The sweeter side of VAT

Legal cases are always most fascinating when they make apparent the law’s many intricacies and ambiguities. VAT tax disputes may not always seem like the most interesting subject. However, a recent tribunal ruling showed how captivating they can be…

Kinnerton Confectionery is a company that primarily sells sweets marketed at children – if you’ve ever seen Peppa Pig Sweets, Kinnerton are the company behind them. Most of these – as confectionary products – are standard VAT rated at 20%.

However, the company recently moved out of their normal market and into the allergen-free market, creating a nut, gluten, egg and dairy-free ‘Just Luxury Dark Chocolate’ bar. This got complicated when they sold their new product with a zero VAT rating.

For those of you unfamiliar with the intricacies of VAT confectionary law (most of you, we expect!), here is a brief summary of the U.K law relevant to this case:

• Most food for human consumption is zero rated
• However, confectionary should be standard rated – this includes chocolate bars
• Cakes and ingredients for making cakes are zero rated

This means that cooking chocolate, when marketed as such, should be zero rated because it counts as a cake ingredient.

To avoid full tax liability, Kinnerton branded the chocolate as suitable for cooking. They wrote on the packaging it was ‘ideal for cakes and desserts’, wording that largely mirrors that used by other cooking chocolate manufacturers. Because of this, Kinnerton thought they had a strong argument for zero rating the chocolate bar.

Products placed in the confectionary section tend to receive greater attention than those placed in the baking aisle, but are usually standard VAT rated. By creating a confectionary product that was zero rated, Kinnerton Confectionery tried to have their cake and eat it.

HMRC, however, were quick to catch on. They argued that because the product was often sold alongside confectionary items, it wasn’t marketed or sold as a cooking ingredient. Basically their argument rested on the premise that, although Kinnerton stated that it was suitable for cooking, this didn’t equate to the product being a cooking chocolate.

HMRC decided to appeal against the chocolate bar’s tax status, and their assessment was upheld by a judge. Kinnerton was ordered to pay HMRC a £258,470 liability and had to standard rate their product.

The rather vague distinction between confectionary products and standard foods has resulted in a few strange VAT anomalies. Strawberry flavoured powdered milkshakes, for instance, incur standard VAT; chocolate flavour, however, is VAT free. An even more bizarre example is that gingerbread men with just two chocolate eyes are zero rated; add chocolate trousers and they become liable to full VAT.