VAT In Manufacturing

VAT can be a complex area and there have been a plethora of diverse cases we have seen been debated in the manufacturing sector. Paula Mason, VAT Manager, highlights some of these in her update below.

EU VAT Reclaim Opportunities

Manufacturers typically suffer VAT in connection with their business activities both in the UK and in EU Member States.

Obviously, VAT suffered in the UK can be reclaimed in the UK VAT return, but how can VAT suffered in the EU be reclaimed when the business is only required to be registered for VAT in the UK? Paula Mason, VAT Manager explores this further below.

The answer lies in the EU Thirteenth Directive.  This allows businesses to recover EU VAT suffered on expenses such as accommodation, food and drink, marketing, transportation, and various other expenses relating to the manufacturing process where the place of supply for VAT purposes is where the supplier is located.

Claims must be made directly to the tax authority for each Member State, and each have their own eligibility rules, as well as differences in dates to submit claims by and minimum amounts.  Therefore, it can be quite a complex area for manufacturers submitting multiple Member State claims and professional assistance is usually a must.  However, submitting claims is definitely worth considering if the VAT being suffered in the various Member States is significant.

Where businesses are established in the EU but have suffered VAT in other Member States where they are not required to be registered, the EU Eighth Directive allows VAT to be claimed back from other Member States using a standardised procedure.

If you have any queries regarding UK, EU or international VAT, please contact our VAT Manager, Paula Mason by emailing hello@scruttonbland.co.uk or calling 0330 058 6559.

Recent Case Law – “Taking the Biscuit”

Most VAT case law in the Manufacturing sector appears to relate to food and whether the product being manufactured should be zero rated or standard rated.  The VAT rules are extremely complex and if not assessed correctly, can be both reputationally and financially damaging to the business concerned.

One recent case, DuelFuel Nutrition Ltd v HMRC, has resulted in the taxpayer having no option but to sadly close their business.

Background to the Case

The product in this case was a two-in-one solution marketed to sports enthusiasts and consisted of a flapjack and either a cake or a brownie which was packaged together.  The flapjack provided carbohydrates for energy prior to exercising and the cake or brownie provided protein after exercise to rebuild muscle.

The taxpayer heavily researched the VAT treatment of the products and was confident that they should be treated as cakes and therefore zero rated but, to gain certainty, they wrote to HMRC in October 2021 asking for clearance.  HMRC disagreed, stating that the products were confectionery and therefore subject to VAT at 20%.  In their opinion, the products ‘did not dry out like a cake would’.  In the famous Jaffa Cake case, it was this fact that went in the taxpayer’s favour; a Jaffa Cake was held to be a cake and not a chocolate covered biscuit.

Despite appealing directly to HMRC and stating that according to independent lab tests the products did dry out, HMRC upheld their decision.

First Tier Tribunal

DuelFuel filed an appeal against HMRC’s decision with the First Tier Tribunal.  Even though the Tribunal referred to the independent lab tests and stated that the products ‘tended to dry out when exposed to air’ this did not affect the final judgement.

At the Tribunal, it was first considered if the products were cakes according to VAT legislation.  As there is no statutory definition of cake, the Tribunal adopted a multi-factored test to do this.  This included looking at the nature and description of the products, ingredients used, manufacturing process, size, appearance, taste, texture packaging, marketing and in what circumstances they would be consumed.  The Tribunal concluded that even though the products looked like cakes, the ingredients used in making them, the taste, and the packaging, marketing and pattern of consumption were such that an ordinary person would not consider them cakes.

The taxpayer then argued that if they were not cakes, they could not be considered confectionery either.  Under the legislation, confectionery is defined as “not including cakes or biscuits other than biscuits wholly or partly covered with chocolate or some other product similar in taste and appearance” and a further Note 5 in the legislation states that “confectionery includes chocolates, sweets and biscuits; drained, glace or crystallised fruits; and any item of sweetened prepared food which is normally eaten with the fingers”.  The Tribunal stated that as the products were an ‘item of sweetened prepared food which is normally eaten with the fingers” this was sufficient to classify them as confectionery, but the taxpayer disputed this stating that despite this, the products must be “similar to the other items in Note 5 such as chocolates and sweets”.

The Tribunal therefore relied on another case at the Upper Tribunal (WM Morrison Supermarkets) where it stated Note 5 “deems products with certain attributes … to fall within the confectionery exception” and that the wording in Note 5 “was intended to extend the definition of confectionery beyond its natural meaning”.  The products were therefore deemed to be confectionery using this wider definition in Note 5 and therefore standard rated.

It will be interesting to see how the widening of the definition of confectionery will impact on other similar products being manufactured and the increasing difficulty taxpayers will face in trying to obtain zero rating.

If you would like to speak to our team about a VAT matter, please contact hello@scruttonbland.co.uk or call 0330 058 6559.