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VALUE ADDED TAX — zero-rating — food product designed for allergy sufferers — presented as a bar containing cereals and fruits — whether properly categorised as cake — no — whether product "sweetened" — no — product nevertheless categorised as confectionery and standard-rated — VAT Act 1994, s 30, Sch 8 Group 1, Item 1, Excepted Item 2, Note (5) — appeal dismissed
MANCHESTER TRIBUNAL CENTRE
BELLS OF LAZONBY LIMITED Appellant
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THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS Respondents
Tribunal: Colin Bishopp (Chairman)
Kathleen Ramm FCA
Sitting in public in North Shields on 10 October 2007
Nigel Gibbon, solicitor, for the Appellant
James Puzey, counsel, instructed by the Solicitor and General Counsel for HM Revenue and Customs for the Respondents
© CROWN COPYRIGHT 2007
DECISION
- The combined effect of section 30 of, and Item 1 of Group 1 of Schedule 8 to, the Value Added Tax Act 1994 is to zero-rate "[f]ood of a kind used for human consumption". That effect is, however, subject to exceptions. In essence, the legislation seeks to zero-rate staple foods, while subjecting luxury foods, snacks and the like, as well as food supplied in the course of catering, to VAT at the standard-rate. We are required in this appeal to determine whether a food item manufactured by the Appellant is zero-rated, or falls within one of the exceptions, with the consequence that it is standard-rated. Not surprisingly, the Appellant maintains that it is zero-rated, and this appeal has been brought against the Commissioners' ruling, set out in a letter of 1 December 2006, to the effect that it must be treated as standard-rated.
- Although there have been some amendments to the relevant legislation over the years, those amendments have not affected its structure, which is essentially the same as that used in the days of purchase tax, superseded by VAT nearly 35 years ago. In the meantime food technology has advanced considerably and consumer tastes have changed. The range of products which consumers may buy is now far more extensive than that available in the early 1970s, and the placing of many of the newer products on sale within the legislation is not always obvious. The product with which we are concerned is of this kind.
- It is manufactured by the Appellant, Bells of Lazonby Limited, which holds itself out as (and we accept it to be) a high quality baker, and is sold by Sainsbury's as part of its "Freefrom" range, designed for purchasers who suffer from various allergies. Those relevant in this case are gluten, wheat and dairy allergies: the product is aimed particularly, though not exclusively, at coeliacs. It is an "own-brand" product, and the Appellant's name does not appear on the packaging.
- The box in which the product is sold lists as its ingredients: "Golden syrup (25%), puffed rice (9%), concentrated apple juice, sultanas (8%), coconut, dates (7%), raisins (6%), cornflakes, buckwheat flakes, hazelnuts (4%), apricots (4%), pumpkin seeds (2%), brown rice flour and flax seeds". More prominently, on the front of the box, its contents are described as "Fruit, nut and seed bars", and, in smaller print, "Puffed rice and syrup bars with sultanas, dates, raisins, apricots, hazelnuts and pumpkin seeds". The fact that the product is gluten, wheat and dairy free is indicated prominently on the front, and is repeated on two sides of the box. The box also carries pictures of the contents.
- We were asked to view a video recording of the manufacturing process. It showed, and the Appellant's managing director Michael Bell confirmed in his evidence, that the ingredients are mixed together mechanically and the mixture is then placed manually, in measured quantities, into baking trays. It is spread, also manually, so as to be evenly distributed in the tray, which then passes through an oven at a prescribed temperature, and for a prescribed time. After baking the product is cut mechanically into bars, approximately 90 mm long, 30 mm wide and 20 mm thick, each individually wrapped in cellophane; the wrapped bars are then packed for sale in boxes of five. They are accurately depicted on the box. Each bar reveals, on its uncut sides, various cereal grains and fruits; because of the cutting the contents are less readily identified from inspection of the edges, but close examination shows that the composition of the bars is consistent throughout. To the taste, the product is sweet, though by no means excessively so, and one can discern the presence of cereals and fruit, though we think it would require a trained palate to identify, from taste alone, which cereals and fruits are included. The product is chewy, with some similarity to a conventional flapjack in texture, though it is noticeably coarser. We should perhaps add that the Appellant makes gluten and dairy-free "flapjack style slices" which are also sold as part of Sainsbury's Freefrom range.
- The products which are excluded from the general effect of Item 1 are set out in a list of "Excepted items". Only Item 2 of that list is relevant here; it is as follows:
"Confectionery, not including cakes or biscuits other than biscuits wholly or partly covered with chocolate or some product similar in taste and appearance."
- Note (5) to the Group provides that:
"… 'confectionery' includes chocolates, sweets and biscuits; drained, glacé or crystallised fruits; and any item of sweetened prepared food which is normally eaten with the fingers."
We take it, from Item 2, that "cake" comes within the general rubric of confectionery, but is not mentioned within Note (5) because, whatever its sweetness, and whether or not it is covered with chocolate, it is zero-rated.
