Understanding VAT on Food: Key Cases and Insights

VAT has been a continuance in the UK since the 1st April 1973. While many might have wondered at the time if it was an April Fools- the fact that it’s remained for the last 51 years states that it’s clear that it’s not. Since its introduction, many cases have shown the complexities of VAT. It’s clear that “the simple tax“ has been anything but.  

VAT is now so commonplace in our lives that it’s likely you overlook the VAT treatment of food and drink you consume regularly. However, those in the production, manufacturing, or even retailing of food products must be aware of the complexities of VAT. These complexities relate to all food products, especially those which exist in the nefarious world that exists between ‘food products‘ and confectionery.

What is the basic VAT position?

At a basic level, all sales of goods or services are treated as either taxable or exempt.  Taxable supplies can then be split into three rates of VAT – standard-rate, reduced-rate and zero-rate.  UK VAT legislation defines those goods and services that fall within the exempt, reduced and zero rate of VAT with everything left over being subject to VAT at the standard rate.   

As a general rule, food products ‘of a kind used for human consumption’ are zero-rated under VATA 1994, Sch. 8, Grp. 1. Whilst this all sounds straightforward, when we delve deeper into the VAT legislation relating to food products, there are many ‘excepted items’ to the basic rule, and exceptions to these exceptions, which have led to more Tribunal cases regarding the liability of food products than there are hundreds and thousands to be found in the baking aisle of your local supermarket (which are zero rated in case you were curious). 

Everyone is probably familiar with the often-mentioned Jaffa cake case when it comes to the many VAT cases about food products.  Here, the Tribunal decided that Jaffa Cakes were essentially cakes, which are zero-rated as food of a kind for human consumption under Sch 8 Grp 1 Item 1, regardless of the fact they look like a biscuit, are covered in chocolate and are sold in the biscuit aisle by retailers.  Chocolate-covered biscuits, however, are standard rated under Excepted Item 2.  Amongst other factors which determined this outcome was the fact that a Jaffa Cake goes hard when it’s stale like a cake, whereas a biscuit goes soggy.   

HMRC V INNOVATIVE BITES LTD

More recently HMRC has lost at the Upper Tribunal concerning the sale of ‘mega marshmallows’.  HMRC v Innovative Bites Ltd [2024] UKUT 95 (TCC), found that mega marshmallows can be zero-rated because they do not fall within VATA 1994 Sch 8 Group 1 excepted item 2. 

Whilst this may seem a frivolous case to non-purveyors of marshmallows, it’s another example of how the devil is in the detail when it comes to VAT and any misunderstanding or difference of opinion can be costly.  After all, marshmallows are nothing new, but this latest case confirms that the VAT liability of marshmallow products varies depending on specific factors: 

• Tiny marshmallows – these are zero-rated for VAT purposes, as they are held out for sale as baking ingredients; 
• ‘Normal’ size marshmallows – these are standard rated for VAT purposes are they are classed as items of confectionary (and are usually sold alongside other confectionary items); 
• Large/’Mega’ marshmallows – these are now recognised to be zero-rated for VAT purposes on the basis that they are a food product which requires further preparation before eating. 

What was the result of the case?

In the Innovative Bites case, the tribunal judges found in favour of the manufacturer on the basis that the product is principally designed and marketed for roasting over a campfire or for use in making s’mores.  This element of ‘further preparation’ required before eating was a key factor in preventing the product from being classed as confectionary “intended for immediate consumption”, and therefore standard rated. 

Also taken into consideration was that most of the product sales took place in the summer months when barbeques sales were at their highest; the products were marketed for use with campfires and BBQs and so were placed in the BBQ aisle by the majority of retailers with the clear intention that they would be purchased for roasting. 

The marketing of the product was therefore as important as the fact that a degree of further preparation was intended before the product was eaten. 

ARE THERE OTHER KEY VAT ON FOOD CASES?

In another recent case, the classification of food products continues to prove a controversial topic.  In this case, Walkers Snack Foods Ltd V HMRC  [2024] TC 09024, the First-tier Tribunal (FTT) dismissed the taxpayer’s appeal and decided that ‘Sensations Poppadoms’ were made from potatoes and were therefore similar to potato crisps.  On this basis, they were excluded from zero rating and subject to VAT at the standard rate, despite Walker’s argument that they were similar to traditional poppadoms, which are zero-rated. 

As with mega marshmallows, the poppadoms were a kind of food used for human consumption and therefore potentially zero-rated under VATA 1994, Sch. 8, Grp. 1.  However, HMRC believe they should be excluded from the zero-rating provision under Excepted Item 5 on the basis that they are similar to potato crisps. 

Excepted Item 5 includes “Any of the following when packaged for human consumption without further preparation, namely, potato crisps, potato sticks, potato puffs, and similar products made from the potato, from potato flour, or potato starch, and savoury food products obtained by the swelling of cereals or cereal products; and salted or roasted nuts other than nuts in the shell.” 

As with many food-related tribunal cases, a multifactorial assessment was carried out by the FTT which included how the product was packaged, where it was sold and whether, as alleged by Walkers, the product was marketed as being primarily designed to be eaten as part of a meal, i.e. for use with dips etc.   

On looking at all of the above factors the FTT concluded that the ‘poppadoms’ were similar to potato crisps, being designed and packaged as a snack food with no evidence of being marketed as something to be eaten as part of a meal.  They were sold in the snack aisle and were found to have a significant percentage of potato content, i.e. circa 40%, meaning they were similar to crisps.  In light of these facts, the product was found to fall within Excepted item 5 and be standard rated.  However, Walkers have since appealed to the Upper Tribunal, so the case is not closed just yet.   

HOW CAN AAB HELP?

These cases highlight the continued complexities of VAT and how difficult it can be for those in the food creation industry to navigate. The complexities of the law make determining the correct liability difficult especially when creating new products. Our VAT experts have years of experience supporting businesses manage the complex VAT landscape. If you have any queries about the complex VAT liabilities you might be facing, please do not hesitate to get in contact with  Maria McConnell, or your usual AAB contact.