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Five of the most controversial VAT decisions

14 min read

20 April 2016

Tampons, Cornish Pasties and coin-operated porn machines don’t have much in common – but they have all been at the centre of fierce debates over what should and should not count as a luxury item

Real Business delved into some of the raging viral debates around sales tax – and discovered a world where toilet paper is a luxury but Jaffa Cakes are considered vital.

On the face of it VAT rules are simple: all goods are liable for sales tax, unless they’re everyday necessities, in which case they’re not. But with a plethora of exempt, zero-rated and reduced rate goods in categories with definitions that are far from clear cut, there’s plenty of room for wrangling – and plenty who aren’t afraid of fighting their corner.

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(1) Jaffa cakes 

 If she’d been around in 1991, you can guarantee that Marie Antoinette would have chosen a less controversial foodstuff to offer the starving proles. That a tribunal ruled the McVitie’s confectionary product to be a cake one-quarter of a century ago hasn’t stopped the debate continuing over whether the product should be treated as a luxury item or given a tax exemption on the grounds of being a necessity.

The makers of the sweet treat ended up in court because of the way UK VAT legislation differentiates between biscuits and cakes. The latter are treated as a necessity and exempt from sales tax whatever they’re coated in – but the amount of chocolate on a cookie makes a big difference to its price.

HMRC guidance on the difference between cakes and biscuits runs to over 1,000 words – and whoever wrote it obviously knew a thing or two about cookies, as they drew fine lines between gingerbread men with chocolate eyes (classed as a necessity) and biscuits with fine lines of the stuff piped over the outside of them (which are clearly a luxury good).

When appealing the taxman’s decision to change the categorisation of Jaffa Cakes, McVitie’s steered clear of the intricacies of biscuit decoration, instead plumping for the argument that Jaffa Cakes should be placed in their eponymous category. The argument put forward by the company owners was that the baked good goes hard when left out on plate, unlike a biscuit which goes soft.

But a keen member of the team also baked a 12-inch version of the treat to prove the point – and it was probably this that won the judge over.

The argument was most recently reignited when Ed Milliband claimed in a Mumsnet interview that Jaffas were his favourite biscuit – though his categorisation was less controversial than his adamant opposition to dunking.

Read on to discover which bathroom cabinet essentials are taxed in Australia, despite condoms being tax-free there.

Luxury or necessity?

(2) Tampons

If the UK votes to leave the EU in June, you can be certain that at least part of the explanation will lie with sanitary products.

Though David Cameron secured the agreement of the European Union on abolishing the tax on sanitary products in March, the issue had already heated up and attracted protests from an unlikely alliance of feminists, Labour MPs and pro-Brexit Conservative backbenchers. A petition to abolish the tax attracted more than 300,000 signatures.

VAT is currently charged at a reduced five per cent on tampons bought in the UK – and has been since 2001 when the last campaign against it succeeded in getting the rate lowered. This was the lowest amount allowed in Europe until Cameron’s recent victory.

The chancellor announced in his 2015 Autumn Statement that the £15m revenue raised from the controversial levy while he continued to fight it would be passed on to womens’ charities including Eve Appeal, SafeLives and Women’s Aid.

Strangely, while UK politicians have been fighting for the right to reduce it, French MPs were – until recently – still convinced that sanitary products should be treated as luxury items. The first time the National Assembly in Paris voted on the matter, a bill proposing to lower the tax from 20 per cent to 5.5 was rejected on the grounds it would damage the public purse.

The Australian government also overturned proposals to abolish a ten per cent tax on sanitary products in August 2015 – even though a rap was composed in support of the campaign. The debate is particularly contentious down under because condoms are exempt from the sales tax.

Contraceptives and other bathroom cabinet essentials like toilet paper are still liable for VAT at 20 per cent in the UK – perhaps explaining why some politicians felt the need to claim for them on expenses.

Do personal pornography viewing booths count as cultural venues? Find out on the next page.

(3) Coin-operated private pornography viewing booths

When a pornography shop in Bruges tried to get a VAT reduction for its viewing booths on the basis of being a “cultural venue”, the Belgian authorities were having none of it. But the owners of the creatively-named Erotic Centre refused to back down, and the case ended up in the European Court of Justice – were it was ruled that the taxman was right.

Erotic Centre’s bosses claimed that the service offered should get the same VAT treatment as cinema tickets – arguing that the number of seats, the type of film shown or the method of projection used should be considered irrelevant for the purposes of VAT classification.

