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  • VAT Rules – Not Such a Simple Tax

    8 October 2020

    Keith Miller

  • VAT
  • Bread + Some Other Strange VAT Rules

    In 1972, when preparing the British people for the introduction of VAT, the then Chancellor of the Exchequer Anthony Barber famously described it as “a simple tax”.

    He probably thought it was, bless him. Almost 30 years later, Lord Justice Sedley delivered a more accurate assessment when frustration got the better of him during a tricky insurance-related VAT case:

    “Beyond the everyday world lies the world of VAT; a kind of fiscal theme park in which factual and legal realities are suspended or inverted.”

    Now that sounds more like it.

    Subway – Bread, Sugar, VAT & Irish Tax Courts

    I was reminded of all of this when reading about the recent Subway VAT case in Ireland.

    You may have read that the Irish tax courts have decided that the bread that Subway uses for its Sub rolls does not qualify for the VAT zero-rate but should instead be taxed at a higher rate.

    Because bread in principle qualifies for the VAT zero-rate, it appeared that the case must have turned on an external factor such as its preparation, temperature, etc.

    But no, the zero-rate didn’t apply because the Irish Revenue Commissioners successfully argued that the bread used by Subway wasn’t actually bread.

    They took issue with the sugar content of Subway’s bread, which is one of the key factors that determines whether bread is bread for VAT purposes (and thus VAT zero-rated) or not bread (in which case VAT is payable, albeit at a reduced rate).

    The ruling is an embarrassing one for Subway and its franchisees (it was a franchisee that took the case), not just financially, but its reputation took a hit too, as the court argued that the sugar content was much higher than Subway had previously suggested.

    Zero VAT Rates

    Although the bread issue got all the headlines, anybody who has seen the judgement will have also noticed that a lot of time was also taken up discussing whether tea and coffee could be zero-rated! The Subway franchisee who took the case had argued that tea and coffee should be zero-rated whether hot or cold (unless it had been specifically heated up having already cooled down) and that freshly prepared tea and coffee should not be excluded just because it happened to be hot when prepared. This is an argument that did the rounds years ago, so it was interesting to see it being tried again. Unsuccessfully I might add.

    VAT & Food Businesses

    However, just as Ringo wasn’t even the best drummer in The Beatles, the Subway case wasn’t even the most interesting food-related VAT case reported this week.

    This award goes to the ECJ decision in the case of an unnamed Dutch taxpayer who had argued that the aphrodisiac capsules it sold were essentially foodstuffs, so should therefore benefit from the VAT reliefs applied to such products. Although the ECJ accepted that the aphrodisiacs were edible and had some nutritional value, it was ruled that their nutritional qualities were not sufficient to warrant the capsules being classed as foodstuffs.

    The judge ruled that although the product may have provided benefits to the user, their consumption produced “effects other than those necessary to keep the human body alive and enable it to function and develop.” The judge did however point out that this ruling didn’t mean that items that claimed to have aphrodisiac properties couldn’t still be classed as foodstuffs, but they would have to have the necessary nutritional benefits to be classified as such. Oysters (and asparagus, apparently) are still safe then.

    These recent cases highlight that food is the area of VAT that has provided most headlines over the years. I’m not sure that there have been more food-related VAT cases than any other topic, but it certainly demonstrates that food is regularly at the forefront of most people’s thoughts.

    Jaffa Cakes & Biscuits

    Most people have heard about the oversized Jaffa Cake that was baked specially for the VAT case in which it was confirmed that Jaffa Cakes are actually cakes for VAT purposes, and thus zero-rated. HMRC argued that in spite of their name, Jaffa Cakes were actually biscuits, and because they were partially covered in chocolate, they should be subject to VAT (biscuits with chocolate covering are standard rated, although cakes are still zero-rated even if chocolate covered).

    Most people also know that the case turned on the fact that Jaffa Cakes (like other cakes) turn hard when left out, whereas biscuits go soft.

    Perhaps another reason that food-related cases are interesting is that they highlight the often nonsensical VAT rules that apply to food.

