Once you tax, you can’t stop

Good morning. I’m talking about chips, this morning, but not of the computer variety. Or to be more precise, crisps, which our American and Canadian friends know as chips. (What they call fries, we call chips. But that’s not important right now). Given the great Irish attachment to the potato, and that I’ve teased the Canadians over important cases about margarine, this just has to be blogged.

Procter & Gamble v HMRC [2008] EWHC 1558 (Ch) (Warren J) (Thanks to the Legal Post for highlighting this case).

In the great tradition of cases about teacakes and Jaffa Cakes, not to mention chocolate-covered wafers, this is a dispute about classifications for the purposes of VAT (value-added tax; somewhat similar to sales tax in North America but typically included in the advertised price rather than added on at the counter). In the UK, food is in general zero-rated (i.e. VAT of 0%) but certain kinds of food are standard-rated (VAT of 17.5%). Various foodstuffs and drinkstuffs are standard-rated, such as ice cream and confectionary – you can get the full list here from HMRC (the UK Revenue service). Obviously, from the point of view of the manufacturer, they’d rather their products were zero-rated, as it means the cost to the consumer is less (or they can just put up the prices and still beat their competitors).

So, Pringles are a snack. I actually remember arriving on the Irish market, and found addictive for a while, though I went off them – the tins are great musical instruments though. But what is their VAT classification? They are food – so they could be zero – but if they fit into this category:

Any of the following when packaged for human consumption without further preparation, namely, potato crisps, potato sticks, potato puffs, and similar products made from the potato, or from potato flour, or from potato starch, and savoury food products obtained by the swelling of cereals or cereal products; and salted or roasted nuts other than nuts in shell.

they get the 17.5% rate (By the way, the law is somewhat similar in Ireland, with no relevant differences, though the actual rate is higher, being 21%). To be honest, it was news to me that their potato content is quite low (less than half), but apparently that’s how it is. So off they go to the revenue tribunal and on to the courts..

P&G (makes of ‘Regular Pringles’, which means the ones in the tall tubes, any flavour) have some particularly creative arguments, like:

Regular Pringles are not similar to potato crisps on the ground of regularity of shape, having a shape not found in nature, uniform colouring, texture, taste particularly “mouth melt”. Crisps do not contain non-potato flours as does Pringles. Crisps are not normally packaged in tubes.

Customers do not see Regular Pringles as potato crisps. The ingredients of products in the modern snack market are largely irrelevant to purchasers, as is demonstrated by the labelling requirements.

I think the strongest counter-argument from the tax authorities is that the intention was to classify food like potato crisps as non-zero for policy reasons. But the judge says (perhaps with tongue in junk-filled cheek), in dismissing Revenue’s policy arguments (that the idea of denying the zero rate to potato crisps was an anti-junk food policy):

[The Tribunal below accepted] that in general the intention of Parliament was to standard-rate food that was not purchased primarily for the purpose of nutrition. However, one must be very careful about reading too much into the statutory provisions. It cannot, in my view, be said that the legislation shows a clear policy to tax “junk food”. What difference, one might ask, is there between a turnip crisp and a potato crisp in terms of its “junkiness” or otherwise? One might think that the answer is very little and yet the former is zero-rated and the latter standard rated. It is not difficult to multiply examples of that sort. There are plenty of “junk foods” which do not fall within any of the exceptions from zero-rating for food; there are also examples of healthy foods which are standard rated, for instance freshly squeezed orange juice available in supermarkets which falls within excepted item 4.

Indeed, extracted from the judgement (summarised by me, actual listing in appendix to judgement), we can see that Pringle-buyers are also likely to buy other zero-rated products such as KP Skips (no longer with potato ingredients), Doritos, Quaker Snack-a-Jacks, Jacobs Twiglets and Mini Cheddars (biscuits) or standard-rated products such as Monster Munch (no potatoes but content made from “swelling cereal” which attracts standard rate); McCoys (conventional potato crisps); KP Hula Hoops (because of potato flour); Walkers’ Quavers (potato flour); Walkers’ Potato Heads (with actual potato). What an odd line to draw. That said, there does appear to be some difficulties with the sources and the judge finds himself unable to draw upon the drafting context all that easily. It’s more a pointer to the out-of-date law than to a judicial failure, I think.

Anyway, a few hundred paragraphs later, we discover that Pringles are not potato crisps for VAT purposes, and therefore Pringles get the zero rate. Which doesn’t seem quite right as a matter of policy, though there are good arguments on interpretation and construction that support the decision.

We even get into the blend of law, philosophy and how to cook an egg, the judge saying:

Method of manufacture (in particular cooking) is also relevant not because of the similarity or dissimilarity of the process, but because of the result it has on the product. Care needs to be taken in how account is taken of this. A fried egg may be said to be dissimilar from a scrambled egg and the difference in cooking method may be pointed out as a dissimilarity. But the reality is that it is not the dissimilarity in the cooking as a process which is relevant, but the result that the different method of cooking has on the egg so that the fried egg is not similar to the scrambled egg.

Thanks, Your Honour. And thanks, too, for not making any potato famine jokes…

3 thoughts on “Once you tax, you can’t stop

  1. The teacakes litigation is over! Eventually! After more than 13 years! See Marks and Spencer plc (Appellants) v Her Majesty’s Commissioners of Customs and Excise (Respondents) [2009] UKHL 8 (3 February 2009). The matter had been referred to the ECJ twice, and had returned to the House of Lords after the second reference. Lord Walker of Gestingthorpe concluded his speech as follows:

    The Court of Justice’s answers to the third and fifth questions did therefore raise the possibility of further issues having to be decided by the national court. But the Commissioners have, after thirteen years of litigation, decided that they do not wish to pursue these matters. The House can therefore dispose of the matter by allowing the appeal from the order dated 21 October 2003 of the Court of Appeal, and inviting submissions as to costs (if necessary) within fourteen days.

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