Why the current rules are past their ‘best before’ date.
Everybody (OK, maybe not quite everybody) loves a bizarre VAT story. A recurring favourite is of course whether a Jaffa Cake is a biscuit or a cake, but a recent debate on social media also highlighted how the extent of the chocolate in a gingerbread man’s festive outfit could lead him to lose his zero rated status.
If you dig deeper into the rules regarding VAT on food and drink (with HMRC’s VAT Notice 701/14 being a good place to start), you will come to realise these are just the tip of the iceberg. For example:
In a case of ‘it’s one rule for them’, millionaire’s shortcake is zero rated, but shortbread that is wholly or partly chocolate covered is standard rated.
The VAT treatment of Nesquik drink powders depends on the flavour: chocolate flavour is zero rated, whereas strawberry or banana are standard rated.
Flapjacks are zero rated, but cereal and muesli bars are standard rated.
For marshmallow teacakes, snowballs etc., the VAT treatment depends on shelf life and if they ‘harden rapidly’ when removed from the packet.
If bicarbonate of soda is sold in small tubs as a baking ingredient then it is zero rated, but large tubs sold for cleaning are standard rated.
Savoury popcorn is standard rated, unless it’s microwave corn ‘sold for popping’.
A bay plant/tree can be zero rated, but only if it does not exceed 50cm and has not been clipped or shaped to be ornamental.
Finally, and just to prove it’s not just food where you encounter these bizarre rules, children’s clothing made from undressed and untanned goat skin can be zero rated, unless it is from Yemen, Mongolia or Tibet.
Whilst the above examples are amusing, and have kept VAT advisers and tax tribunals busy over the years, they are also a symptom of how complex and confusing the UK VAT rules can be.
Many of the rules for food and drink derive from the old purchase tax regime, which was replaced with VAT when the UK joined the EU in 1973. As a result, they are often outdated and difficult to apply in the modern world.
The ATT has previously called on the government to take a fresh look at VAT on food and drink. Simplifying and rationalising these rules would reduce confusion, and save both HMRC and taxpayers the time and costs often associated with arguments over VAT treatment. Bringing more food and drink items into the zero rate or a reduced rate could also provide a financial benefit to a hospitality sector which has been hit extremely hard by the pandemic.
Unfortunately, we have seen little appetite to date for such a review. Instead, we have had limited temporary VAT cuts for the hospitality and leisure sector, including the introduction of a short lived new 12.5% rate (due to expire on 31 March this year). Whilst these have provided a welcome cash boost for many businesses, they have done nothing to reduce complexity or make the underlying rules more coherent. Let’s hope that 2022 is the year when HMRC decide to look again at the VAT rules on food and drink, which are arguably well past their ‘best before’ date.
Home >Articles > Time for a fresh look at VAT on food and drink
Time for a fresh look at VAT on food and drink
Why the current rules are past their ‘best before’ date.
Everybody (OK, maybe not quite everybody) loves a bizarre VAT story. A recurring favourite is of course whether a Jaffa Cake is a biscuit or a cake, but a recent debate on social media also highlighted how the extent of the chocolate in a gingerbread man’s festive outfit could lead him to lose his zero rated status.
If you dig deeper into the rules regarding VAT on food and drink (with HMRC’s VAT Notice 701/14 being a good place to start), you will come to realise these are just the tip of the iceberg. For example:
In a case of ‘it’s one rule for them’, millionaire’s shortcake is zero rated, but shortbread that is wholly or partly chocolate covered is standard rated.
The VAT treatment of Nesquik drink powders depends on the flavour: chocolate flavour is zero rated, whereas strawberry or banana are standard rated.
Flapjacks are zero rated, but cereal and muesli bars are standard rated.
For marshmallow teacakes, snowballs etc., the VAT treatment depends on shelf life and if they ‘harden rapidly’ when removed from the packet.
If bicarbonate of soda is sold in small tubs as a baking ingredient then it is zero rated, but large tubs sold for cleaning are standard rated.
Savoury popcorn is standard rated, unless it’s microwave corn ‘sold for popping’.
A bay plant/tree can be zero rated, but only if it does not exceed 50cm and has not been clipped or shaped to be ornamental.
Finally, and just to prove it’s not just food where you encounter these bizarre rules, children’s clothing made from undressed and untanned goat skin can be zero rated, unless it is from Yemen, Mongolia or Tibet.
Whilst the above examples are amusing, and have kept VAT advisers and tax tribunals busy over the years, they are also a symptom of how complex and confusing the UK VAT rules can be.
Many of the rules for food and drink derive from the old purchase tax regime, which was replaced with VAT when the UK joined the EU in 1973. As a result, they are often outdated and difficult to apply in the modern world.
The ATT has previously called on the government to take a fresh look at VAT on food and drink. Simplifying and rationalising these rules would reduce confusion, and save both HMRC and taxpayers the time and costs often associated with arguments over VAT treatment. Bringing more food and drink items into the zero rate or a reduced rate could also provide a financial benefit to a hospitality sector which has been hit extremely hard by the pandemic.
Unfortunately, we have seen little appetite to date for such a review. Instead, we have had limited temporary VAT cuts for the hospitality and leisure sector, including the introduction of a short lived new 12.5% rate (due to expire on 31 March this year). Whilst these have provided a welcome cash boost for many businesses, they have done nothing to reduce complexity or make the underlying rules more coherent. Let’s hope that 2022 is the year when HMRC decide to look again at the VAT rules on food and drink, which are arguably well past their ‘best before’ date.
