The First Tier Tribunal get their teeth into a zero rating dispute
Jan Garioch CA discusses a tax tribunal decision about whether chocolate brownies were zero-rated.
Pulsin’ Ltd appealed against HMRC’s decision to refuse to repay output VAT on their Raw Chocolate Brownies. They contended that they had paid output VAT in error since their product was not sweet enough to be confectionary, it could not be classified as a cake and finally that fiscal neutrality required zero rating as similar products were zero-rated.
The Raw Chocolate Brownies are made by cold compression of cacao, dates, cashews, concentrated grape juice and brown rice bran. This produces a dark brown bar with cacao as the primary ingredient.
It is to be hoped that the members of the Tribunal had light breakfasts before tackling this case because they closely examined the Raw Chocolate Brownies alongside Morrison’s brownies, Pret’s brownies, gluten-free and vegan brownies. To augment their carbohydrate binge Mr Kipling French Fancies and Battenberg Bars were available along with Tunnock Tea Cakes and Victoria sponge cakes.
A list of other products ‘known to the Tribunal’ reads like a guilty pleasures list including tiffin, chocolate crispy cakes and snack packs of Jamaican ginger cake.
Examination of the law
The Tribunal, apparently immune to sugar rush headaches, systematically examined the relevant legislation and case law.
Item 1 to Group 1 provides for the zero-rating of “Food of the kind used for human consumption”. Excepted item 2 excludes from zero rating “Confectionary, not including cakes or biscuits other than biscuits wholly or partly covered with chocolate or some products similar in taste or appearance”. Their consideration of Lees of Scotland Ltd & Thomas Tunnock Ltd v HMRC gave them a lot to do. That case found sweetened, prepared foods normally eaten with the fingers are confectionary.
To further decide if the products in question qualified as a cake, the test was the view of the ordinary person informed as to ingredients, manufacture process, unpackaged appearance, taste and texture, time and place of consumption, packaging and marketing.
The Tribunal considered Raw Chocolate Brownies on all of these heads and referred to reviews to discover opinions from members of the public. Since these ranged from ‘very like a brownie’ to ‘nothing like a brownie’ they may not have been of huge assistance.
It is a sad reflection on our modern diet when the Tribunal notes that a majority of processed foods are sweetened. They concluded an element of context must be applied, otherwise, chilli chicken skewers would, nonsensically, come within the definition of confectionary as a sweetened, prepared food normally eaten with the fingers.
From past case law, the Tribunal was clear that the multifactorial exercise (considering ingredients, manufacture process etc) does not require a predominance of cake like factors in order to conclude that any particular product is a cake. What is required is that there are sufficient characteristics of a cake to be so characterised.
For a few of the factors, the Tribunal struggled to see the characteristic of cake in the Raw Chocolate Brownies under scrutiny. Their shelf life is longer than traditional brownies. They also behaved very differently to sponge cake when left unwrapped and exposed to the air. They acknowledged that they would look out of place on a plate beside chocolate eclairs, but felt they would be quite at home on a plate of brownies.
The decision
The Tribunal found ingredients and process of manufacture entirely consistent with being a cake. Therefore, they found no need to consider the fiscal neutrality point and concluded on balance that Raw Chocolate Brownies possessed sufficient characteristics of cake to be classified as such. Zero rating applied and the overpaid VAT is repayable.
Such intensive scrutiny of cakes took a toll on the Tribunal and they complained that the current state of the law on the taxation of food items is not fit for purpose.
They expressed their fundamental disagreement with HMRC’s guidance that the borderline between cake and confectionary presents few problems and see it driving anomalous outcomes.
As a final flourish, they found the favourable taxation of cakes to be entirely anomalous against the backdrop of sugar tax implementation to encourage consumption of healthier soft drinks.
