VAT ruling means HMRC misses out on a lot of ‘lolly’

Teacakes and flapjacks have both been unlikely celebrities in the world of VAT disputes, but they have now been knocked off the taxman’s shelf by the humble lolly.

Appeal judges decided Dr Oetker, the maker of the Onken Biopot yog­hurts and frozen pizzas, could zero rate its lolly-making kits, leaving the taxman with a bitter taste in the mouth.

At first sight it may seem trivial, with £95,896 plus interest at stake, but it also brought the long-running dispute between the taxman and big business on what products escape tax back to the fore.

This particular deadlock was over “Choco lolly kits”, which are supplied by Dr Oetker to supermarkets at wholesale level for onward sale.
Dr Oetker snapped up a company called Supercook on 1 January 2008, and since that date Dr Oetker has supplied Supercook’s range of baking products and kits.

The taxman believed that lolly making kits should be rated for standard VAT, and issued an assessment against Supercook in respect of periods September 2005 to December 2007, notifying the company on 11 Sept­ember 2008.

HMRC also issued an assessment to Dr Oetker for £9,007 plus interest in respect of periods March 2008 to August 2008, notifying the company on 23 October 2008. The companies both appealed.

“These kits are variously packaged. We were shown a number of such kits. The kit upon which HMRC made their decision was packaged as Scooby-Doo Choco Lolly Kit. Other similar kits were packaged as Shrek Choco Lolly Kits, Barbie Choco Lolly Kits, Halloween Choc Bat Kits and Princess Sparkle Choco Lolly Kits. The VAT rating for the various kits would be identical, tax judges said.

Judges found that an essential feature of the case was Dr Oetker selling the kits to customers “who are put in a position to make an item
of food which would be zero-rated if bought already manufactured”.

They decided the key features of the transaction, including the packaging a nd general presentation of the kits, make it clear to purchasers, namely supermarket’s cust­omers, that the kits will enable them to make lollies.

“We find that lollies identical in all material respects to those that such consumers will make, not being chocolate, would be zero-rated items if purchased ready-made… We find that the kits are similar to ready-to-mix items sold in supermarkets, such as bake scone mixture or Yorkshire pudding batter mix, which are zero-rated.”

The judges also ordered HMRC to pay Dr Oetker’s costs.

Dr Oetker no longer produces the lolly-making kits.

John Whiting, tax policy director of the CIOT, said: “VAT cases continue to demonstrate how complex and uncertain boundary issues are in this supposedly simple tax – almost 40 years after we were promised a simple VAT, cases like this show we’re still not there. The outcome of this case may well be a chill to the Treasury as they suck on the implications for the amounts of lolly VAT brings in.”

Further reading:

Asda loses 18-month flapjack VAT dispute with the taxman