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Steve Allen, Director of VAT Solutions (UK) Ltd, reports on a further selection of recent VAT cases.

Steve Allen

Tribunal decides that snacks are potato-based and have to be standard-rated

An interesting case concerning the correct VAT liability of the popular ‘Pringles’ snacks.

HMRC contended that regular Pringles were classed under excepted item 5 of Group 1 of Schedule 8 to the VAT Act 1994 and hence standard-rated. In a separate case Procter & Gamble had successfully argued that Pringles Dippers were not included under the excepted items and were zero-rated. The Tribunal made a point of differentiating regular Pringles from ‘Pringles Dippers’.

The legislation imposes a double test, both parts of which have to be satisfied if a food product is to be standard-rated: (a) whether the product is similar to potato crisps, potato sticks or potato puffs; and (b) whether it is made from the potato, or from potato flour, or potato starch.

The Tribunal held that regular Pringles are a unique product in ingredients, taste, and shape, and so asking whether they are similar to potato crisps as required by test (a) is a difficult task.

In applying the ‘reasonable man test’ in test (a), it was considered that, although in many respects, regular Pringles are different from potato crisps, it was still felt that they were ‘sufficiently similar to satisfy that test that they are indeed similar to potato crisps'.

For test (b), the legislation is silent on the proportion that satisfies that it is made ‘from the potato, or from potato flour, or from potato starch'. In the Pringles Dippers case, the Tribunal said that the test suggested that the product would have to be made wholly (or substantially wholly) from potato. In this Tribunal, it was contended that it must be the case that the draughtsman knew that a potato crisp could not be made entirely from potato, and so test (b) must be applied to products made partly from potato products. Here, the potato flour content is over 40 per cent and it is the largest single ingredient. Accordingly, the Tribunal held that regular Pringles are made from potato flour thus satisfying test (b). As both tests were found to be satisfied, the Tribunal dismissed the appeal and found for HMRC, concluding that regular Pringles are indeed standard rated.

The Tribunal was conscious that it was undesirable for them to come to a different conclusion from the Tribunal in the Pringles Dippers case on the answer to tests (a) and (b), the decision which no doubt encouraged Procter & Gamble to bring this appeal. The principal disagreement with the previous Tribunal is over test (b), and whether the legislation means ‘wholly’ or just ‘partly from’ potato products. Test (a) is a matter of degree, and Pringles Dippers had differences from potato crisps that are not present in Regular Pringles. Nothing which this Tribunal has said affects Pringles Dippers, which are, in any case, outside Excepted Item 5 as not being packaged for consumption without further preparation.

Procter & Gamble UK (VTD 20,205)

Tribunal says fees relating to ‘school absence scheme’ are not education-related

This case was described as a test case for a number of independent fee-paying schools, with the Appellant being represented by a leading QC.

The background is a scheme parents can enter into of their own choice, whereby, in return for an additional payment, the school fees will be refunded in specified circumstances to the extent that the pupil is unable to attend classes (e.g. illness or accidents). The dispute concerns the VAT liability of the additional payment. HMRC had initially accepted the payment as exempt as part of the consideration for the supply of education, but decided in December 2005 that the payment is consideration for a separate standard-rated supply, and duly assessed for tax in the prior three years.

The Chairman commented as follows:

Despite the persuasive nature of the primary case for the School as advanced by Mr Cordara, I am unable to accept his submission that there is in reality a single supply of education of which the provision of the Scheme simply forms part: there is a difference for VAT purposes between the nature of the supply made to parents who avail themselves of the Scheme, and those who do not. Certainly, each group receives an education for their children but those who do join it also receive the separate supply referred to in the last preceding paragraph, which has no effect on that education. I further disagree with Mr Cordara’s contention that any terms concerning fees are an integral part of, and cannot be divorced from, the contract for education: the fees for the Scheme are identified on the School’s invoices and are charged separately from those for education. Whilst the Scheme necessarily relates to the supply of education made by the School, it cannot itself be described as a supply of education. I hold that there are two separate supplies: a supply of education, and a supply of the entitlement to the refund of school fees in prescribed circumstances.

The Chairman subsequently found for HMRC and dismissed the appeal.

Birkdale School, Sheffield (VTD 20,122)