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September 4th 2015 / BY: Wisteria

Cake and Biscuits, do they really make you VAT?

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Do I fancy that slice of birthday cake your colleague just bought into the office? Or do I fancy just one more biscuit to dunk in my morning tea?

Everyone loves a cake or some biscuits whether this is at home or in the office. But no matter how good they may taste, many people are unaware that one is in fact subject to Value Added Tax whereas the other is not.

Not only this, but many people who decide to eat more healthily by eating raisins and cereal bars are indeed paying more in terms of tax compared to the less healthy options.

We firstly look at what this VAT is in the UK and then we move onto looking at cakes and biscuits in more detail.

Value Added Tax (VAT)

Her Majesty Revenue & Customs (HMRC) levy this indirect tax on the supply of goods and services made by UK companies. It was implemented to tax the amount of “value-added” on products from start to the finished product.

Once registered with HMRC for VAT, there are a number of important obligations that a VAT registered business will need to comply with.

To make things easy, the UK has a number of different rates which apply to all sorts of different goods and services.

– Standard Rate – Currently 20% (raised from 17.5% on 4 January 2011) which is levied on services such as accountancy services or goods like chocolate covered biscuits and alcoholic drinks.
– Reduced Rate – Currently 5% and is levied on domestic fuel or power and smoking cessation products.
– Zero Rate – 0% which is levied on books, clothing and footwear to name a few.
– Exempt – No VAT is applied to education, financial services as well as in relation to land supplies.

Having said this, not all UK companies have to register for VAT, it is only compulsory for those with a taxable turnover of over £82,000 (2015/16 tax year)

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Is that a biscuit or a cake?

One of the most famous HMRC cases in relation to VAT to date, involves the much loved orange filled, chocolate covered, Jaffa Cake. So what was the big fuss all about I hear you say.

In the eyes of HMRC, VAT rates differ for what is classified as a biscuit or a cake and this view has been with us since VAT was first introduced.

Since its introduction in the UK in 1973, it was HMRC’s view to ensure that families all over the UK could afford to maintain a healthy diet and continue to be able to purchase staple foods. As such, VAT was raised on those ‘non-staple diet’ foods such as confectionary, sweets, crisps and nuts (this essentially replaced the previous ‘Purchase Tax’).

Applying this logic, as well as what actually happens to a cake or biscuit when it is left out uncovered, McVities were able to successfully argue that their Jaffa Cake was a cake and therefore no VAT would be due. HMRC lost the case and since 1991, the Jaffa Cake has been a cake for tax purposes.

Over time, even though the staple foods such as cakes, chocolate chip cookies and chilled/frozen ready meals have become more associated with an unhealthy diet. And most probably a key contributor to the rising number of individuals in the UK with Type 2 Diabetes, the VAT rules on these foods and these so called ‘staple diet foods’ remain to be free of VAT.

On top of this, it appears that the healthier that you want to eat, the more you pay in terms of VAT. Items such as the following are all subject to VAT:

– Roasted Peanuts
– Diabetic Chocolate
– Protein Bars
– Snacking Raisins

Given that the NHS estimate that by 2025, five million people will have diabetes, it may in fact be an optimal time for the government to look at reform and changing the way that VAT is charged.

Maybe the healthier foods should be taxed less, and the unhealthy foods taxed more.

This is already being pushed for by celebrity chefs such as Jamie Oliver to organisations promoting healthy eating, such as Huel.

So to answer the two questions at the start of this piece, no doubt you will opt for the slice of cake over the biscuit. Not just because cakes taste much better than biscuits (and maybe less healthy), but because you actually pay no VAT to HMRC!

If you would like to find out more about VAT and how it may affect your business, then leave a message on our Contact Page and one of the VAT team will get back to you as soon as possible.