Pulsin’ Limited v The Commissioners for HM Revenue and Customs: [2018] UKFTT TC06909

This month’s Chartered Accountants Tax Case Digest takes a look at a case where a company claimed that its healthy brownies were not biscuits but cakes for VAT purposes which would make them zero-rated. The company’s claim was successful though it is not yet clear if HMRC will appeal this decision.

No VAT is charged on plain biscuits or cakes. But when a biscuit is covered in chocolate it becomes a luxury under VAT rules and standard rate VAT at 20% is added to the price. This case is just another in a series over the years where the VAT treatment of Jaffa cakes, tea cakes and other sweets treats have been closely examined.

Chocolate chip biscuits where the chips are in the dough or pressed into the surface before baking are zero-rated. Bourbon and other biscuits with a chocolate sandwich layer between two halves also escape VAT. However, if your biscuit is wholly or partly coated in chocolate then VAT applies at the standard rate. And at Christmas time, if your gingerbread person comes with more than just two dots for eyes, 20% VAT may have been added to the price.

It is not yet clear if HMRC will appeal this decision.

Background

This case concerned the proper classification for VAT purposes of “Raw Choc Brownies” (“the Product”) which are produced in four flavours.

By an error correction notice (“ECN”) dated October 2016 the Appellant, Pulsin’ Ltd (“Pulsin’”), sought to claim repayment of output tax it considered to have been overpaid in connection with the sale of one of the variants of the Product over the period September 2012 to August 2016 in the sum of almost £50,000. Pulsin’ had, during that period, treated sales of the product as standard rated but subsequently considered such supplies to be properly taxed as zero rated cakes.

A further ECN was submitted in June 2017 in respect of the other variants of the Product for the period May 2013 to May 2017 in the sum almost £262,000. The ECNs were both rejected by HMRC who considered that the products were not eligible to be zero rated on the basis, in summary, that they did not display enough characteristics of a cake to so qualify.

Pulsin claimed that:

• The Products were not sufficiently sweet to constitute confectionary;
• By reference to an overall assessment the Products fell to be classified as cakes; and
• If the Products are not classified as cakes, fiscal neutrality would still require them to be zero rated as essentially similar products in competition with products eligible to be zero rated.

Decision

The relevant legislation was set out. Section 30(2) of the Value Added Tax 1994 (“VATA”) provides:-

“A supply of goods … is zero rated by virtue of this subsection if the goods … are of a description … specified in Schedule 8 …”

VATA Schedule 8 is headed “Zero Rating” and Group 1 describes, and therefore specifies, items eligible to be zero rated under section 30 within the category of food. The zero rating of food is complicated as the provision under Group 1 provides for a wide general description (qualifying for zero rating) subject to excepted items (which must therefore be standard rated) with exclusions and overriding items to those exceptions (which then requalify to be zero rated).

Item 1 to Group 1 provides for the zero rating of:-

“Food of the kind used for human consumption”. Excepted item 2 excludes from zero rating “Confectionary, not including cakes or biscuits other than biscuits wholly or partly covered with chocolate or some products similar in taste or appearance”.

Note 5 then provides “for the purposes of item 2 of the excepted items ‘confectionary’ includes chocolates, sweets and biscuits; drained glace or crystallised fruits; and any item of sweetened prepared food which is normally eaten with the fingers”.

The approach to be taken by the Tribunal was not the subject of any significant dispute between the parties. In essence the Tribunal undertook a multi-factorial assessment. Relevant case law was also set out in some detail.

HMRC relied heavily on the recent case of Kinnerton Confectionary Limited v HMRC [2018] UKFTT 0382 by seeking to encourage the Tribunal to focus heavily on the manner in which the product was held out for sale as determining the question of its liability.

The Kinnerton case concerned the liability of an allergen free chocolate bar. In that case Kinnerton sought to align their chocolate with cooking chocolate (which is zero rated). The FTT in that case determined that it was not possible to decide whether the product in that case was cooking chocolate or eating chocolate from the recipe particularly given that the recipe of the chocolate in question was the same as other items which the taxpayer accepted were standard rated confectionary. The FTT therefore forensically considered the packaging, placement in supermarkets, website information, advertising and views of customers.

However it was the Tribunal’s view that the approach taken in that case was of little or no help in determining the answer in the present case. The case law referenced in the Kinnerton case assisted in determining how a single product which has duel uses was to be taxed. In such situations only how it was held out for sale could determine its liability. It was the Tribunal’s view that the present case was not such a situation.

The arguments in the case centred on the comparison between the Products and a “traditional” brownie, though other examples of cake were bought and available to the tribunal. Having decided that the Products are confectionary the question was therefore whether the Products were to be treated and taxed as cakes.

The relevant factors and the Tribunal’s view on each were as follows:-

1. The ingredients used are not the same as a traditional sponge cake but by reference to the range of products that are treated as cakes, particularly allergen free/vegan cakes, the ingredients are consistent with those of a cake;
2. The process of manufacture is to mix press and cool, which is entirely consistent with the manufacturing process of items uncontroversially cakes such as crunch cakes or tiffin;
3. The unpackaged appearance was of a cake bar. HMRC assert in their public guidance that the liability of comparator products is not relevant however, comparison of the appearance to items accepted, or at least taxed, as cake must be relevant;
4. The taste of one of the variants was as one would expect from any high quality chocolate brownie cake. The taste and texture was consistent with a conclusion that the Products were cakes.
5. Eating habits have changed. All food manufacturers including the manufacturers of traditional cakes have adapted their products to reflect those changing habits. The Tribunal was given approx. 100 different reviews of the Product which showed that most people saw the Product as a snack but also gave the impression that the individuals giving the reason for consumption as “snack” may well have also consumed an individually wrapped cake bar in the same circumstances.
6. The packaging of the Product points to convenience/hygiene.
7. The marketing of the Products is as a healthy, vegan, egg, dairy and gluten free brownie. The marketing reinforces that it may be eaten as a snack but as indicated above the Tribunal considers that cakes too are frequently eaten as snacks.
8. The shelf life of the product is certainly a contra-indicator that the product is a cake but mostly because the ingredients are less subject to deterioration over time.
9. The name of the product is Raw Choc Brownie. Brownies are generally considered to be cakes and the name and description are indicative of the Products being cakes.
10. The Products behave very differently to a sponge cake, less differently to a crunch cake, marshmallow tea cake and certainly similar to tiffin all of which will behave when exposed to the air in a way similar to more traditional confectionary.

Put alongside a slice of traditional Victoria sponge, a French Fancie and a vanilla slice or chocolate éclair the Products may look out of place. However, put alongside a plate of brownies, or, for instance, at an event where it was more likely that bought and individually wrapped cakes would be served the Products would not stand out as unusual.

The Tribunal also set out that the current state of the law on the taxation of food items is not fit for purpose and results in anomalous outcomes as tastes and attitudes to eating change. The Tribunal also fundamentally disagreed with HMRC’s guidance that the borderline between cake and confectionary presents few problems and argued as an aside that as the UK implements sugar tax to encourage consumption of healthier soft drinks the favourable taxation of cakes is entirely anomalous with that.

On balance the Tribunal formed the view that the Products showed enough characteristics of cakes to be so categorised.

The full judgment in this case is available from:- http://financeandtax.decisions.tribunals.gov.uk/judgmentfiles/j10872/TC06909.pdf