Nothing dampens the holiday spirit quite as much as talking about tax. But hey, when it comes to VAT on biscuits and cakes, it’s just how the cookie crumbles. Or is it a biscuit? Or a cake?
This festive season, we’re looking at the sweeter side of VAT, specifically the case of United Biscuits (UK) Ltd vs HMRC (TC/2022/09475) and Mcvitie’s Jaffa cakes.
Before leaving any milk and cookies (or biscuits and cakes) for Santa, here’s what you need to know.
The ‘Blissfuls’ case
Once upon a time, HMRC VAT notice Food products (VAT Notice 701/14) stated that a gingerbread man with chocolate eyes was zero-rated. However, a gingerbread man with chocolate pants is taxed at a standard rate. The difference? Chocolate coverage, of course.
This sparked some debate when United Biscuits launched a new product called Blissfuls. What is a Blissful? Imagine a biscuit cup with chocolate hazelnut and chocolate, plus a biscuit logo on top. Delicious? Definitely! Taxable? Perhaps.
This is why United Biscuits sought confirmation from HMRC that it was zero-rated.
As confirmed in key legislation, the standard rate applies to confectionery (not including biscuits) wholly or partly covered with chocolate. However, United Biscuits argued that their Blissfuls were, in fact, not covered in chocolate but filled with chocolate – making it zero-rated.
HMRC disagreed and deemed it standard-rated. The taxpayer made a sale at a zero rate and appealed HMRC’s decision. However, the First-tier Tribunal (FTT) considered that if the biscuit is covered by chocolate to any extent, the excepted item rules apply, and the product is standard-rated. The appeal was dismissed.
McVitie’s takes the cake
A similar case revolves around the relevant VAT on cakes. The Jaffa-cake case, in particular, helps us understand the intricacies of VAT on biscuits and cakes.
Jaffa Cakes are made by McVitie’s, a British biscuit and cake manufacturer established in 1839, which was involved in a noteworthy tax dispute with HMRC in 1991. Why does the Jaffa Cake VAT story matter? As seen during the Blissful case, chocolate-covered biscuits (and other sweet biscuits) are standard-rated for VAT purposes, whereas cakes are zero-rated. This is because cakes are classed as ‘food’ and chocolate-covered biscuits are not.
The debate revolved around whether these sweet treats should be classified as biscuits, hence liable for VAT, or as cakes, which were considered a staple food and exempt from the same tax as biscuits. HMRC argued that food items “wholly or partially covered in chocolate” were deemed luxury items and should be taxed accordingly.
McVitie’s could have complied with HMRC’s decision and paid the alleged VAT. Instead, they chose to contest the matter. You know what they say: You’ve gotta risk it to get the biscuit- we mean cake!
Ultimately, McVitie’s emerged victorious in their court battle to determine the classification of Jaffa Cakes as either cakes or biscuits.
Their argument hinged on the fact that Jaffa Cakes resembled cakes more than biscuits when stale: cakes harden while biscuits turn soggy.
The judge ultimately sided with McVitie’s, affirming that Jaffa Cakes were rightfully classified as cakes and, therefore, zero-rated!
Know your (sweet) stuff with VAT IT
These legal cases stand as a lesson to all business owners on the importance of understanding VAT rates and their impact. If the court had ruled in favor of HMRC and decided that Jaffa Cakes were, in fact, classed as biscuits, McVities would have faced what was reported to be a £3m bill.
Do you know your sweet stuff? Find out which food products are VAT-rated in the
UK here. https://www.gov.uk/guidance/food-products-and-vat-notice-70114
