First introduced in 1973 by the then-Chancellor Lord Barber, VAT has since been adopted by over 130 nations, contributing a staggering £70 billion yearly to the UK's coffers. In essence, VAT is a legislative system where a business is taxed on the elements used in producing a product, which is then reclaimed when the end consumer makes a purchase.
Within the European Union, VAT is applied at varied rates. For instance, Luxembourg boasts a rate of 15%, Hungary sits at a commanding 27%, whilst here in Britain, we're pegged at a standard 20% rate.
Over the years, some items have been deemed "essential" and thus either exempt from VAT or assigned a reduced rate, leading at times to peculiar legislative outcomes.
Few debates have been as delightfully divisive as the 'cake or biscuit' dilemma concerning Jaffa Cakes. It took a legal dispute to settle this.
Under UK law, cakes and biscuits attract a 0% VAT. But the twist in the tale is that any biscuit partially or entirely cloaked in chocolate is taxed at the standard rate. As clarified by HMRC, the distinction is that cakes, even if enrobed in chocolate, remain zero-rated, whilst chocolate-covered biscuits don't enjoy the same luxury.
In a landmark 1991 case, HMRC – known then as Her Majesty's Customs and Excise – took McVities to task over their zesty delights, suspecting them to be biscuits. McVities was undeterred. Legend has it that they even produced a massive 12-inch Jaffa Cake to underscore their point. The verdict? HMRC conceded, and Jaffa Cake enthusiasts celebrated as a treat evaded a 17.5% VAT spike.
While McVities celebrated their victory, other food brands weren't as fortunate. While potato crisps are standard-rated for VAT, maize and corn snacks are not. Procter & Gamble, the makers of Pringles, attempted to classify their product as maize-based but to no avail, given that Pringles are composed of 50% potato.
Marks & Spencer, on the other hand, emerged victorious after a 13-year tussle with HMRC, securing a whopping £3.5 million VAT refund. The bone of contention? Teacakes, which HMRC had mistakenly categorised as biscuits.
VAT, with all its quirks, remains a significant revenue stream for the UK, second only to two other tax sources. As we ponder a potential future outside the EU, it's improbable that the government will significantly alter VAT policies.
The Jaffa Cake legal saga underscores a crucial message for all businesses: understanding tax and VAT is paramount. Had the court sided with HMRC, McVities would've been staring down a reported £3 million bill.