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Flapjack or cake?

29th Apr 2022
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The FTT decision in Glanbia Milk Ltd has further highlighted the urgent need to tidy up Group 1 to VAT Act 1994, Sch 8, zero-rating for food.

The taxpayer manufactured 36 varieties of food products described as flapjacks. They considered them to be zero-rated food. HMRC disagreed and argued that they were standard rated.

The legislation is hugely out-of-date, being repeatedly overtaken as new products are launched. This creates massive uncertainty for manufacturers in particular. This decision highlights a number of factors that underline this:

  1. The taxpayer sought to make an application to admit similar products into its evidence for the Tribunal Hearing. These, it argued, were sold at the zero-rate. This is simply evidence of inconsistency in the marketplace. Of course. it generates significant cost advantage to the business selling at zero-rate.
  2. HMRC guidance in Notice 701/14, paras 3.4 and 3.6 seems not to be consistent with the internal guidance at VFOOD6200. Paras 23-24 of the decision make reference to this.
  3. The previous case of WM Morrison Supermarkets plc indicated that the healthiness or otherwise of a product does not affect the VAT categorisation. I do think any re-write of Group 1 should make some attempt to reflect the healthiness of the product. Whilst a lower VAT rate will not solve the problem of our poor eating habits, it will help to highlight the issue.
  4. The specific question as to whether the products are properly categorized as ‘cakes’ were considered. This is not easy! Five factors were addressed:
  • Ingredients and manufacturing technique
  • Texture and appearance
  • Function and typical circumstance of consumption
  • Marketing and markets
  • Packaging and name

The impact of such decisions on many businesses is substantial.  On a supermarket shelf, a 20% difference between similar products is Hobsons’ choice or even Hobnobs choice! The major supermarkets can sustain the loss of a few individual lines. But for smaller manufacturers, the 20% addition to the selling price will be make-or-break.

Time to simplify Group 1, methinks.

Have a read at the Glanbia Milk case here, before it goes to the Upper Tier: www.bailii.org/uk/cases/UKFTT/TC/2022/TC08439.html

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