- The Appellant, through its solicitor Nigel Gibbon, argued first that the product should be regarded as a cake; his alternative argument was that it did not fall within the definition of confectionery—thus the general exception of confectionery from zero-rating was of no relevance. For the Commissioners, James Puzey of counsel argued that the product did indeed come within the definition of confectionery, and could not properly be described as a cake; thus it was necessarily excepted from zero-rating.
- The legislation does not seek to define "cake", and the draftsman must, therefore, be taken to have used the word with its ordinary meaning. Examination of a dictionary, too, yields no precise definition though it is evident that in its ordinary, culinary, context the word implies a finished product the principal ingredient of which is likely to be flour or a similar material, and that baking is a usual, if not always necessary, part of the manufacturing process. Indeed, Mr Bell told us, without recourse to a dictionary, that his understanding was in those terms, though he too could not point to a definition universally recognised as such within the baking trade.
- Mr Gibbon emphasised that the Commissioners, in their published guidance—Public Notice 701/14, of May 2002—adopted a liberal meaning. According to that notice, at paragraph 3.4, zero-rating applies not only to those items which are incontrovertibly cakes, such as sponges and fruit cakes, but also to slab gingerbread, flapjacks, marshmallow teacakes, "crunch cakes" (described as "corn flakes or any other breakfast cereal products coated in chocolate or carob and pressed into brittle flat cakes"), caramel or "millionaire's" shortcake and lebkuchen. Flapjacks are contrasted with standard-rated "cereal, muesli and similar bars with honey or other added sweetening matter." While accepting that the statutory test was not whether the Appellant's product was a flapjack but whether it was a cake, Mr Gibbon argued that, in the interests of consistency, a product such as that with which we are concerned, which closely (as he contended) resembled a flapjack should be treated in the same way and not as the dissimilar cereal bar: it had no added sweetening matter, which the Public Notice itself treated as a material factor. We observe in passing that zero-rated "crunch cakes" are contrasted in the Notice with standard-rated Florentines.
- Mr Puzey drew our attention to the Commissioners' internal—but publicly available—guidance V1-7, Chapter 1, Food, in which there appears the following passage:
"8.5.1 Flapjacks and cereal bars
It is our policy that there is a difference between flapjacks and cereal bars. This policy development arose because, at the inception of VAT, flapjacks were widely accepted as cakes and cereal bars were not widely available, if at all. Flapjacks were accepted as being a 'cake' because of common perception, not because of any specific reasoning behind such factors as their recipe, ingredients or the manufacturing process.
However, since that time, the difference between flapjacks and cereal bars has narrowed due to the development of cereal bars and their current proliferation on the market. The amendment to the law in 1988 [that is, the addition of the words following the second semicolon in what is now Note (5)] was made to bring products, particularly cereal bars, within the scope of the standard rate by defining confectionery as 'sweetened items of prepared food normally eaten with the fingers'. As a result cereal bars are standard-rated as long as they are sweetened.
The problem that has arisen is that a flapjack is, by default, accepted as a cake but should probably now be categorized as a confectionery item, and therefore standard-rated, within the legislation.
- 5.2 VAT Treatment of Flapjacks
For the above reasons we narrowly define what is a 'flapjack' as it is intended to only apply to that product as it was at the inception of VAT. As such, we allow the zero-rating of standard flapjacks along with minor variations e.g. when ingredients like dried fruit, raisins, chocolate chips etc are added. We view the addition of toppings similarly."
- We have referred to the Commissioners' guidance as it throws some light on the manner in which the Commissioners themselves approach the task of classification, and because, in the interests of consistency, we should not discard it lightly. The primary question we must answer nevertheless remains, namely whether the Appellant's product is properly to be regarded as a cake. That it has some similarity to a flapjack is not determinative, particularly so if the Commissioners are right in thinking, as their guidance indicates, that including flapjacks within the category of cakes requires a generous interpretation of the meaning of "cake". We should add for completeness (Mr Gibbon did not suggest the contrary) that we also accept that paragraph 4.4 of Public Notice 701/14 is correct in stating that the mere fact that a product is designed for those with allergies or other food sensitivities is not a reason for zero-rating its supply; the legislation does not distinguish such products and they are, therefore, to be treated in the same way as similar products which are not so designed.
- We were taken by the parties' representatives to a number of other decisions of this tribunal and of the courts in which confectionery, or supposed confectionery, products have been considered, but we are conscious of the warning given by Lord Woolf MR in Customs and Excise Commissioners v Ferrero UK Ltd [1997] STC 881 at 885 that one should not elevate findings of fact in one case into statements of principle to be applied in others. Instead, if we are right in our view that the word "cake" is intended to bear its ordinary meaning in the context in which it used, we should ask ourselves whether an ordinary person, aware of that context, would consider the Appellant's product to be a cake: that was the approach endorsed by the Court of Appeal in Ferrero. We do not think such a person would limit the term to what might be regarded as a conventional, or traditional, cake such as the sponge or fruit cake mentioned in the Public Notice, but even adopting a fairly liberal interpretation we doubt if he would class this product as a cake. We share the Commissioners' evident view that flapjacks (that is, a product, in its most familiar form, usually composed of oats held together by fat and syrup) are, at best, at the borderline; they may be eaten instead of cake, and at the same time of day, but in our view it is unlikely that an ordinary person would consider that a flapjack was merely a variety of cake—he would, we think, consider it a distinct, even if in some respects similar, product. That conclusion is reinforced by the fact that the box in which the product is sold describes it as a bar, and not as a cake; the word "cake" does not appear anywhere on the box. Though by no means conclusive, the manner in which its supplier (even if that supplier is the retailer rather than the manufacturer) describes a product must be some indication of its true nature.
