Posts

Max Schofield – Snowballs and Windfalls: VAT reduced rates lead to unpredictable and unreasoned jurisprudence

The First-Tier Tribunal appeal decision, released 25 June 2014, regarding the applicable VAT rate to ‘Snowballs’ confectionery is not the first time that large amounts of money have hinged precariously on the definition of a cake, and it is unlikely it will be the last.

Despite steps towards harmonisation of VAT systems, Member States have been allowed to maintain reduced rates and exemptions. The UK has been able to maintain its zero-rates for “clearly defined social reasons and for the benefit of the final consumer.” Food, falling broadly into this justification, has been zero-rated since the introduction of VAT to the UK in 1973. The relevant legislation in force was Value Added Tax Act (VATA) 1994, specifically Schedule 8 which specifies a zero rated supply of “Food of a kind used for human consumption.” This provision alone could feasibly provide enough ambiguity for even an excitable first-year law student to try and include obscure items for zero-rating. Heston Blumenthal must be extending the scope daily. There are however exceptions to the food exception. Item No.2 excepts confectionery – although importantly not including cakes. Then Note 5 to that Item clarifies confectionery as including chocolate, sweets and biscuits and any item of sweetened prepared food which is normally eaten with the fingers.

This variation in rates, depending on subclasses from a multitude of characteristics, provides ambiguities and thus, litigation opportunities as well as administrative costs for HMRC to investigate and enforce rate differentiation based on decisions made over forty years ago. Decisions which deem cakes and biscuits necessary items but prescribe a standard rate for chocolate-covered biscuits as a luxury item. Or HMRC guidelines on how much chocolate is allowed on a zero-rated gingerbread man before it becomes liable to the standard rate. (Spoiler alert: the answer is “Gingerbread men decorated with chocolate unless this amounts to no more than a couple of dots for eyes”.) These bizarre rules have lead to criticisms of the legislation as well as VAT generally as overly complex and illogical. A variety of academic literature has been published calling for the abolishment of reduced rates (de La Feria, 2013; Mirrlees Review, 2011) . With this in mind we may address the facts of the Snowballs case between Joint Appellants “Lees” and “Tunnocks” and HMRC.

Both Appellants manufacture a product known as Snowballs and in 1995 received a ruling from HMRC that this product should be treated as zero rated for VAT purposes. A month later they were advised that the liability of Snowballs had been incorrectly imparted because of a VAT Tribunal decision classifying them as standard rated confectionery. The parties were seeking repayment of overpaid VAT under section 80 of the VATA. (The combined sum claimed by the appellant parties was for a windfall rebate of just under three million pounds sterling). The only issue for determination in the appeals was whether Snowballs were cakes. It was conceded that snowballs were confectionery within the VATA but the disagreement arose from whether they fall into the subset definition of cake. The appellants contended that they were cakes and should therefore enjoy zero-rating as opposed to the HMRC opinion that posited Snowballs were not cakes.

Amongst the authorities considered was the Goodfellow case (EDN/87/10, VTD 2453) which stated that no objective test can be imposed to determine whether a particular item of confectionery is or is not a cake. Following the reasoning of Lord Woolfe in a previous case (Ferrero 2 [1997] STC 881) the test to be applied was whether a Snowball displayed sufficient characteristics of a cake that it should be classified as such. The Tribunal noted that this was a “very fine balancing exercise”, but did not elaborate on what constituted ‘sufficiency’ as prescribed by Lord Woolfe. The case provides an expansive, although not exhaustive, list of factors (para.18) deriving from previous cases that should be considered by the court. Included are: Ingredients; Taste and Texture; Circumstances of consumption; Marketing; and Appearance, to name but a few. The criterium of “how it behaves” after it is removed from packaging is reminiscent of the Jaffa Cake case (United Biscuits LON/91/0160). Jaffa Cakes become hard upon going stale unlike a biscuit which conversely goes soft. The Snowball similarly hardens after a few hours on a plate (para.22(q)). The Tribunal next considers its own knowledge and experience of snowballs and cakes in general, noting that Judge Scott watches TV programmes such as Great British Bake Off and has a “sophisticated and wide ranging understanding” of many types of cakes, meringues and confections. Following the presentation of a smorgasbord of confectionery items from Jaffa Cakes to Bakewell Tarts and including Snowballs, all of which were tasted “in moderation”, the Tribunal listed their observations and findings in fact.

