The High Court held that, on the proper construction of excepted item 5 of Grp.1 of Sch. 8 to the Value Added Tax Act 1994, a savoury snack produced by the taxpayer was not within the exception and so constituted zero-rated food for VAT purposes.

Facts

The taxpayer produced a savoury snack, ‘Regular Pringles’, which Customs determined to be standard rated for the purposes of VAT. The taxpayer appealed to the VAT and Duties Tribunal submitting that Pringles were not similar to potato crisps for reasons of regularity of shape, uniform colouring, texture, taste and packaging. Further, the manufacturing process was different from that of crisps and more like that of biscuit or cake. In the taxpayer's view, the tribunal should follow its earlier decision that Pringles Dippers were zero-rated (Decision No. 18,381; [2004] BVC 4,038).

Customs took the view that the tribunal in that earlier case erred in allowing the taxpayer's appeal and that the decision should not be followed. The similarity of Pringles to potato crisps was supported by a number of factors, including that potato was the main ingredient; the product was not intended for dipping; it was intended to be eaten as a snack and was not purchased primarily for nutrition; it was intended to be eaten on its own; the texture was more similar to crisps than tortilla chips; the shape broadly resembled potato crisps; and the packaging in canisters was not unique for potato crisps.

The tribunal held that the legislation imposed a double test: (1) whether the product was similar to potato crisps, potato sticks or potato puffs; and (2) whether it was made from the potato, or from potato flour, or potato starch. Although the tribunal in the Pringles Dippers case considered the ingredients to be the most important factor and judged other factors in weighted order of importance, the present tribunal took the view that the test should be applied as a whole without an order. Taking into account all the relevant factors of appearance, taste, ingredients, process of manufacture, marketing and packaging and applying the test of how a reasonable person would see the product, the tribunal concluded that, whilst in many respects Pringles were different from potato crisps, they were, nevertheless, sufficiently similar to satisfy the first part of the dual test.

In relation to the second part of the test, the tribunal disagreed with the tribunal in the Pringles Dippers case in terms of how the percentage of ingredients should be interpreted. In this case, the potato flour content was more than 40 per cent. It was the largest single ingredient by nine percentage points and was nearly three times larger than the other flours taken together. The answer to the second test, therefore, was that Pringles were made from potato or from potato flour or potato starch. The fact that there were other ingredients did not affect that conclusion. The product was, therefore, excepted from zero-rating under excepted item 5 of VATA 1994, Sch. 8, Grp.1 (Decision No. 20,205; [2007] BVC 4,107).

The taxpayer appealed, contending that the tribunal had failed to explain what test it was applying; applied an incorrect approach to the knowledge of the reasonable man in assessing similarity; and failed to identify the separate elements which weighed in the balance and thus failed to explain which way each factor pointed or the weight they attached to it. The court was asked to rule, among other things, on the proper construction of the words ‘made from’ in the context of excepted item 5.

Issue

Whether Regular Pringles were standard-rated for VAT purposes within the words ‘potato crisps, potato sticks, potato puffs and similar products made from the potato, or from potato flour, or from potato starch’ in excepted item 5 of VATA 1994, Sch. 8, Grp. 1.

Decision

Warren J (allowing the appeal) said that the question whether Regular Pringles were ‘similar products made from the potato etc’ raised questions of law and of mixed fact and law. The meaning of ‘made from’ in the context of excepted item 5 was a matter of law; it was necessary to identify what concept was identified by those words before applying the facts to that concept. The concept of similarity in the statutory context was not clear and obvious. There were different views about the level on which similarity was to be assessed and about the criteria which should be applied in assessing actual similarity. This was not a case where all that had to be done was to apply clear and undisputed principles to the facts (Fitzpatrick v IR Commrs and related appeals (No. 2) [1994] BTC 66 and R & C Commrs v Premier Foods (Holdings) Ltd [2007] EWHC 3134 (Ch) considered).

If the tribunal had (or even might have, if its reasoning was not sufficiently clear) applied the wrong concept of similarity, their decision was open to review notwithstanding that their decision was, in one sense, a matter of fact. The court was not restricted to a review on Edwards v Bairstow principles. However, once the reasonable man in the street understood the context in which he was to form a view, the question of similarity was for him.

Whatever the correct approach to similarity, it was also necessary to know what products could be said to be ‘made from potato etc’, bearing in mind that similarity had to be judged in the context of the whole of excepted item 5. The correct approach to construing the words ‘made from’ was that the product should contain nothing, or substantially nothing, other than potato. Excepted item 5 was drafted on the basis that the three specified products, potato crisps, potato sticks and potato puffs, were all products which were made from potato; they were the paradigm potato products by which similarity of other potato products was to be judged.

The three products specified in limb (a) of item 5 were all products which could be said to be made of potato and not, relevantly, of anything else, notwithstanding that they, in fact, contained other matter, namely in the case of the crisp, residual oil. Their distinguishing feature was that each of them was a product made substantially out of potato (and other ingredients including flavouring) to which a process had to be applied to turn them into crisps. Although that process involved adding a further ingredient to the product, it did not prevent the product being made from the potato in the sense required by the first approach. The use of the word potato in each limb reflected the need for the similar products in limb (b) to be comprised of potato in a way which corresponded to the way potato was comprised in one of the three products within limb (a).

A similar product would be the stick made of potato flour instead of pure potato. The flour stick might have to be cooked in a different way and might retain different residues of oil or other product (perhaps more than the pure stick did, if the pure stick had any such oil residue). But the end product was still a potato product. It should be possible to assess, as a matter of fact, whether the potato flour was in the same sort of relationship to the flour stick as the pure potato was to the potato stick; or, as part of the same approach, to assess whether the contents other than potato flour or pure potato were as irrelevant to the question whether the flour stick was made from potato flour as they were to the question whether the potato stick was made from potato. On that approach, a flour stick made half of potato flour and half of some other flour would not be ‘made from’ potato in the sense required by excepted item 5.

That approach might be reasonably straightforward to apply in cases such as that where it was possible to see quite easily how such correspondence operated. In other cases, it might be more difficult to decide whether the required correspondence was present. In yet other cases, it might be absolutely clear that there was no correspondence between the way the potato was comprised in the product and the way it was comprised in the potato crisp, stick or puff. The Regular Pringle, on that approach, was clearly not ‘made from potato’.

If that conclusion was wrong, the only realistic alternative approach was to say that the product had to contain potato. No doubt there would be a de minimis hurdle to pass but, subject to that, the need for potato content was simply a threshold test so that only products which contained no potato, or de minimis amounts, were excluded.

Chancery Division.
Judgment delivered 4 July 2008.