Clutching at (cheese) straws

Clutching at (cheese) straws



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In a First Tier Tribunal vs HMRC, Walkers Snack Foods Ltd. valiantly failed to prove that its Sensations Poppadoms were a side dish, that a food group can be determined by type font, and that things made from potato are not really potato.

The most recent VAT case might bring a smile to your face, yet it underscores the fundamental business considerations of price point and profit margins.

You may recall our celebration of VAT’s 50th birthday where we recounted such tales as the Battle Over Whether A Jaffa Cake Was Actually A Jaffa Biscuit, and why you don’t pay VAT on a ‘naked’ gingerbread man, but giving him a little icing waistcoat costs you the full 20%. 2023 saw the “Blissful” biscuits case fail on the question of being covered in chocolate or not and even a case on the VAT treatment of a Turmeric drink.

All illustrating the complexities of the tax for manufacturers and retailers in a cost-conscious economy.

The latest case sees Walkers – the crisp manufacturers – bring an added layer to the debate around the interpretation of branding – which for some – added a lighthearted view to the serious setting of a recent First Tier Tribunal.

A rather entertaining Judgement was handed down on 10th January 2024. And while Walkers may not be in a mood to see the funny side now, the Tribunal clearly were, supplying the following gem for the archive:

“calling a snack food “Hula Hoops” does not mean that one could twirl that product around one’s midriff, nor is “Monster Munch” generally reserved as a food for monsters.”

This was in response to the company’s argument that if you name a product “Poppadoms”, then the only possible thing for it to be is a poppadom.

The product in the dock was Walkers’ Sensations Poppadoms – a range that promises to “deliver authentic flavours… taking your tastebuds on a journey of discovery”.

More authentic than Cheese and Onion, then (Ed note – yes VAT advisers can have a sense of humour).

The point Walkers wished HMRC to consider was that these particular products should not be beholden to the laws that govern the Common Crisp, which is taxed at 20%. Rather that the “Oriental crackers and poppadoms” range of potato-ish products should be zero-rated for VAT.

The general rule for this is that most “food of a kind for human consumption” is zero-rated, except items like catering products, alcoholic drinks, sports drinks, soft drinks, mineral water, confectionery (apart from cakes and some biscuits), crisps and savoury snacks, hot food, hot takeaways and ice cream, and certain frozen yoghurts – which are always standard rated, according to the 1994 VAT Act.

Some might say Walkers – optimistically ignoring the inconvenient part about ‘crisps and savoury snacks’, launched a gloriously quixotic campaign to get Sensations Poppadoms zero rated – on the grounds that they were indeed ‘food of a kind for human consumption’, and throwing in the ‘principle of fiscal neutrality’ for good measure (i.e. all products of the same type should be treated the same for VAT purposes).

HMRC countered that there was a further exception – Item 5 – to the ‘food for human consumption’ category that also covered:

“products [similar to potato crisps, potato sticks, potato puffs] made from the potato, or from potato flour, or from potato starch” and are “packaged for human consumption without further preparation”.

…and added that it would actually breach fiscal neutrality to treat the products as zero-rated.”

Which would seem to deliver an authentic flavour of victory to HMRC.

But Walkers came back with the first of multiple new angles.  

The ‘They’re not potato crisps, potato sticks, potato puffs’ angle

 “These are poppadoms! Not your common or garden potato crisps, potato sticks or potato puffs” was the argument.

The Tribunal honed the argument down though: “Nobody is disputing that. The dispute is whether or not they’re “made from the potato, or from potato flour, or from potato starch” and whether they are “similar products”.

Walkers’ team tried a second angle…

The ‘They’re not ready for human consumption’ angle

Another argument dismissed by the Tribunal:

“The products are designed”, Walkers suggested, “to be used with dips, chutneys and pickles, and as a side with a meal”.

Quite why a product bathed in chutney flavouring was designed to be dipped in still more chutney, they didn’t explain. What was important was that the products required further preparation before consumption and so did not fall within Note 5 – which lists food items that are subject to VAT.

This approach was challenged in the Tribunal by HMRC – packaged snacks that aren’t ready to eat? The court said as much (and in all below Tribunal extracts, we paraphrase):

“There’s nothing on the consumer packaging that tells you prior preparation is required.”

“True,” said Walkers (realising there was some rather tricky and expensive case law around this point), “it would have to be stated on the packaging, wouldn’t it?”.