- For his second argument, to which we now come, Mr Gibbon concentrated on the fact, as he contended, that this was not a sweetened product. He accepted that it was expected that it would normally be eaten with the fingers and that, for his argument to succeed, it was necessary to satisfy us that the syrup content of the product did not amount to sweetening. For the Commissioners, Mr Puzey pointed out that the definition of confectionery in Note (5) was not exhaustive, so that we should not conclude that this was a zero-rated product merely because it was not clearly included within the definition set out in the Note; and that, as this tribunal has pointed out on previous occasions, it is the fact of the sweetening, rather than the intention to sweeten, which determines whether the product in question is to be considered to be "sweetened".
- We have already commented that the product is not conspicuously sweet. Mr Bell told us the syrup used is not (despite what is said in the list of ingredients) golden syrup of the kind readily available to a retail purchaser, but a variant of it, ragus syrup. He provided samples of ordinary golden syrup and of ragus syrup, both of which we tasted. We found that ordinary golden syrup is much sweeter than ragus syrup. Mr Bell told us that ragus syrup had been used because Sainsbury's particularly required a product which was not very sweet. Similarly, the recipe included no added fat, because Sainsbury's wanted a "healthy" product. However, he said, it was impossible to make a product of this kind without an ingredient which held the remaining ingredients together. Of the ingredients used in this product, syrup and apple juice had the potential for holding the remainder together, but the only combination which worked satisfactorily was the one actually used. He showed us samples of what the Appellant's bakery had produced using different combinations of syrup and apple juice and we could see clearly that none led to a satisfactory result. It is, of course, possible that combinations which Mr Bell had not tried might do so, but the conclusion we draw is that the syrup is, if not absolutely essential, the most suitable ingredient for the purpose. We also accept that syrup or sugar in some other form is a common ingredient of cake, biscuits and other items which are zero-rated and are sweet to the taste; sweetness alone is not the test.
- In Organix Brands plc (2005, Decision 19134) the tribunal took the view that it was not appropriate to determine whether a product was sweetened by taking the ingredients other than the sugar or other sweetening ingredient, and comparing the sweetness of that mixture with the finished product in order to ascertain whether the latter was sweeter than the former. We agree with that approach and, like the tribunal in Organix, we are satisfied that an ingredient which is an integral part of the recipe cannot be regarded as something which has sweetened the product; without it the product would be something else. In this case, as the samples produced by Mr Bell showed, without the syrup one would be left with only loose ingredients.
- At paragraph 3 of its decision the Organix tribunal, referring to the words in Note (5), "any item of sweetened prepared food which is normally eaten with the fingers", it said "They clearly extend the definition of 'confectionery' beyond its ordinary meaning". We agree with that comment and in so doing we accept Mr Puzey's argument that the definition of confectionery in Note (5) is not exhaustive: the purpose of the Note is not to limit confectionery, as the term is to be construed for the purpose of the legislation, to those items specifically mentioned, but to bring within it items which might otherwise fall outside it. However, the Organix tribunal, despite the comment we have set out, went on to conclude that the product with which it was concerned was not confectionery because it was not sweetened.
- We disagree with that approach, and instead adopt the view of Sir Andrew Morritt C in Premier Foods (Holdings) Ltd v Revenue and Customs Commissioners [2007] All ER (D) 363, a judgment given after this appeal was heard, that inherent (as distinct from added) sweetness is not incompatible with the classification of a product as confectionery. The difficulty for the Appellant, in our view, is that there is no other description which fits this product. Regardless of the words of Note (5), the most suitable description of this product is confectionery, giving that word its ordinary English meaning. The informed ordinary person, asked to classify this product after having discarded the description "cake", would struggle to find any appropriate term other than "confectionery". Thus it falls within Excepted Item 2 and is correspondingly standard-rated. The fact that it is so treated while cakes are zero-rated is one of the unreal results at which the tribunal hinted in Procter & Gamble UK (2007, Decision 20205) at paragraph 9. Examination of the two lists, of zero-rated and standard-rated products, set out in the Public Notice shows little logic in the distinctions between the two categories. Why, to take the example we have already mentioned, "crunch cakes" should be zero-rated while Florentines are standard-rated is a mystery which we are, fortunately, not required to solve.
- We are satisfied that the Appellant's product is properly classed as confectionery and that the appeal must therefore be dismissed. Mr Puzey did not seek a direction in respect of costs.
COLIN BISHOPP
CHAIRMAN
Release Date: 4 December 2007
MAN/06/0916
