“You owe us £3 million in VAT back-payments for these Jaffa Biscuits!”
“With respect, you mean Jaffa Cakes; and no we don’t.”
“Do. They’re biscuits.”
“Don’t. They’re cakes. They go hard when they’re stale. If they were biscuits, they’d go soft.”
“They’re biscuits. You buy them in the biscuit aisle.”
“Cakes. They’re made with flour, eggs and milk.”
“Aha! But there’s chocolate underneath the biscuit, making it a chocolate biscuit.”
“No, the chocolate sits on top of the cake. And anyway, it actually says they’re cakes on the box. Jaffa Cakes, see?”
While not, perhaps, an exact transcript of the 1991 HMRC vs United Biscuits trial, it’s a fair summary of what became probably the most celebrated case in VAT’s history, as the tax’s 50th birthday comes up on Saturday 1st April 2023. (How will you be celebrating?)
When the (then) Chancellor of the Exchequer, Lord Barber, introduced Value Added Tax back in 1973, it was intended to be a much-simplified replacement for the labyrinthine and inscrutable Purchase Tax. This highly fruitful consumption tax had been charged for years at different rates for different products – at brain-bending rates like 662⁄3%. And by the time it gave way to VAT, it was levied at the diverse levels of 13%, 22%, 36% and 55!
Showing VATs age
But like most 50-year olds, VAT now bears the wrinkles and battle scars of living in a complex, volatile world. HMRC set out to be fair, insisting that only luxury goods would attract VAT, while so-called ‘essentials’ would not. But thanks to the picky old taxpayer, they then spent years justifying their idea of what constituted a luxury.
HMRC might have thought it obvious to the rest of us that a biscuit is a necessity (and therefore Zero-rated). Until, of course, it is partly covered in chocolate, when it becomes a luxury and attracts full-fat VAT at 20%.
Likewise, a cake (as Partygate proved) is an absolute necessity in the Government’s eyes – whether it’s smothered in chocolate, jam, cream or caviar; and is therefore always Zero-rated.
So imagine their surprise when the plebiscites failed to share their clarity of thought. Is it not obvious, for instance, that there is a class system for Gingerbread men, based on their decorations? Those with just two chocolate-drop eyes are classed as essentials, so VAT-free. But if they sport an icing-sugar waistcoat, buttons, or any other means of covering their modesty, they’re clearly an indulgence – and VAT applies in full.
Luxury or necessity
Okay, how about chocolate-covered shortbread? Yes, you’ve got it. It’s a luxury item and attracts standard-rate VAT. But should you add a layer of caramel (making it Millionaire’s Shortbread), it’s a necessity and there’s no VAT to pay. Once again, it’s one rule for the rich…
And as the Inspector runs his gimlet eye down your shopping list, his idea of luxury further diverges from yours. Orange squash, petrol and ice cream are rated as luxuries. So is poodle food – but not, of course, Labrador food (you’ve got to keep the workers happy). Similarly, every home is entitled to a VAT-free pet ferret, but not a fancy-breed rabbit.
To bee or not to bee
And if you were thinking of buying a bumble bee – watch out, because you’ll be stung with 20% VAT. Far better to buy a Zero-rated honeybee.
By now the only thing that should be becoming clear is that you can’t take VAT for granted. Nothing is straightforward and case law is changing the landscape all the time.
We live and breathe VAT
Fortunately, your Xeinadin VAT specialists live and breathe this stuff. While you’re tucked up watching Happy Valley, they’re actually rooting out strange anomalies like the fact that cracking open a nut makes it VATable. Seriously, that’s what they do for pleasure.
So if you want to be absolutely sure that the VATman’s not going to come up behind you with a sockful of wet sand, why not have a confidential chat with your Xeinadin advisors by completing the contact form below.