Value-added tax (VAT) hit the ‘big 4-0’ on 1 April this year. VAT was originally touted as the ‘simple tax’ but it has become one of the most complex and illogical. Legislation and the courts have often struggled to keep up with a changing world and today this middle-aged tax is full of anomalies and inconsistencies.
When VAT was introduced, certain goods and services were considered so essential that it was decided they should be subject to no tax. This was done in two ways: zero-rating and exemption.
In the eyes of UK law, biscuits and cakes are necessities and are zero-rated. However, chocolate-covered biscuits are regarded as a luxury, which means the full rate of VAT is payable. For reasons that are not entirely clear or logical, no distinction is made between chocolate-covered cake and cake without a chocolate coating.
All this might have passed us by as a quaint aspect of British legal thinking if McVities, the maker of Jaffa Cakes, had not gone to court arguing that its product was a cake. To prove its case, McVities baked a special 12-inch Jaffa Cake that persuaded the court of its cake-like properties. As a result, no VAT is charged on Jaffa Cakes or other, more traditional chocolate-covered cakes.
An equally eccentric VAT rule applies to gingerbread men. No VAT is charged if the figure has two chocolate spots for its eyes, but any chocolate-based additions, such as buttons or a belt, mean VAT is payable. So it's cheaper to buy no-chocolate gingerbread men.
Are you eating in or taking away?
Ever been in a cafe ordering a sandwich and wondered why the cashier is so keen to know whether you're eating in or taking away? This is because a takeaway sandwich is zero-rated for VAT, but if you intend to eat it at the premises it is standard-rated. Asking about your intentions helps the retailer calculate the proportion of zero-to standard-rate sales. Some cafes do charge a higher amount to eat in, but most charge the same price and just lose some margin for the eat-ins.
Chancellor George Osborne seriously underestimated the public's love of the humble pasty when he announced plans to levy the 20% standard rate of VAT on hot, freshly-baked takeaway food as part of the 2012 Budget. A well-documented U-turn followed, in which the proposal was amended to allow food that was hot but cooling down to continue to be zero-rated.
Hence, pasties, pies and other hot takeaway food are zero-rated unless kept warm in the shop - for example, under a hot plate or in a cabinet, in which case it is standard-rated.
Another example, kangaroos are standard-rated but kangaroo steaks, now more popular as food in some UK restaurants, are zero-rated. Rabbits are zero-rated, even if sold as pets, despite the fact they have waned in popularity as a food source over the last four decades. And, topically, HMRC assumes horses are never sold for food, so they are standard rated.
Other unusual VAT rules:
Maybe one day we may see VAT get a 21st century overhaul. It certainly needs one.
By David White, Partner, Charterhouse, based in Beaconsfield
