A 50 year history of VAT

VAT (Value Added Tax) was introduced in the UK 50 years ago on 1st April 1973. When it was introduced, the then Chancellor, Anthony Barber, famously described it as a “simple tax”.

However, while the concept may be simple in theory, in the intervening years it has become increasingly more complicated in practice, and the majority of the population only knows that the standard rate of VAT is 20% and that it has something to do with Jaffa cakes!

To celebrate the 50th anniversary of VAT we have compiled a top 5 interesting VAT disputes starting with the Jaffa Cake case.

Jaffa Cakes

The now-famous case centred on whether Jaffa Cakes were cakes and therefore zero-rated, or chocolate-covered biscuits which are subject to VAT.

To argue their case for zero-rating, McVitie’s baked a giant Jaffa cake and were successful in convincing the tribunal that, although they shared similarities with biscuits, Jaffa cakes are a cake as they have the following characteristics:

• They are made of a thin cake-like mixture rather than the thick dough of a biscuit.
• Their texture is that of a sponge cake.
• They harden when stale, in the manner of a cake, whilst biscuits go soft.
• In terms of bulk and texture, a substantial part of the product is the sponge.

Since the 1991 ruling, HMRC (previously HM Customs & Excise) have accepted that Jaffa cakes are zero-rated. The Irish Revenue also regard Jaffa Cakes as cakes, as their moisture content is greater than 12%, and they are subject to the reduced rate of VAT (13.5% in Ireland).

Pringles

The VAT treatment of Pringles proved so contentious that it took a Supreme Court ruling to finally decide whether Pringles were potato crips and therefore subject to VAT, or zero rated as a non-potato savoury snack.

Proctor and Gamble argued that Pringles were made up of only 42% potato flour and their overall content and shape were ‘not found in nature’. The High Court concurred with this, concluding that Pringles were zero-rated because they did not possess the required amount of “potatoness”

However, the Supreme Court were not swayed by the lack of “potatoness”, nor the claim that Pringles are more like a cake or bread than a crisp. The Supreme Court felt that the identity of Pringles was a short practical question which required a short practical answer, and the easiest way to decide was to consider how an 8-year-old child would describe a Pringle.

The answer was that a Pringle is a potato crisp and therefore subject to VAT.

Frankie Ferret

A less widely known case is a 2009 tribunal case in connection with the VAT treatment of food for ferrets.

Supreme Petfoods Limited submitted a claim to HMRC for repayment of overpaid VAT. They had been charging VAT on ferret food but were of the opinion that this should, in fact, be zero-rated animal feeding stuffs rather than standard-rated pet food. HMRC disagreed.

Supreme Petfoods sought to convince the tribunal that ferrets were, on the whole, working animals, not pets.

Originally marketed as Frankie Ferret but later changed to Selective Ferret, they pointed out that neither packaging made any reference to ferrets as pets. They also relied upon a survey carried out by the Ferret Education & Research Trust which indicated that a substantial number of the UK’s 1 million ferrets were working ferrets.

Unfortunately, for Supreme Petfoods, the tribunal decided that the majority of the UK’s ferrets are kept as pets and so ferret food is standard-rated pet food.

HMRC may consider ferrets pets, but seemingly rabbits are not. Rabbit food is a zero-rated animal feed unless its packaging indicates that it is specifically intended for pet rabbits.

Cornish pasties

In 2012, Cornish pasties hit the headlines when the then Chancellor, George Osborne, announced in the Budget that VAT would be charged on food sold above ambient temperature.

Previously, pies, pasties and sausage rolls had been treated as zero-rated food despite numerous court cases in which it was debated whether they were standard-rated takeaway food if sold hot.

The existing differential that they were trying to tackle was between products which were deliberately sold hot (and therefore standard-rated), and products that were merely still warm because they hadn’t cooled down after being baked (and zero-rated).

Politicians and the management of Greggs all became involved in what became known as ‘Pastygate’ and George Osborne had to confess he couldn’t remember the last time he ate a pasty.

The Prime Minister, David Cameron, tried to show he was more in touch with the electorate and declared he ate them regularly. Unfortunately, the shop he claimed to buy them from has closed 2 years before he said he’d visited.

Cornish MPs were particularly outraged, and the Conservative MP for Southeast Cornwall is believed to have written to the Chancellor saying

“Who is going to monitor the ambient against pasty temperature? Surely the last thing we need is to employ an army of thermometer-wielding tax inspectors poking our pasties to see if they have cooled enough?”

There was a ‘Say No To The Pasty Tax’ group on social media and a protest march was held in Falmouth.

In May 2012, the government altered the definition of a ‘hot’ pasty to allow them to make a U-turn and pies, pasties and sausage rolls were once again zero-rated unless sold as ‘hot’ food and kept hot in a special cabinet.

Belly dancing

In 2014, Audrey Cheruvier, a belly dancing teacher, had to pay HMRC over £50,000 unpaid VAT after HMRC registered her business for VAT.

Ms Cheruvier, trading as Fleur Estelle Dance School, appealed the decision as she said her services as a belly dance teacher were exempt educational services. She told the tribunal that her classes were no different to dance tuition taught in schools and universities because she provided a ‘serious and systematic course of study and instruction’.

HMRC’s view was that there is no evidence that belly dancing is ordinarily taught in schools and universities, there is no written element, it is not taught to an external syllabus only one of her own devising, and it is not examined.

The tribunal agreed with HMRC that Ms Cheruvier was unable to demonstrate that belly dancing is a component part of any dance course taught at a school or university so it does not qualify for exemption as private tuition in a subject ordinarily taught in a school or university.

The private tuition of other activities which tribunals have been asked to consider include transcendental meditation, yoga, pilates and kickboxing, all of which were ruled to be subject to VAT.

The Shorts VAT team

In the 50 years since its introduction, VAT has become increasingly complicated, and we can almost certainly expect more disputes in the next 50 years.

If you have a query about VAT, are unsure what the VAT treatment of a certain product is, or are perhaps considering challenging an HMRC VAT decision yourself, we strongly encourage you to seek advice from our dedicated VAT team today.