It is a question to challenge some of the finest legal minds in the land: when is a cake not a cake, and a biscuit not a biscuit?
Two judges solved it last week by letting their taste buds decide – after testing a plateful of Snowballs, a chocolate and coconut covered marshmallow treat that has been popular with the sweet-toothed masses for generations.
Verdict: Snowballs are cakes. And that means the snack’s manufacturers are in line for a £2.8million rebate from the taxman after a lengthy legal wrangle over whether Snowballs should attract VAT (which biscuits do) or be zero-rated (as a cake).
VAT can be very complicated as highlighted in the case of Jaffa Cakes – Cakes or Biscuits?
The leading case on the borderline is that concerning Jaffa cakes: United Biscuits(LON/91/0160). Customs and Excise had accepted since the start of VAT that Jaffa cakes were zero-rated as cakes, but always had misgivings about whether this was correct. Following a review, the department reversed its view of the liability. Jaffa cakes were then ruled to be biscuits partly covered in chocolate and standard-rated: United Biscuits (as McVities, one of the largest manufacturers of Jaffa cakes) appealed against this decision. The Tribunal listed the factors it considered in coming to a decision as follows.
The product’s name was a minor consideration.
Ingredients:Cake can be made of widely differing ingredients, but Jaffa cakes were made of an egg, flour, and sugar mixture which was aerated on cooking and was the same as a traditional sponge cake. It was a thin batter rather than the thicker dough expected for a biscuit texture.
Cake would be expected to be soft and friable; biscuit would be expected to be crisp and able to be snapped. Jaffa cakes had the texture of sponge cake.
Size: Jaffa cakes were in size more like biscuits than cakes.
Packaging: Jaffa cakes were sold in packages more similar to biscuits than cakes.
Marketing: Jaffa cakes were generally displayed for sale with biscuits rather than cakes.
On going stale, a Jaffa cake goes hard like a cake rather than soft like a biscuit.
Jaffa cakes are presented as a snack, eaten with the fingers, whereas a cake may be more often expected to be eaten with a fork. They also appeal to children, who could eat one in a few mouthfuls rather like a sweet.
The sponge part of a Jaffa cake is a substantial part of the product in terms of bulk and texture when eaten.
Taking all these factors into account, Jaffa cakes had characteristics of both cakes and biscuits, but the tribunal thought they had enough characteristics of cakes to be accepted as such, and they were therefore zero-rated.
Changes to UK legislation relating to prompt payment discounts will take effect in relation to supplies made on or after 1 April 2015. From that date, the way many businesses account for VAT when offering prompt payment discounts will change.
Currently businesses can issue invoices that give details of the amount of the prompt payment discount and its terms and show the VAT due calculated on the discounted price. If the discount is not taken up HMRC has not required businesses to alter the amount of VAT invoiced and accounted for.
After the change businesses must account for VAT on the consideration they actually recieve.
HMRC are currently consulting on the implementation of this legislation and the consultation ends on 9th September.
In many ways its surprising that it hasn’t always been the case that you pay VAT on the consideration!