David McKinlay considers the ever-confusing world of VAT and cakes following the case concerning a healthy brownie produced by Pulsin’ Ltd (TC06909).
Almost 30 years after the infamous Jaffa Cake VAT case (is it a cake or a chocolate biscuit?) a new cake question for the 21st century has arisen on whether a brownie is a cake or confectionery.
Food rules recap
There are complicated rules on the VAT treatment of food. VAT law states that “food of the kind used for human consumption” is zero-rated. However, there are exceptions to this rule including “confectionery, not including cakes or biscuits other than biscuits wholly or partly covered with chocolate or some products similar in taste or appearance” which are standard-rated.
To make it even more confusing, there are also exclusions and overriding items to the exceptions (ie items that requalify as zero-rated) or exceptions to the exceptions if you like.
All this means a chocolate cake is zero-rated whereas a chocolate biscuit (a so-called luxury item) is standard rated. In the Jaffa cake case, it was found that a Jaffa cake is a zero-rated cake rather than a standard rated chocolate biscuit.
In the case of Pulsin’ Ltd a similar question was asked as to whether a ‘healthy brownie’ should be classed as a zero-rated cake or as standard-rated confectionery.
Pulsin’ Ltd was successful in its arguments, and the FTT agreed its healthy brownie products (Raw Choc Brownies) showed enough characteristics of a cake to be classified as such and zero-rated for VAT purposes. This should allow Pulsin’ Limited to reclaim over £300,000 of VAT back from HMRC.
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Place on a plate
The FTT applied the same tests used in Lees/Tunnock ‘snowballs’ VAT case (the chocolate covered mallow variety as opposed to the cold ones commonly thrown at this type of year) and the FTT focused on the manner in which the brownies were consumed. In the snowball case the manner in which the snowballs were eaten was one of the decisive factors. It stated “a snowball…is not out of place on a plate of cakes” and thus has the characteristics of a cake.
The FTT asked whether a brownie was out of place on a plate of cakes. The FTT’s comments were slightly different but had the same effect. It stated “…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 a cricket or sporting tea where it is more likely that bought and individually wrapped cakes will be served on a plate the Products would absolutely not stand out as unusual”.
I am not sure how often readers have a brownie at a ‘sporting tea’ but it does not appear to be a reference that would immediately spring to mind to the man on the Clapham omnibus.
Presentation for sale
The FTT also considered how the brownie was held out for sale and considered comments made by the public in the reviews left on Amazon and Ocado, to see if the brownie was perceived to have the characteristics of a cake.
The result of these tests, together with the findings from another eight tests, allowed Judge Amanda Brown to rule that this brownie was indeed a cake and should be zero-rated.
Food glorious food
Deciding on whether VAT should be charged on a new food product is not as straightforward as you would think. This won’t be the last VAT case to question whether a food item is a cake or confectionery, as long as there are no changes to the current VAT law.
Bear in mind the VAT law was initially drafted in 1972 when tastes and attitudes to eating were decidedly different. Indeed, the FTT states in its view “the current state of law on the taxation of food items is not fit for purpose” and it “fundamentally disagrees with HMRC’s guidance that the borderline between a cake and confectionery presents few problems”. It went on to question whether cakes should be taxed more favourably in light of the recent sugar tax on drinks.
It is unlikely that this case will make HMRC stop and consider the current VAT law and guidance regarding cakes and confectionery. However, it is possibly an issue we should now be examining.
About David McKinlay
David McKinlay is a member of the Chartered Institute of Taxation and an Associate Director at RSM’s Edinburgh office. David has worked in VAT for over 16 years.