The Jaffa cake sequel - McVitie’s find out VAT isn’t always Blissful!

Everyone remembers the Jaffa Cake Case – don’t they? Was it a cake or a biscuit we debated in the courts. 20% of VAT on the price was the financial bottom line for McVities if HMRC won the argument that it was a chocolate covered biscuit – but it was McVities argument that took the biscuit (sorry) and they proved that their product was a chocolate covered cake, not a biscuit, so subject to 0% VAT!

It’s pretty obvious if a biscuit is wholly or partly covered in chocolate, right? It either is, or it isn’t! But what if it’s filled with chocolate? Does that count?  It’s this question that prompted a return to the VAT Tribunal for McVities.

Are their new Blissful Biscuits “covered” in chocolate? they argued not – hence the 0% VAT treatment beckoned again. The top of their biscuit had no “chocolate covering” on it at all, was their view. Which was factually correct. Were they on to another winner with Blissful? Sadly, the First Tier Tribunal  (FTT) was unconvinced.

Whilst we can look at these discussions with a degree of levity at the heart is hard commercial reality in financial terms for the business. Charging £1.20 and considering whether VAT is due or not is the difference between the business retaining £1 or £1.20 as their income. It also offers the potential for a price reduction for the consumer in difficult economic times.

In this new case we are not looking at the issue as to whether the item was a cake or a biscuit. Here the issue centred around what partly or wholly covered in chocolate actually means. If you’ve not seen the biscuit yet McVitie’s Blissful Biscuits are made up of a biscuit cup that was filled with hazelnut and chocolate and sealed with a lid, also made from biscuit, that contained the McVitie logo. The argument was that it was a filled biscuit. Similar to a Bourbon or a Custard Cream, where the filling sat between two layers of crunchy biscuit goodness. If the biscuit was not partly or wholly, “covered” in chocolate, it should be zero rated.  

The problem, which HMRC argued in response, was that the top layer of biscuit wasn’t the same as the bottom layer, like a Bourbon or a Custard Cream. The top layer was considerably smaller and designed to fit inside the cup to seal, most, but not all, of the delicious chocolate filling inside. However, it didn’t cover all ofthe filling. It left room, not just at the sides of the lid, but through small holes in the McVitie logo, for the filling to peak through. The result of which made the biscuit look like it had some chocolate on its top.

But does this mean its covered in chocolate? HMRC fought back. They argued, if the McVitie logo doesn’t fit on top in its entirety, then the “top layer” of the biscuit must also be made of something else. But what? Could it be the chocolatey filling that peaks through the sides and through the small holes in the McVitie logo?

The FTT thought so. The judge stating that, “legislation does not require one layer to be higher than another to be classed as, covered”. Which seems reasonable, although where it says this in the legislation, is unclear. The FTT felt that, the ordinary man on the street, if asked, would also view the Blissful Biscuit as being partly covered in chocolate. Therefore, the wording must be taken in its literal meaning and, as a consequence, Blissful’s should be included in schedule 8, group 1, item 2, excepted items, and treated as standard rated – 20% VAT was due!

On the serious side:

This case has been an interesting one to watch. Not just because it revolved around biscuits, but because it raised questions about the wording in the VAT legislation and how that wording can be interpreted. HMRC argued that McVitie’s was seeking more from the statute than the wording allowed. So, in response, the FTT brought us ordinary folk into the argument. What would we, the informed public, view the wording to mean? Well, the concept of something being “covered” in chocolate, to the ordinary man on the street, would very likely mean “covered” in chocolate. So, was the FTT right to bring us into the argument? We shall see. There’s still time for McVitie’s to appeal.    

All of this speaks to the importance of considering VAT liability questions within the context of the wording of the existing law and relevant cases.

Our specialist VAT team have supported a range of clients – not just those involved in food production – in determining the VAT treatment of their activities. Liability questions crop up across the service sector as well – areas such as supplies in financial services, education or welfare services provision are common areas of debate and there’s real money at stake when VAT liabilities are incorrectly determined.

If you or your clients need to consider the VAT treatment of supplies they currently make or for new goods and services being planned, then do get in touch – we’d be happy to chat it through over a coffee and possibly a biscuit – blissful!

Contact us via IndirectTax@Xeinadin.com

This article is for information only and specific advice should always be sought.