Was the sale of “Raw Choc Brownies”, which had been treated as standard rated sales by Pulsin’ Ltd, capable of being taxed as zero-rated cakes?
The appeal was allowed by the First-tier Tribunal (FTT), resulting in a repayment of overpaid VAT of £311,262 for Pulsin.
Pulsin had submitted two error correction notices to HMRC, seeking repayment of VAT that it considered to have been overpaid.
HMRC did not consider that the products displayed enough characteristics of a cake to so qualify.
Pulsin offered the brownie in four flavours. All were sold in individually wrapped bars produced by cold compression of ingredients including dates, cashews, cacao, various syrups, concentrated grape juice and brown rice bran.
Pulsin appealed on three counts:
- The products were not sufficiently sweet to constitute confectionary;
- On an overall assessment, the products fell to be classified as cakes; and
- Principle of fiscal neutrality applied, as the products with which they were in competition were zero-rated for VAT purposes.
The VAT legislation is set out in the zero-rating schedule i.e. VATA 1994, Schedule 8, Group 1 – Food. This group is complex and lists general items where zero-rating applies i.e. food for human consumption, then lists “excepted items” from this rule i.e. items that are standard rated. Item no 2 excludes from zero-rating:
“Confectionary, not including cakes or biscuits other than biscuits wholly or partly covered with chocolate or some products similar in taste or appearance.”
Note 5 to that group further explains what the term “confectionary” includes:
“Chocolates, sweets and biscuits; drained glace or crystallised fruits; and any item of sweetened prepared food which is normally eaten with the fingers.”
Both Pulsin and HMRC in this case referred to an earlier Tribunal decision, that of Lees of Scotland Ltd & Thomas Tunnock Ltd. Here it was decided that “Snowballs” in this case had sufficient characteristics to be characterised as a cake, and accordingly were zero-rated.
The “test” for whether the products were to be classified as cakes was “…a matter of formed impression”.
A number of factors were identified which led the tribunal deciding that the products were a cake, as opposed to a biscuit, and therefore zero-rated. These factors included:
- The ingredients were not the same as a traditional sponge cake, however it was fair to say that they were consistent with a cake;
- The process of manufacture was to mix, press and cool, which was entirely consistent with the manufacture process of items that are uncontroversially cakes, such as crunch cakes or tiffin;
- The unpackaged appearance was of a cake bar;
- The taste of the simpler Maca Bliss was as one would expect from any high-quality chocolate brownie cake; and
- The name of the product is Raw Choc Brownie. Brownies are generally considered to be cakes.
The FTT concluded by saying :
“Put alongside a slice of traditional Victoria sponge, a French fancy and a vanilla slice or chocolate éclair, the products may look out of place. However, put alongside a plate of brownies, or, for instance, at a cricket or sporting tea where it is more likely that bought and individually wrapped cakes will be served on a plate the products would absolutely not stand out as unusual.”
Who is potentially affected?
Where you have clients that consider their product as being in line with any of the items set out in the food zero-rating schedule, there is always the possibility of a successful claim being made against HMRC. Just because HMRC considers the product to be standard rated, it does not necessarily mean they are correct.
Furthermore, where a claim is successfully made, it is capable of being applied retrospectively in addition to the prospective period.