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VAT Measures Curtailed

News has just broken that the 2012 Budget proposals to charge 20% VAT on freshly cooked produce have been curtailed. The so-called “pasty tax” would originally have applied to most freshly cooked foods that were sold above ambient temperature but reports indicate that it will now apply only to food that is served, or advertised, as hot to order, or kept warm in cabinets or supplied in heat-retaining packaging.

It follows that food which is served hot simply because it was recently cooked, and where no effort has been made to keep it warm, should now escape the 20% charge.

The news will be welcomed by high street hot food vendors such as Greggs, which led a high profile campaign against the levy since its announcement in March.

The Nonsense of "Ambient Temperature"

The original proposal was that any food (except bread) which was served above ‘ambient temperature’ would be subject to VAT at the standard rate. It was justified on the basis that it would simplify the rules for VAT on food and ‘remove anomalies’ but was roundly criticised as impractical since it would have meant that the VAT status of pasties, and similar products that could be eaten hot or cold, would have changed through the day, depending on when cooked and how warm a day it was. (See VAT on Pasties and Other Freshly Baked Products: The Fight Grumbles On )

It seems that despite the potentially very serious consequences for high street bakers, Mr. Osborne’s department preferred to wait until MPs were no longer sitting before releasing news of this change of heart in a letter to the Treasury Select Committee. Mr. Osborne’s own position on the matter has done little to endear him to the public – he was reported at one stage to have suggested that people could avoid paying extra for their pies and pasties easily enough by buying them cold.

Will the Changes Work?

At first blush, the new proposals effectively draw a line between cooked foods being kept warm by any means, and those left to cool naturally. As such, they may well serve to address the anomalies which did indeed exist and which meant that apparently similar foodstuffs were subject to VAT in one outlet, but VAT-free in another. Greggs and similar businesses could have cause to be doubly happy, if the revised proposals become law.

Or is the Damage Already Done?

Reports indicate that the Treasury had expected to raise VAT revenue by £110m from the original proposal and will now have to settle for £70m. It could be argued that if the Treasury had been able to come up with sensible suggestions first time around then they wouldn’t now have a £40m hole in their Budget. Or even that it’s £40m they should never have tried to “raise” in the first place.  Two statements made in the original Tax Information and Impact Note (“TIIN”) spring to mind: (emphasis added)

“Economic Impact - This measure might lead to a small increase in the price of hot food products which would lead to a fall in demand.”

A 20% increase in selling price would not be ‘small’ and so the inference to draw is that it was the retail bakers who were expected to bear the brunt of the VAT hike.

“Other Impacts - Small firms impact test: The measure may impact on small businesses that sell affected products, however there is no scope for different treatment of the sale of hot takeaway food by small businesses.” 

And yet just two months later, it seems that HM Treasury has now been able to find that very scope. Bravo.

While the government’s latest volte face (volte farce might be better) would seem to be a “victory for common sense”, there has been little mention so far of that other blight on Budget 2012, the withdrawal of “Age Allowance” for those aged 65 and over. Here the corresponding TIIN plumbed fresh depths, with the line “There will be no cash losers from this measure”. And yet according to that same TIIN, the government expected soon to be raking in over £1Billion a year from the change – an amount which dwarfs the figures relating to VAT and hot foods.

Too Little, Too Late

It may be that the government has figured it simply cannot back down over the “granny tax” as it’s too large an amount to lose. The alternate argument is of course that it’s too large an amount for older people to be asked to give up.  With the general public’s attention diverted to the relatively less expensive issue of hot or cold pies, it is possible that Mr Osborne believes that he might yet get away with the “granny tax” – a political sleight of hand, so to speak. If he does, then he almost certainly misdirects himself. The so-called “grey vote” may not shout loudly but it doesn’t need to: it is vast. Three proverbs with which those slighted over-65s will be more than passingly familiar:

1. Patience is a virtue,
2. He who laughs last laughs longest, and
3. Revenge is a dish best served ...cold