The findings, elucidated over the course of twenty paragraphs, are generally similar for both parties and comprehensively cover every conceivable aspect of Snowball gastronomy. General to Snowball production is the lack of flour and the lack of baking – the Tribunal is quite clear that a Snowball does not have all the characteristics of a cake (para.50). The final rationale is given in para.53, beginning with: “A snowball looks like a cake. It is not out of place on a plate full of cakes. A snowball has the mouth feel of a cake.” And is followed by further subjective declarations such as Snowballs might be used, like a cake, to celebrate a birthday in an office. Towards the end of the paragraph they mystifyingly and inexplicably introduce preferences “depending on background, age, sex, etc” as to the eating surface of plate or napkins. This may be an innocent appreciation of the possibility of messy children with the dynamics of flakey desiccated coconut as addressed in the judgement although it is hard to imagine how consumption of Snowballs differs between the genders. The judgement is summed up with the aid of a caveat that by no means does everyone consider a snowball to be a cake, however the Tribunal finds the Snowball to possess “sufficient characteristics to be characterized as a cake.” The appeal succeeds.

Despite offering such edifying quotes as, “We found that the plate looked like a plate of cakes”, which rivals any dicta from the greats like Oliver Wendell Holmes or Lord Denning, we must analyse the substantive judgement. Marshmallows and chocolate separately are standard rated confectionery. But, marshmallow coated in chocolate is still agreed to be confectionery yet is zero-rated as a cake. This seems counterintuitive. With actual baking and mixing of ingredients so that the product is indistinguishable following processing such as combining flour, eggs and sugar to make sponge then a different rate may be appropriate. However, merely merging two standard rated ingredients to create a zero-rated amalgam would require a justification or reproducible and reliable reasoning which does not present itself in this judgement. The purpose of the original exception of the zero-rating of cakes was likely to have a nostalgic motivation of home-baking and community cake meetings. The purpose of the legislation is not addressed, if it had been then Snowballs may not have been reclassified. The judgement notes that food science has changed considerably along with the general public’s perception of what is a cake. The statement on the beliefs of the general public is made without evidence or explanation yet the Tribunal say they must give the word cake its ordinary meaning and discuss the perspective of an ordinary person. I am left unconvinced as to whether the man on the Clapham omnibus would call a Snowball a cake. This amorphous and insipid judicial reasoning should be avoided and is the result of bad law in the form of convoluted rate differentiation rules. The abrogation of which, may come from domestic amendment or from harmonising EU legislation or Recommendations. Wasting resources with further cases on the same issues would be wholly unpalatable.

Additionally, reference and comparison to teacakes is recurring which demonstrates the Tribunal’s appreciation of the M&S teacake “saga” ([2008] E.C.R. I-2283) that started with HMRC’s acceptance of teacakes as zero-rated in 1994. Despite the case not being suggested for consideration as an authority (para.15) there is repeated and unsolicited reference to teacakes – twenty mentions in fact. This may be interpreted as the Tribunal trying to buttress their final decision, which was not easily arrived at, on authority (contrary to the previously cited Lord Woolfe in Ferrero 2 who urged Tribunals not to be misled by authorities which are no more than authorities of fact and to avoid inappropriately elevating issues of facts into questions of principle). My inference is that this referencing of the teacake decision is used because the Tribunal was concerned as to their reasoning and conclusion regarding Snowballs. By following the precedent of HMRC’s treatment of teacakes as “seemingly no different” (para. 33) the Tribunal hoped that their lack of substantive rationalization could be mitigated and excused, and importantly provide a more digestible judgement for the HMRC.

This case is merely the icing on the cake with regards to the problems caused by rate differentiation throughout the European Union. Simplification of the rate structures and definitional legislation must be a priority to avoid further litigation on cakes and biscuits, even if simply for the sake of the Tax Chamber’s waistlines.

Max Schofield

Cornell Law School

(*For a further discussion on VAT rate reform see DELI Blog post “Towards Unilateral Convergence of VAT Rates in Europe: A Blueprint for Reform of VAT Rate Structures” by Prof. Rita de La Feria, available at: https://delilawblog.wordpress.com/2013/11/29/towards-unilateral-convergence-of-vat-rates-in-europe-a-blueprint-for-reform-of-vat-rate-structures/)

Advertisements

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s