VAT is arguably Britain’s most baffling tax, with 71% of UK VAT-registered businesses arguing that the rules are too complex and hard to follow.
Even now, 51 years after it came into force, some of the world’s best-known brands still fall foul of the complexities of Value Added Tax. Take Walkers' recent court loss, for example.
The savoury snack manufacturer, best known for its collection of flavoured crisps, recently made headlines for losing a high court battle. Walkers argued that their flavourful packets of so-called ‘Sensations poppadoms’ do not attract the standard 20% VAT rating that applies to other potato-based snacks as they are not crisps.
So, Walkers set out to prove that it shouldn’t forfeit a fifth of the proceeds from each packet of the beloved Indian delicacy to the taxman, but the courts disagreed.
VAT is one of HMRC’s highest-yielding taxes, after Income Tax and National Insurance Contributions (NICs). Valued Added Tax earns HMRC £8 billion every year. Crisps are quite clearly included in all HMRC guidance on the topic as not qualifying for zero-rating, so 20% VAT should be included in the selling price and accounted for to HMRC.
However, some foodstuffs, such as bread, cakes, some biscuits and (yes!) plain poppadoms are zero-rated. So, it’s no surprise that businesses look for inventive ways to circumvent the legislation to reduce their tax liability and maximise profits.
However, it is a fallacy to believe that campaigning for certain products to be zero-rated benefits the consumer in lower pricing. Most consumers would not know which food they are paying VAT on. Any reduction in the VAT rate applying to a product is more likely to benefit the manufacturer or retailer than the consumer. In reality, a packet of Sensations Poppadoms will be priced similar to a packet of regular crisps with the consumer blissfully unaware of what VAT is charged on it.
Walkers’ argument hinged on differentiating their packets of flavoured poppadom snacks from crisps - with which the Walkers’ brand is essentially synonymous.
However, despite being branded as poppadoms and being clearly labelled as such, the court found that Walkers’ versions are, in fact, crisps and should therefore be taxed as crisps.
Why? This comes down to content, rather than intent. Just because the food product has poppadom in the name, is it really a poppadom? In the words of the tribunal judges, Anne Fairpo and Sonia Gable: “Nominative determinism is not a characteristic of snack foods: calling a snack food Hula Hoops does not mean that one could twirl that product around one’s midriff”.
After all, poppadoms are normally made with a simple mixture of flour, water and cooking oil. They are often called flat bread although they are more like a cracker or tortilla chip due to their crispy crunchiness. They are not generally a readily available ‘snack’ food and require further preparation to eat to accompany an Indian dish.
Walkers’ “Sensations poppadoms” are sold in a packet and marketed similarly to crisps. They are therefore crisps in all but name, according to the ruling. 40% of their ingredients are derived from potatoes (such as potato granules and starch) and they contain “more than enough potato content for it to be reasonable to conclude” that they are crisps - and therefore fall within the standard rated tax bracket.
I understand why companies seek to save money where possible, but challenging VAT can be dangerous, especially in terms of a company’s reputation.
A similar argument was made for Pringles to be zero-rated some years ago. Ultimately, the company responsible for manufacturing Pringles at the time, Procter & Gamble, lost the case under appeal - which left it with a hefty backlog of tax to pay, but also considerable damage to the product’s reputation and the company’s sales figures and profit margins...
As with the recent Walkers’ case and as part of the court proceedings, it was necessary to establish the ingredients and manufacturing processes in making the product. In an attempt to improve profit margin and avoid accounting for 20% VAT, Proctor and Gamble put the reputation of their product on the line by seemingly disparaging their goods in court.
While arguing that Pringles aren't crisps, Procter & Gamble revealed that the snacks are made of less than 50% potato, with the majority of each Pringle being a mulched together mixture of oil, cornflour, cornstarch, rice flour and preservatives. While the gamble could have saved them a pretty penny in VAT charges, all it ultimately did was publicise their ingredients and diluted consumer confidence in the popular crisp company as consumer confidence nosedived to an all-time low.
Comments following the case in 2009 ranged from “Pringles are the epitome of marketing over content” to “50% potato, 200% price markup?”. As one publication summarised, Pringles are “made out of 33% fat and flour and only 42% potato” making the “failed bid to avoid paying an estimated £20m in VAT a year” ultimately an example of poor PR.
Clearly, when it comes to navigating the complexities of VAT, being transparent and open about your offering is vital - for consumers, as well as for HMRC. If you’re concerned about your tax liability and want to learn more, get in touch with our team of experts today.
