VAT on snacks

VAT on snacks

The First-tier Tribunal released a decision in a case concerning a conclusion reached by HMRC that certain products sold by Walkers are standard rated for VAT purposes.  Is there VAT on snacks?

The products at issue are ‘Sensation Poppadoms’ and Walkers argues that they should be zero-rated for VAT purposes on the basis that they are ‘food of a kind used for human consumption’ and that they do not fall within any of the excepted items. Walkers also contend that the products should be zero-rated under the principle of fiscal neutrality.

HMRC argued that the products fall within excepted item provisions, because they are ‘products similar to potato crisps, potato sticks, potato puffs made from potato, or from potato flour, or from potato starch’ and are ‘packaged for human consumption without further preparation’. HMRC also asserted that it would breach the principle of fiscal neutrality to treat the products as zero-rated.

The only issue for the FTT to consider was whether the products fall within Note 5, of Group 1 of Part II of Schedule 8 of VATA94. The FTT noted that it had been agreed that the products were not specifically ‘potato crisps, potato sticks, potato puffs’; the dispute is as to whether or not the products are ‘made from potato, or from potato flour, or from potato starch’ and whether they are ‘similar products’ creating VAT on snacks.

Having concluded that the products are packaged for human consumption without further preparation, the FTT was provided with a detailed list of the ingredients and concluded that across the flavours they contain 17.5-18% potato granules, 17.5– 18% potato starch and approximately 4.25% modified potato starch.

The FTT noted that the products contain approximately 40% potato-derived ingredients, being a significant proportion in comparison with the other ingredients. The FTT recalled that the legislation refers to the potato content in the form ‘the potato … or potato starch’. It considered it to be self-evident that the use of the word ‘or’ in this context is not intended to exclude products which contain more than one of the potential potato-related ingredients; the purpose of the legislation is clearly to include products which have one or more substantial potato-related elements.

The FTT also noted that following the purpose of Note 5, it is necessary to consider potato-based ingredients in the aggregate in determining whether the product is ‘made from’ those ingredients. The test for VAT on snacks is not whether the products are ‘made from the potato’ or separately ‘made from potato starch’ but whether the products are ‘made from’ one or more of those potato-based ingredients.

The FTT concluded that there is more than enough potato content in the products for it to be reasonable to conclude that they fall within the provision of Item 5 which provides for VAT on snacks.

Considering how ‘similar to’ should be assessed, the FTT recalled (following the Court of Appeal in Pringles) that “similarity involves a question of degree and a multifactorial assessment of all the factors”.

Considering VAT on snacks the FTT noted that:
• Marketing material shows the products being eaten in settings which it considered are not dissimilar to those in which one would expect to find potato crisps. Other marketing images focused on the flavours of the products and, in that context, the FTT considered they are not distinguishable from advertising of potato crisps which may also focus on the flavours involved
• The products are sold in large (‘sharing’) bags (potato crisps are sold in similar sized bags) but are no longer sold in smaller individual portion bags
• The packaging is consistent with other products in the same range produced by Walkers, including potato crisps
• The products are primarily sold in the snack food aisle of retailers, placed with potato crisps and similar snacks
• The products are visually similar to potato crisps, flavours are not distinct from those used for potato crisps and the texture is not significantly different to comparator potato crisps
The FTT also noted that Walkers had sought to argue that the products were called ‘poppadoms’, unlike potato crisps. However, the FTT considered that it is not appropriate to give any weight to the name of a product in considering whether it is similar to potato crisps, given the general freedom (within the constraints of trademark law) for manufacturers to choose the name of their product. The fact that a poppadom made to a traditional recipe from flour without potato is zero-rated for VAT purposes does not mean that a poppadom made to a traditional recipe which includes potato must also be zero-rated for VAT purposes. The former is not excluded because it is a ‘poppadom’ but, instead, because it contains no potato.

On the question of similarity, the FTT concluded that the products are similar to potato crisps. VAT on snacks of potato crisps is charged at the standard rate. They are also packaged and sold in a similar manner. Removing them from their packaging, the FTT considered that their appearance and texture is similar to potato crisps and given the predominance of the flavouring, the taste is not a distinguishing factor.

Finally, considering the argument of fiscal neutrality, the FTT concluded that Walkers had not established that the products are objectively similar to poppadoms. There is no breach of fiscal neutrality in concluding that the products are within Note 5.

In summary, the FTT found that the products are made from potato and potato starch, it is therefore irrelevant whether the products are similar to poppadoms. What matters is whether they are similar to potato crisps, which they are. They are therefore within Note 5 as VAT on snacks and standard rated for VAT purposes. There is no breach of fiscal neutrality in treating the products as standard-rated. Thus there is standard rated VAT on snacks.

VAT on snacks and similar items continue to be a cause of debate when considering VAT liability.