Sweet nothings: Zero-rated cakes

Picture of chocolate covered biscuits
By Alex Burden, Student Blog

29 May 2017

To cake or not to cake: it's a frequent taxation question. The multi-layered tax system in the UK means that particular food groups are afforded different levels of VAT; find out how a biscuit can make all the difference.

The question over whether Jaffa Cakes were indeed cakes, first arose in 1991 when McVities contested HMRC's assertion that the chocolate and sponge goods were in actual fact biscuits, which can come with a higher level of tax.

In a perhaps strange ode to Britain's relationship with cakes, they are afforded a zero-rated VAT, in contrast to the 20% which is applied to Milk Chocolate Digestives, for example.

The Jaffa's chocolate covering and spongy-orange base (as well as its similar size to biscuits in general) meant that a review was needed - any biscuits with chocolate on them are standard-rated, whereas cakes and plain biscuits are not. Its placement in supermarkets was also a cause for concern as it is generally sold alongside biscuits.

In Ireland, the Jaffa is held on a reduced-rate of 13.5% due to it being 'regarded as a cake as the moisture content is more than 12%'.

And if you ever wondered where the inspiration for 'giant' Jaffa Cakes came from, McVities had one produced for their court case to demonstrate its cake-like qualities to the adjudicator. This included reference to its similar ingredients to a sponge cake and its propensity to harden when it goes stale (biscuits go soft).

The philosophy of cakes and biscuits

Listen to Radio 4's Philosopher's Arms show for their debate on whether Jaffa cakes are actual cakes or a biscuit. The appropriately-named Matthew Sweet will discuss the issue with Tim Crane, Knightbridge Professor Philosophy at Cambridge, and a former Great British Bake-Off winner.

Why a professor of philosophy? As Tim explained to the BBC the question is "how do our concepts relate to reality?" 

It comes down to bodies such as HMRC to decide what reality an item sits within for the purpose of applying a meaningful revenue or classification

For example, do we apply classifications to fit our world, or do use the classifications that come from reality i.e. the same ingredients are used to bake a cake, but its format is decided as an exception to the rule due to other qualities that simultaneously exist within the same item? 

When it comes to tax, our classifications can grow out of several different qualifications rather than a direct link. As our world is not clear-cut and entirely binary, it comes down to bodies such as HMRC to decide what reality an item sits within for the purpose of applying a meaningful revenue or classification.

How one ingredient can change a tax rating

Other biscuity-type items that have faced the conundrum include coconut-coated Snowballs, who were standard-rated by a tribunal, and then re-assessed by a different tribunal as a cake.

The tribunal said: "A snowball looks like a cake... [it] has the mouth feel of a cake... It would often be eaten in a similar way to cakes; for example, to celebrate a birthday in an office... We find that these facts mean that a snowball has sufficient characteristics to be characterised as a cake."

Shortbread is also classified as a zero-rated bakery product, but top that with chocolate and you have propelled yourself into standard-rated biscuit realms. But put a caramel layer in between that chocolate and shortbread, and you are back to zero-rated.

Alcohol is obviously subject to standard-rated VAT as a controlled product, but what about if it's an additional ingredient to jelly?

Alcohol is obviously subject to standard-rated VAT as a controlled product, but what about if it's an additional ingredient to jelly? Ocado faced this dilemma when seeking zero-rating for their fruit jelly shots (fruit and veg are zero-rated), but HMRC argued that adding prosecco meant it should be classified as a sangria-type product.

After much deliberation, the tribunal decided that although it included alcohol, it could be compared with tiramisu or other alcoholic desserts, and would, therefore, remain zero-rated.

Where's that philosopher when you need them?

And a final note on Twix bars; in the US the legal definition of sweets contains the 'Twix Tax Test' - where an item contains flour or requires refrigeration it does not count as 'candy' and cannot be rated as such.

In the UK it gets slightly more complicated: it actually says it's a biscuit, and it's covered in chocolate, but HMRC classify it as confectionery rather than biscuits! It does come standard-rated, however, as do other products such as Mars bars.

Gov.UK guide on VAT rates for goods and services

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