bitten into, which is not the case with Blissfuls.

The Tribunal was not persuaded by this argument. Ultimately, the Tribunal judge stated that the area not covered by the biscuit lid must be covered by something and, in this case, that something must be chocolate. As a result, the product is a biscuit partly covered with chocolate and is standard-rated.

Incidentally, let’s hope McVitie’s don’t include too many Blissfuls in its assorted biscuit boxes. If standard-rated chocolate-covered biscuits exceed 15% of the net weight of the box, the whole box of biscuits will be standard-rated.

As odd as this might sound, it may not be the strangest quirk in chocolate-covered biscuit-based VAT. A chocolate-covered shortbread is patently standard-rated as a chocolate-covered biscuit. Add in a layer of caramel though, and this becomes a millionaire’s shortbread, which is a cake. As we all know, thanks to United Biscuit’s previous high-profile VAT case, chocolate-covered cakes are zero-rated.

And it’s not just biscuits for which the VAT liability might change if you cover the item in chocolate. Nuts are generally zero-rated, but if you buy your festive nuts covered in chocolate, VAT should be charged at the standard rate. The same usually applies to fruit covered with chocolate. However, if the fruit in question is an apple on a stick, covering it in chocolate does not change the VAT liability from zero-rated to standard-rated!

Rest assured that when the snow falls this Christmas and you’re snuggled up by the fire with a mug of hot chocolate, that at least the cocoa or drinking chocolate used in your drink was zero-rated, even if you used chocolate milkshake powder to make it. Just beware if you use a different flavour of milkshake powder, as they are standard-rated. Nestlé lost this argument in the courts.

The takeaway

Of course, as a consumer, most of the differences between these VAT rates don’t really affect us. It won’t influence our purchase decisions unless the difference in VAT rate filters through to the price, which it generally doesn’t. As a quick demonstration of this, Nestlé’s chocolate-, strawberry-, and banana-flavoured Nesquik powder are sold at the same price in all the major UK supermarkets, despite the chocolate flavour being zero-rated.

However, businesses in this sector and their advisers must navigate the VAT legislation regarding food on a regular basis. We see several court cases a year in this area, which costs both HMRC and the taxpayer time and money and clogs up the court system. 

Could Father Christmas bring us simplification of the VAT rate legislation this year?

Ed Saltmarsh, VAT and Customs Manager, ICAEW