The great M&S sandwich VAT debate

As someone about to notch up 35 years of working in VAT, I am always amused when a VAT-related story breaks through into the wider national consciousness. Yes, sometimes this involves a weighty matter such as the introduction of VAT on private school fees; but more often than not the news media pick up on a story with a VAT angle that provokes a mild amusement.

I would say the examples of this over the years are disproportionately weighted towards food items – Jaffa Cakes and Pringles come to mind – with some of the more recent VAT court cases involving products such as giant marshmallows and mini poppadoms.

Strawberry & Creme

Following months of negative headlines resulting from the impact of cyber-attacks, you have to hand it to Marks & Spencer for setting the agenda with their Japanese-inspired ‘Strawberry & Crème’ dessert sandwich, a story that has gone viral. And of course, a story that raises a VAT angle.

To paraphrase, the basic VAT question that has been aired here across the news and social media is whether the sandwich is zero-rated – under the heading of ‘general items’ as ‘food of a kind used for human consumption’ – or whether the product falls within the list of ‘excepted items’ and hence defaults back to being standard rated. Examples of the latter include confectionery, ice cream, alcoholic drinks and potato crisps.

Excepted items

But hold on a minute – after the list of ‘excepted items’ there is a list of ‘items overriding the exceptions’ – this includes frozen yoghurt, drained cherries, candied peels, tea and coffee, which means such items flip back into being zero-rated.

Confusing? Yes, it certainly can be. And we haven’t even got into the question of cold versus hot takeaway food. Remember George Osborne’s attempts to introduce a ‘pasty tax’ in 2012? That didn’t go terribly well.

And what of the M&S strawberry & crème dessert sandwich on sweetened bread? The law says ‘confectionery’ includes ‘any item of sweetened prepared food which is normally eaten with the fingers’.

So, does that answer the question? Not really. Cakes are clearly zero-rated in the law. And HMRC’s guidance reflects their view that zero-rating includes a range of bakery products that clearly contain sweetening and are normally eaten with the fingers, such as flapjacks and marshmallow teacakes.

Challenging encounters

My favourite illustration of the challenges one can encounter is the shortbread biscuit. Clearly zero-rated. Partly or wholly cover it in chocolate – and it becomes standard rated. But add a layer of caramel in the middle to turn it into millionaire’s shortbread – and it becomes zero-rated again, as a cake.

Why do we see numerous VAT cases on food products each year? In part because it is big business – not just whether a retailer must account for VAT on the sale of the item, but whether a zero-rated item can be sold at a more attractive price point than rival similar looking products – and hence the manufacturer can generate higher sales volumes and greater profitability.

Simplification and modification

What all of this says to me is that the law is complex and there is a strong argument for simplification and modernisation. I am easily persuaded that when the VAT law was being drafted in the early 1970s the lawmakers intended to tax ‘luxury items’ whilst relieving basic foods from VAT.

Food is one obvious area of life where a huge number of new products have emerged since that time. The law has simply not kept pace, with the result that new products emerge that do not easily fit into a legal framework that was drawn up more than 50 years ago.

You might recall we saw something similar a few years ago with the dispute about the VAT treatment of online newspapers, which did not easily sit within a part of VAT law that still referred to printed matter - and which was enacted before the invention of the internet.

Politically unpalatable

Personally, I don’t believe the answer to be to simply apply VAT to all food items – there is plenty of research to say that lower-income families spend a greater proportion of household income on food than the better off. So, in my view, such a move would be regressive and politically unpalatable. However, there remains a strong case for reforming and simplifying aspects of the VAT law, with food being an obvious illustration.

Jelly and ice cream

And what do I make of the M&S sandwich? I haven’t felt tempted to try one yet, nor I confess have I spent any significant time considering the VAT position. Can a sandwich still be zero-rated and yet have a sweetened fruit filling? I guess my starting point - as someone who was a young boy in the early 1970s, and who attended numerous jelly and ice cream style birthday parties of that era - is that I struggle with the notion that the lawmakers of that era intended to tax that other staple of the 1970’s children’s party – the jam sandwich.

As I say, this is only a starting point, and the one thing we know for sure is that questions concerning VAT and food frequently end up before the VAT tribunal. One wonders whether the latest sandwich from M&S will one day join the list of famous cases.