    For example, bakeries need to be careful when accessorising gingerbread men. Because they are considered to be biscuits, they are subject to VAT if covered (or partially covered) in chocolate. So, although a couple of chocolate eyes won’t be a problem according to HMRC, some chocolate buttons or a scarf will render the poor chap subject to VAT.

    Pringles & Innocent Smoothies

    Another strange quirk in the UK’s VAT rules is that potato snacks are subject to VAT, but other snacks such as corn-based snacks are zero-rated.

    This led to a high-profile battle between Pringles manufacturer Procter & Gamble and HMRC, with the arguments not entirely dissimilar to those in the recent Subway case. The High Court initially ruled that the unusual Pringles packaging and the fact that potato content was less than 50% meant that Pringles should not be considered a potato snack and should thus be a zero-rated foodstuff. Nobody was sure what they were, but they were VAT-free!

    HMRC won the day in the Court of Appeal, however, and Pringles are now treated the same as potato snacks and are subject to VAT.

    HMRC also won the day against Innocent smoothies, who had claimed that their fruit smoothies should be VAT zero-rated because all the ingredients were zero-rated foodstuffs. This isn’t how VAT works, of course, so it was found that although all the ingredients would be VAT-free in their own right, mixed into a smoothie they became a beverage, which is subject to VAT!

    Perhaps the strangest (but satisfyingly logical) food-related VAT rule however is that the lease of a field can be zero-rated as animal feed where the intention is to use the field as grazing land for livestock.

    Interesting Non-Food Related VAT Rules

    Not all VAT cases are food-related of course, and many turn on a close analysis of the law so are perhaps only interesting to lawyers or tax geeks, but I have picked out a few that I found notable or unusual.

    Candles – another one from Ireland is that plain straight white candles are not subject to VAT, but are subject to VAT if they are decorated, scented, spiralled, or tapered.

    Botox – this is one we have written about before and not just because it raised a few eyebrows.

    Although the courts have found that Botox is a medical procedure that is potentially eligible for VAT exemption, this will only apply if it can be demonstrated that the principal purpose of the treatment is to “protect, restore or maintain the health of the individual”. It was argued that Botox treatments did this by enhancing the patient’s self-confidence and quality of life, but the court did not think this was enough unless the treatment addressed a condition that had been diagnosed by a medical professional who was qualified to make such a diagnosis.

    E-books – before 1 May 2020, electronic versions of publications (e.g. online subscriptions) were subject to VAT in the UK although their printed counterparts were zero-rated. Both are now zero-rated. Although the playing field has now been levelled to some extent, audiobooks remain subject to VAT.

    Private Tuition – the provision by an individual of private tuition is VAT exempt if the subject is “ordinarily taught in schools or universities”. This of course has resulted in lots of disputes as to whether or not the subject qualified.

    Amongst the activities that the VAT Tribunal has ruled did not qualify are transcendental meditation, belly dancing, yoga and pilates.

    Recently, VAT Tribunals have found that kickboxing is not a qualifying activity but that Latin-American dance classes did qualify, even though they were held at licenced premises and advertised as “‘a fun night out and a way of meeting members of the opposite sex”.

    Mongolian Goatskin Coats – I kid you not. Children’s clothing is generally zero-rated (there are grey areas of course, particularly items that are suitable for adults). However, children’s clothing that is made from Mongolia, Yemen or Tibet goatskin is subject to VAT. Don’t ask me why, I don’t know. Nobody knows.

    HMRC have even published a Fur skin Flowchart in case you’re not sure. Here’s how it plays out if you’re lucky enough to have survived elimination before question 11.

    Question 11 – Is the fur skin from goats or kids?

    • No – zero-rated.
    • Yes – go to question 12

    Question 12 – Does the goat or kid originate from Mongolia, Yemen, or Tibet?

    • No – zero-rated.
    • Yes – standard-rated.

    I’ll think I’ll leave it there. Thanks for reading. For all and any info on VAT and your business please contact a member of our helpful tax team. You can also find more articles about VAT below.


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