HMRC v Snacks: Legal tax battles over the UK’s favourites
There is one tax that has turned a biscuit into a legal battle and a marshmallow into a courtroom mystery, while, at the same time, has caused a lot of confusion for businesses.
Value Added Tax (VAT) – a levy that has only been around 53 years – still finds itself the centre of attention at the HQ of HMRC.
Introduced in the Finance Act 1972, VAT is considered one of the UK’s most important taxes, accounting for 20 per cent of central government revenue in 2022.
Current VAT rates are 20 per cent standard and zero-rated for others.
What makes it confusing, especially for food businesses, is the exempt list, which is zero-rated.
Food and drink for human consumption is usually zero-rated but some items are always standard-rated, which includes confectionery, hot food and savoury snacks.
Occasionally, some businesses try their luck with the rule. For other businesses, the rules can be confusing to follow.
Either way, HMRC rolls up its sleeves to get litigious. Like other government departments, HMRC has an in-house legal team. While its legal budget isn’t publicly disclosed, in 2023-24, the tax agency spent £4.3bn to collect £829bn in tax.
But from these legal battles, we get something we never thought was possible: tax can be funny.
The most famous case was in 1991 when McVitie’s had everyone wondering if its famous orange-flavoured chocolate sponge was ‘a biscuit or a cake’?
Well, a Tax Tribunal legally classified Jaffa Cake as a cake due to its sponge-like texture and how it changes when stale. As a result, it is subject to zero-rate VAT.
The mouth-sized ‘cakes’ went on to start a trend of fun – for the public, not the businesses – tax cases.
Dissecting a potato
Once you pop, the fun doesn’t stop. Unfortunately for Pringles owners, the fun stopped in 2009 when the stacking snack was deemed liable for VAT.
The flavoured snack was deemed a “potato crisp” as 42 per cent of the product was made up of potato.
Most big-brand snack-based foods have found themselves in the same situation, and with how over the place the rules are set, you don’t blame the businesses for being confused.
Are you a big fan of Monster Munch or Wotsits? They are taxed at standard-rated, while Skips and Twiglets are zero-rated.
Poppadoms are zero-rated, but Walkers’ Sensations Poppadoms are liable for VAT after a Tribunal ruled last year they are similar to potato crisps.
Just last week, a case regarding the VAT liability of giant marshmallows took “a new bizarre twist.”
The Court of Appeal sent the case back to the First Tier Tribunal following questions on how people eat large marshmallows.
As Robin Prince, VAT partner at accountancy firm MHA, explained: “A significant amount of tax is now going to rest on whether the Tribunal think that a giant marshmallow is normally eaten with the fingers or off a skewer.”
Other notable mentions include Innocent Drinks losing a legal battle in 2010, making liable for the tax. Teas including herbal teas are zero-rated, but not Iced Teas, those need to pay VAT.
Caviar is also VAT-free.
Prince told City PM that the long list of VAT cases “highlighted the complete absurdity of the VAT laws in relation to food”.
“The general public might question whether HMRC continuing to fight these legal actions is really the best use of taxpayers’ money when we all know that making any sense of the VAT dividing lines on food has defeated the best legal minds for decades,” he explained.
Prince went on to call on Chancellor Rachel Reeves to completely overhaul how the zero-rating for food works “to provide certainty and a level playing field for all food producers.”