The Interesting (and Complicated) World of VAT – A Guide to the Different Areas

October 18, 2019 Categories: VAT

How do you make VAT interesting?

Well, it’s a challenge – we’ll admit. But that doesn’t mean you can ignore it if you’re serious about running a profitable, legitimate business.

In fact, have you ever looked into the history of VAT? Let us give you a super-brief version to help your understanding – and possibly help you win a pub quiz in the future.


The what, when, and why of VAT

Value Added Tax (VAT) was introduced by the UK government in 1973. It’s commonly referred to as a ‘sales tax’ and is paid by the purchaser. The retailer or supplier collects this money on behalf of the government and pays it back each quarter in most cases in the form of a VAT Return.

To consumers, VAT is practically invisible, but for VAT-registered businesses, it’s a core part of their accounting regime. If your business turns over more than £85K per annum, it needs to be registered (although you can register voluntarily below that threshold if you wish).

VAT rates are tinkered with every now and again, but as of September 2019, there are three thresholds:

  • standard (20%)
  • reduced (5%)
  • zero (0%)

The cake argument

VAT rates are open to debate, depending on the product or service in question. Sometimes, it can get rather heated – particularly where food is concerned.

One of the most complicated areas for VAT is the sale of food. The basic principal is that raw uncooked food is exempt from VAT. Food and drink sold for human consumption is usually zero-rated but some items are always standard-rated. These include:

  • catering
  • alcoholic drinks
  • confectionery
  • crisps and savoury snacks
  • hot food
  • sports drinks
  • hot takeaways
  • ice cream
  • soft drinks and mineral water

No VAT is charged on plain biscuits or cakes. But when a biscuit is covered in chocolate it becomes a luxury and 20% VAT is added to the price. McVities added chocolate to the their Jaffa Cakes and a tangy orange base, therefore classifying them as cakes, not biscuits. Although the taxman challenged this, claiming chocolate biscuit status, the court ruled in favour of McVities and, as a result, we don’t have to pay VAT on our Jaffa Cakes.

It’s a similar story in the biscuit world, where not all Gingerbread men are born equal. For instance, no VAT is charged for gingerbread biscuits with just two chocolate spots for eyes. However, if your gingerbread man is dressed with any chocolate-based additions (such as trousers) 20% VAT will be added.

And don’t get us started on chocolate chip biscuits…


The Pasty Tax

Former Chancellor George Osborne caused a significant stink in 2012 when he introduced the so-called ‘pasty tax’, which closed the loophole allowing bakeries to treat their pasties as zero VATable.

Bakers previously got away with selling pasties without VAT on top because they were ‘incidentally warm’, rather than classified as hot food.

Some hit back by switching off their warming cabinets and cooking smaller batches throughout the day while others absorbed the price rise to avoid annoying customers. But it got ugly, and all rather silly if you followed the headlines at the time.


A long list of similar arguments

Jaffa Cakes and pasties are joined by the following subjects of VAT tribunals:

  • eBooks
  • slankets (a blanket with sleeves)
  • digital newspapers
  • breakfast muffins delivered to eat at home
  • ambulance rides
  • Bombay mix (no, really)

Some distinctions are very subtle, but that alone illustrates how important an issue this is for businesses. If you sell something that deviates from the norm or you have developed a product that’s a new take on an existing zero-rated item, you’ll need to carefully consider its VAT status.

You should also avoid assuming that everything you sell is subject standard rate VAT, because that zero rate offers a great opportunity to boost sales.


How can I avoid the issue?

If your annual turnover is below the £85K VAT threshold, you can avoid this prickly issue altogether.

But what if you want to grow and surpass that threshold?

There’s no escaping VAT – if you have to charge it by law, you either have to soak up the cost yourself or accept you’ll be charging higher prices.

Critics believe VAT is overly complicated and time consuming, and it’s hard to disagree. Despite this, VAT continues to generate around 21% of the UK’s total annual tax revenue, making any significant changes unlikely.


If you’re stuck with VAT or have any questions about this form of sales tax, please do not hesitate to get in touch with our friendly, knowledgeable team.