You, Me and VAT: 4 Fun Tax Tales

Way back in 2007, drinks manufacturer Innocent applied to have their smoothies become VAT-exempt. It’s a fairly common practice in many industries, usually when a business disagrees with how the tax authority has defined its goods or services. 

The interesting part is the logic that Innocent applied during the case. The company based their case for VAT exemption on the idea that the smoothies are not actually beverages but “liquified fruit salads”. By the dictionary definition of everything in a smoothie, that’s probably an accurate label. However, the UK tax authorities (HMRC) rejected the application. 

The sticking point for HMRC was the term “beverages”. Beverages are defined (in both taxation and the actual dictionary) as any drink that’s not water. In the UK VAT system, beverages are taxed at the standard rate. Additionally, most food for human consumption is not taxed, which includes fruit but not fruit juices. 

So, in a nutshell, Innocent wanted their liquid smoothies to be considered as a fruit but got refused because fruits aren’t liquids. A tale as old as time.

Benjamin Franklin said that “in this world nothing can be said to be certain, except death and taxes”. An absurdly appropriate example of the inevitability of taxes is the 2010 ruling by Swedish tax authorities that VAT must be applied to the sale of illegal counterfeit goods. Even the criminal underworld can’t avoid taxes. It’s how they got Al Capone, after all.

The Swedish tax authorities politely asking active criminals to stay VAT compliant seems like a very optimistic move on their part. The couple involved in the specific case that prompted the ruling appealed against it and had a fairly solid argument. They said it would be illegal, even immoral, for the Swedish state to profit from illegal actions. 

However, the counterfeit goods weren’t the only thing they were selling. The couple sold both legal and illegal goods through Tradera, Sweden’s largest auction site. We’ve included a link to Tradera for context, but be aware that the website is entirely in Swedish. To our Swedish readers, hej hej!

As the couple sold both legal and illegal goods, VAT was payable on the whole enterprise.  Swedish case law directly states that “income derived from criminal activity must be taxable if it is part of a legal activity”.

The overlap between VAT and crime is surprisingly large — if you’re interested, there are some fascinating notes on the HMRC website about how illegal something can be before it is totally tax-exempt.

Stop me if you’ve heard this one. And you might have since it’s arguably the silliest thing that’s happened to VAT ever. 

Way back in 1991, UK biscuit manufacturer McVitie’s argued against the HMRC’s decision to tax Jaffa Cakes (a McVitie’s product) as a luxury, more specifically as a chocolate-covered biscuit. While Jaffa Cakes are called cakes, they’re marketed and sold as biscuits. The appearance and usage of the product alone make this a fair assumption. 

However, McVitie’s argued that the Jaffa Cakes should be labelled as cakes for tax reasons. Obviously, McVitie’s had a financial motivation — cakes are zero-rated in the UK VAT system and would not be taxed. Their argument was that the core recipe of a Jaffa Cake was more similar to a soft sponge cake than it was to a crunchy biscuit. 

While you might be thinking, “wow, all this over a biscuit”, Jaffa Cakes have been sold since 1927, and around 2 billion are made every year, so we’re talking about millions of pounds in tax revenue here. 

To prove their point regarding the recipe, McVitie’s produced a 12-inch diameter Jaffa Cake, which they allowed to grow stale. Whereas biscuits go soft when stale, the Jaffa Cake (like a normal cake) went hard. As such, the tribunal ruled in favour of McVitie’s and changed the product’s tax definition.

In 2012, Britain’s greatest institution (Greggs) was brought to its knees by a proposed simplification of VAT rates that would mean all hot takeaway food would be charged at 20% VAT. The proposal was a small section of the official 2012 UK budget. 

However, since most foods purchased to cook or eat at home are zero-rated, there’s an interesting grey area with this ruling when it comes to pasties and pies. These foods are really only incidentally hot because they’ve come out of an oven and are in the process of cooling down — in fact, they’re often consumed cold. 

As the initial proposal notes that the VAT rate is applied to food “specifically purchased for consumption while hot”, the argument against taxing pasties holds weight.

The proposal was cancelled after much debate in the House of Commons — and believe us when we say that “much debate” is an understatement. Detractors accused the proposal of being classist, and a lot of weight was placed on the idea that the people making the law had probably never eaten a pasty or pie in their life. We can’t comment on whether this argument is true, but the debacle has its own Wikipedia page, which is a convincing piece of evidence for how big of a deal it was.

We began this blog post by admitting that, yes, taxes aren’t very fun or interesting. But that’s only because a lot of tax legislation is overly complicated, and paying taxes involves far more maths than is absolutely necessary. Luckily, Avalara is here to help.

We want to make taxes simpler and more manageable for our customers. No one starts a business to spend all their time on tax admin and bookkeeping. By using our solutions, you can spend less time fighting through VAT rules and more time actually running your business.

Here are just a few of the solutions we offer and how they can help:

• Avatax: Struggling to calculate multiple VAT rates while distance selling? The Avatax platform helps ensure fast, accurate tax calculations at checkout.
• Registration: Registering for VAT in another country can be complicated, and having to do so multiple times as you expand is even tougher. Our digital solution helps streamline the process.
• Returns: Providing accurate VAT returns is a crucial part of compliance, but creating them can be time-consuming. Our Returns and Reporting tool helps you cut down on the time you spend on creating VAT returns and helps ensure they’re error-free. 

If you’re looking for more information on VAT, check out our handy VAT guide. It’s full of useful information and helpful advice on how to comply with cross-border VAT rules - click here to read now.