To a casual observer, VAT is understood to be a tax levied on the goods that they buy, such as restaurant meals, consumer electronics or alcoholic drinks. While this assumption is true in many cases, the reality is actually considerably more complex.
Some goods and services are exempt from VAT, with examples including insurance, charity fundraising and certain medical treatments. However, the real complications arise when it is less clear-cut if a product falls into an exempt category or not. It is in these situations that technical VAT disputes can occur, and where organisations need to fully understand the intricacies of the law in order to navigate these issues successfully.
Not just Jaffa Cakes
Probably the most high-profile example of a technical VAT dispute is the case brought by McVities in 1991 regarding its Jaffa Cakes product.
In the UK, VAT is payable on chocolate-covered biscuits, but not chocolate-covered cakes. HMRC had previously ruled that the snacks were biscuits due to their size, shape and the fact that consumers often ate them in place of biscuits. However, McVities successfully argued that the product should be considered a cake, meaning VAT does not need to be paid.
This case provides an interesting introduction to the nuances of VAT disputes for legal professionals and casual observers alike. Importantly though, it is not the only example of such an event. In truth, these disputes are more common than many may think, so knowledge of the many different instances where they can occur is essential.
More food-related issues
Jaffa Cakes aren’t the only food that has experienced legal wrangles over its VAT status. In 2022, the First-Tier Tax Tribunal ruled that Innovative Bites Ltd did not have to pay a demand for almost £500,000 in VAT, as its Mega Marshmallows product was not deemed to be confectionery (which is normally subject to VAT). In April 2024, an appeal brought by HMRC against the decision was refused.
The opposite ruling was made in a dispute between HMRC and Walkers in January 2024, with the snack manufacturer claiming that its Sensations Poppadoms should not be considered potato crisps, and therefore should not be subject to VAT. In this case, judges ruled in favour of HMRC, concluding that the product is similar enough to standard potato crisps to be considered in the same category for VAT purposes.
In the above examples, both sides attempted to use interpretations of the law to their advantage, with each case leading to different outcomes. In the food industry alone, it clearly pays to know the ins and outs of tax law if a case you are making is to be successful.
VAT disputes in construction
The realm of technical VAT disputes is not limited purely to disagreements over food classification. The construction of new-build properties also has potential for confusion and misunderstanding on both sides.
Labour or materials on new builds can be zero-rated for VAT, but only if the project fulfils specific criteria. The property must be built entirely from scratch, so cannot be an annexe built onto an existing house or building. Any existing buildings on the site must be demolished completely to ground level, unless you are extending a building to create a new house or flat that can be used and sold independently of any other property.
As with the food-related disputes, these rules are open to interpretation, and every dispute is different. Developers could fall foul of the regulations without realising, while HMRC could erroneously claim that VAT should be paid when a Tax Tribunal may rule otherwise upon detailed examination. In every case, having the right legal representation is key.
Mobile plan bundles: the Lycamobile case
At the end of July 2024, Lycamobile lost a VAT-related dispute with HMRC following a Tax Tribunal ruling. The telecoms firm had argued that it did not need to pay VAT unless customers used all the data, call and text allowances in the bundles sold to them, claiming that the bundles represented a type of multi-purpose voucher or non-taxable payment for credits (which are normally not subject to UK VAT).
Despite this argument, the Tax Tribunal ruled that VAT was chargeable at the point of sale, with the aggregate amount of VAT in dispute between Lycamobile and HMRC amounting to £51 million. This subsequently led to a winding-up order being issued by HMRC, demonstrating the serious consequences of being on the wrong side of such a decision.
Electric vehicle charging: the next battleground?
Looking to the future, electric vehicle (EV) charging is an area where VAT disputes could become commonplace, especially as the number of EVs on UK roads continues to grow.
Currently, for example, employees are unable to claim back VAT if they use an EV for work purposes and charge it at home, even though they can make such a claim on mileage made using a petrol or diesel car. Further, it is not yet clear the rate of VAT that should apply on electricity bought through public charging points, and who is liable to account for VAT in these instances.
So far, communication from HMRC on these issues has been inconsistent, so it is likely we will see a number of disputes arise in this area in the coming years. Businesses and individuals likely to be affected should be prepared.
Cutting through the complexity
While legal disputes over snacks might seem comical or trivial on the surface, they help shine a light on what is a hugely complicated but important area of UK law. The fact these disputes extend into many other industries shows that any business owner or individual dealing with VAT matters must always be ready to face an inquiry from HMRC.
The sensible approach is always to seek appropriate legal advice, as this is how those involved in a dispute can achieve the best possible outcome.
Author Hamraj Kang, Founder and Senior Partner at KANGS Solicitors has over 20 years of experience in complex criminal, fraud and tax disputes litigation issues. He is one of only two solicitors in England & Wales ranked as a ‘Star Individual’ in the Chambers UK Directory for his work in the field of financial crime and fraud.