This point, allied to the fact that Walkers own promotional materialshows people eating the product directly from the package, without any dips, chutneys or whatever, and without a meal, took this element to a point of no return for the taxpayer.

The next line presented was …

The ‘There isn’t that much potato in them’ angle

Here, they seized on the question “whether or not they’re “made from the potato, or from potato flour, or from potato starch” and whether they are “similar products””.

They submitted an ingredients list stating that Sensations Poppadoms contain 17.5-18% potato granules, 17.5-18% potato starch and approximately 4.25% modified potato starch.

Their next move may surprise you. Having stated to the Tribunal that the products were literally made from potato, they went on to contend that this proved the products were not made of potato.

Confused? Let’s recap how much of the product is potato, and how much is not:

Walkers’ Counsel’s interpretation: “it says potato here. We use potato granules. And some of the potato starch is modified potato starch. Which is not the same thing.”

A bit you say “Potayto, I say potarto” at this point, the view of the Tribunal being that the granules are cooked, dehydrated potatoes. Note 5 was written in 1969 and is clearly intended, they felt, to catch products with a significant potato-based content, which are similar to crisps, sticks and puffs, taking into future unknown advances in food technology.

Walkers Counsel’s fourth line to support zero-rating of the product was:

The ‘All you can taste is flour’ angle

 “If you’re considering the starting point of what the product is made from, you shouldn’t think about potato. Actually, the most recognisable ingredient from a taste perspective…is the gram flour. You know, like cider tastes of apples, but is mostly water. Our poppadoms taste mostly of gram flour!”

Admittedly, this is a brave one, from a marketing POV. Having spent millions on promising the consumer they will be “taking your tastebuds on a journey of discovery”, imagine the consumer’s surprise when the journey ends at flour.

The Tribunal again failed to see the merit in this argument.

“We can’t taste the gram flour,” said the Tribunal Chair and we are left with the logic they applied that as there’s more potato than anything else, and more than enough to say they’re ‘made from’ potato, they’re still covered by Item 5, and still standard rated.

The final attempt to secure justification under the law as a zero rated food item was:

The ‘They’re nothing like crisps anyway’ angle

Admittedly, this begins to look like desperation, but Counsel contended that the ordinary man in the street would not mistake them for crisps.

If you took a pack of them to a friend’s house, in other words, they wouldn’t say, “Ooh, you’ve brought crisps!”, they’d say, “Ooh, you’ve brought tiny little poppadoms!”

With all of these arguments brought to the fore; EVEN despite Counsel showing the Tribunal a picture of the product on a table being shared in a bowl with a takeaway meal, with cutlery and a drink and a claim that the poppadom “market” would be disrupted; the view remained that the balance of the facts and within the interpretation of the law, these products as subject to 20% VAT.

The Judge’s ruling

Clearly what you call a product is not determinative of what it is – a key lesson for manufacturers from this ruling. Poppadoms are zero rated, but that doesn’t mean you can get your product zero rated by calling it a poppadom. 

What mattered in this particular case, is whether it is similar to a potato crisp and is made from potato. And since it’s made from potato and potato starch, the Tribunal felt it was irrelevant whether it’s similar to a poppadom.

VAT at 20% is due on the sale price – currently £1.75 – which gives 29p in VAT to HMRC and £1.46 to the retailer. If zero rating had been achieved, then the retail price could have reduced to reflect that, or the retailer could have retained the extra 29p themselves. That’s how directly VAT liability treatment affects a business’s turnover and profits.

As this was a First Tier Tribunal it’s not a precedent but the interpretation of the arguments will be of interest to others facing a similar discussion with HMRC.

Walkers do have leave to appeal. And if they do, we’ll be there to give you updates.

Of course, as a sensible Xeinadin client, you may very will feel that all the above could have been avoided with some prior planning. However, HMRC are becoming less open to providing “clear” rulings on liability questions where they see a risk of revenue loss. Leave to an independent Tribunal to decide could be their view.

But if you don’t have pockets as deep as Walkers, the consequences of getting it wrong can be devastating. There are many grey areas, and the complexities take some unravelling. But your Xeinadin VAT specialists have long experience of untangling VAT regulation for clients, and little surprises them.

If you have a question about your own VAT situation, why not set up a confidential chat by completing the contact form below?

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