The Jaffa Cake Case - Understanding VAT
The Jaffa Cake Case is an interesting legal case that is a popular topic often discussed in the media. It’s a good example of how important it is to know what you’re doing when it comes to tax and to be clear about topics like VAT.
What is a Jaffa Cake?
Jaffa Cakes are a product of McVitie’s, a British biscuit and cake manufacturer with the roots going back to 1839. In 1991 the sweet treats were subject to what would become a very famous tax dispute with HMRC.
HM Customs and Excise had decided that Jaffa Cakes were biscuits, therefore subject to pay VAT, unlike cakes which were classed as a staple food necessity and therefore exempt from the same tax as biscuits. In HMRC’s words, food that is “wholly or partially covered in chocolate is a luxury item and should be taxed as such.”
Why does Jaffa Cake VAT story matter?
Chocolate-covered biscuits (and other sweet biscuits) are standard-rated for VAT purposes, whereas cakes are zero-rated. This is because cakes are classed as ‘food’ and chocolate-covered biscuits aren’t.
The difference between zero-rated and standard-rated goods is that if you supply something that’s zero-rated, you don’t pay any VAT to HMRC at all. If you supply something that’s standard-rated though, then you do have to pay VAT.
Businesses are often unaware of their responsibilities when it comes to paying VAT on goods or services they supply. The consequences for not doing so can be severe and result in HMRC pursuing businesses for unpaid or wrongly-calculated VAT.
If you’re a business owner, it’s important that you know that taxes and VAT are a vital part of running your business.
That’s where we come in!
Our Oxford-based accountants work to ensure that you’re compliant with all the latest rules and regulations around tax and VAT so that your business can thrive. We’ll also work with you to develop a strategy for managing your taxes going forward so that you can focus on growing your business instead of stressing out about how much money is due and when.
McVities could have accepted the decision from HMRC and paid the VAT that was allegedly due, but instead decided to challenge the issue.
In a landmark case for the world of baked goods, McVities won their court battle over whether or not Jaffa Cakes are cakes or biscuits.
The company argued that their Jaffa Cakes were cakes because are more like cakes than biscuits because cakes harden when they go stale, and biscuits go soggy, a Jaffa Cake indeed goes hard and their case was proven to be successful.
The judge ruled in favour of McVities and concluded that Jaffas were indeed cakes!
Lesson to be learned
This legal case stands as a lesson to all business owners (big and small) that the importance of understanding tax and VAT is something that should never be underestimated. If the court had ruled in favour of HMRC and decided that Jaffa Cakes were in fact classed as biscuits, McVities would have faced with what was reported to be a £3m bill.
Taxes and VAT can be a confusing and frustrating part of running a business, but we’ve got your back.
Food products (VAT Notice 701/14)
Find out which types of food are zero-rated and which are standard-rated for VAT purposes.
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