Quirky tax reliefs in the UK

Jaffa Cakes
By Nicola Sinclair, CA Today

2 March 2016

Tax reliefs are useful in supporting key sectors and vulnerable groups, yet they can be notoriously complex to navigate. The 2011 report from the Office of Tax Simplification reveals the strange world of tax reliefs.

1. Tailor made, but not quite fitting

Reliefs such as the Blind Person’s Allowance show that when it comes to reliefs that are carefully crafted to support certain groups, the devil’s in the detail.

Blind Person’s Allowance is added to the Personal Allowance of an individual who is certified blind or severely sight impaired. In the 2015/16 tax year the allowance is set at £2,290, which means that an eligible individual can earn £12,890 before any income tax is due.

The OTS noted in its report that in practice the majority of blind people do not earn sufficient income to benefit from the relief. The Government is investigating alternative ways of assisting people with visual impairment, but for the time being the allowance has been made transferrable to a spouse or civil partner.

2. Sector roulette

Some of the tax reliefs previously offered by HMRC are now considered by the OTS to offer advantages to particular sectors. For example, a relief is available which allows literary and creative artists’ profits to be spread over a number of years to even out their profits and tax burden.

The OTS report asks why this sector should receive favourable tax treatment against other sectors with similar volatility of income?

3. Have your cake, and eat it

The practice of VAT zero-rating is notoriously challenging. Zero-rating for food items was introduced in 1973 and it is now very complex to change the scope of the zero-rating without the agreement of all the EU Member States – the campaign for the zero-rating of sanitary protection highlighted the problems.

The rules on zero-rating food are over 40 years old and time and changes to food technology have eroded the boundaries. This gives rise to some weird and wonderful discussions around food classification. Hotly-debated topics include: Are Pringles a crisp? Are Jaffa Cakes a cake or a biscuit?

In 2014, confectioners Lees and Tunnock’s hit the headlines when they challenged HMRC’s position that their snowballs are standard rated confectionery. Under UK VAT rules cakes can be zero-rated and both Jaffa cakes and tea cakes have been the subject of tax cases.

Both items are treated as cakes – so there is no VAT at 20% levied on their sale. A group of judges had the difficult task of testing out a plate of Jaffa Cakes, Bakewell tarts, tea cakes, Lees Snowballs, Waitrose meringues and mini jam snow cakes for the hearing, and decided the Snowball “has the mouth feel of a cake”, thus winning the day for Tunnock’s, Lees and cake-lovers across the land.

What our tax experts say...

“The 2011 OTS report identified a range of outdated and ineffective  tax reliefs, many of which have since been abolished. The difficulty for the tax system is that it’s always having to play catch-up with how the business and policy landscape changes. The business sector today is organised in ways we could never even have imagined 50 years ago.

“The food and drink industry is particularly problematic, because food technology has advanced considerably since 1973, when the scope of zero-rating for VAT on food was established This gives rise to some truly peculiar anomalies. One of my favourites is the zero-rating for chocolate chips, contrasted with the standard rating for chocolate buttons. I have checked this by buying both, and supermarket tills do distinguish between the two. The chocolate chips were much better quality chocolate and wolfed down enthusiastically!”

Anne-Marie Roberts, Head of Taxation – Scottish and Indirect Taxes

Which unusual tax reliefs have you encountered? Let us know by leaving a comment below.

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