But the shop’s private, curtained booths – in which customers can select from a range of adult-oriented viewing options – were excluded from the tax exemption on the grounds that cinemas must show the same film to multiple people.

“The concept of admissions to a cinema must be interpreted in accordance with the usual meaning of those words. The various events and facilities listed have in particular the common feature that they are available to the public on prior payment of an admission fee giving all those who pay it the right collectively to enjoy the cultural and entertainment services characteristic of those events and facilities,” ruled advocate general Yves Bot.

“Therefore, the answer to the question referred for a preliminary ruling is that the concept of admissions to a cinema must be interpreted as meaning that it does not cover the payment made by a customer so as to be able to watch on his own one or more films, or extracts from films, in private cubicles such as those in issue in the main proceedings,” she added.

For some reason, the possibility of extending the booths to accommodate groups doesn’t appear to have been considered.

Precisely how many nuts are there in your favourite Bombay mix? Read on to find out why it matters.

(4) Crisps, nuts, and prawn crackers in sealed packets

Next time you’re struggling to decide between Walkers and Doritos with your lunchtime meal deal, consider this: only one choice will provide the tax man with a significant boost.

While potato crisps, potato sticks, potato puffs, and similar products made from any combination of potato starch or flour and cereal flour are deemed a luxury by HMRC, tortilla and corn chips get off scot-free with a zero per cent rating.

And the deeper one ventures into the savory snack minefield, the more complicated it gets. While prawn crackers made from tapioca are zero-rated for VAT purposes, those made out of cereals are treated as standard-rated luxury items – unless, of course, they’re part of a takeway and don’t come in a sealed bag.

Flavoured rice cakes are subject to VAT at the normal rate – while those “intended for consumption with cheese or other toppings” aren’t subject to a levy. And popcorn is standard rated, unless it’s microwave popcorn, in which case you’re in luck and its tax-free.

If you were hoping nuts might be more straightforward, think again. Nuts in shells are zero-rated, unless they’re salted – while roasted ones are standard-rated, unless they’re almonds.

Bombay mix throws yet another spanner into the works, because it usually contains a mix of both luxury and essential items. As long as the proportion of standard-rated ingredients by weight doesn’t exceed 25 per cent, the whole thing can be sold without VAT payable. But if the mix is too heavy on roasted nuts, the matter gets a lot more complicated – and some unlucky graduate will find themselves tasked with measuring the exact proportion and adjusting the tax accordingly.

The guidelines strongly suggest the possibility that the Institute for Fiscal Studies’ director Paul Johnson has taken a trip down a savoury snacks aisle before denouncing the UK tax system as “absurd” in May 2014.

We’ve saved the best for last on the next page. With a scandal involving two Conservative politicians and a Cornish nationalist, can you guess which snack was involved?

(5) Cornish pasties

From its humble beginning as a cheap, filling snack for West Country miners, few would have guessed that the Cornish Pasty would end up with a political scandal named after it. Yet when “pastygate” reared its ugly head in 2012, the incident saw swathes of criticism levelled the prime minister – and drew attention to some more of the UK’s impenetrable sales tax regulations.

The controversy started with a proposed simplification to the complex criteria used for deciding what temperature a food product is designed to be consumed at. To answer to the obvious question – why on earth does it matter? – requires recourse to yet more wordy HMRC guidance.

The principle is a simple one – and somewhat more reasonable than some of the taxman’s other distinctions. Restaurant and takeaway food is a standard-VAT luxury, while food for eating at home is zero-rated.

The complication comes when food just happens to be hot but can be eaten cold. Until 2012, pies, pasties and sausages rolls had made it through numerous court cases retaining the benefit of the doubt which allowed them to treated as non-luxuries. But George Osborne tried to shake things up in his Budget that year by tweaking the legislation so that standard VAT was payable on anything served “above ambient temperature” – and soon the West Country’s gloves were off.

Cornish nationalist Mebyon Kernow called on local politicians to “put Cornwall and our national cuisine before the desires of their parties” – and they soon rose to the challenge, quickly being joined in their campaign by the management of Greggs.

When Osborne admitted he couldn’t remember the last time he ate a pasty, David Cameron was quick to prove he was more in touch with the common man and consumed them regularly. Unfortunately for the prime minister, the shop he claimed to buy his above-ambient temperature goodies from had closed five years before he said he’d visited.

Needless to say, the policy was soon watered down enough to be completely unrecognisable – and pasties remain zero per cent rated.