20604

ZERO-RATING – EXCEPTED ITEM 5 – FOOD – Whether savoury jumbo Snack a Jacks when packaged for human consumption without further preparation – yes – Whether savoury mini and jumbo Snack a Jacks obtained by the swelling of cereals or cereal  products – Yes – Appeal Dismissed. 

LONDON TRIBUNAL CENTRE

	QUAKER TRADING LIMITED  	Appellant

	- and -

	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

			Tribunal: MICHAEL TILDESLEY OBE	 (Chairman)
				      SANDI O’NEILL                           (Member)	  

Sitting in public in London on 10 and 11 December  2007

Roderick Cordera QC and Jessica Manse counsel instructed by Pricewaterhouse Coopers Legal LLP for the Appellant 

Owain Thomas, counsel instructed by the Solicitor for HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2008

DECISION
The Appeal
1.	The Appellant appealed against the Respondents’ decision dated 20 July 2004 and 4 February 2005, ruling that the mini and jumbo savoury Snack a Jacks were standard rated for VAT purposes.
2.	Snack a Jacks was a food product range of rice and corn cakes which were sold in two sizes: the mini, three centimetres in diameter, and the jumbo, ten centimetres in diameter. The cakes were retailed with sweet and savoury flavourings. The dispute concerned the VAT treatment of the savoury range of mini and jumbo Snack a Jacks.
The Dispute
3.	The central issue in dispute was whether the mini and jumbo savoury Snack a Jacks were savoury products that were obtained by the swelling of cereals or cereal products and packaged for human consumption without further preparation. If yes: standard rated. If no: zero-rated.
4.	Two issues underpinned the central dispute. The first was whether the products were obtained from the swelling of cereals which applied to both mini and jumbo savoury Snack a Jacks. The second was whether the jumbo savoury Snack a Jacks were packaged for human consumption without further preparation. Thus if they were not made from the swelling of cereals, zero rating would apply to the mini and jumbo savoury Snack a Jacks. If the Appellant failed on the first issue but succeeded on the second issue zero-rating would be restricted to the jumbo savoury Snack a Jacks.
5.	The Appellant conceded at the hearing, confirmed by letter dated 18 December 2007, that the second issue dealing with packaging without further preparation applied to supplies of jumbo savoury Snack a Jacks from May 2004 when the revised packaging for jumbo products was introduced.  The Respondents consented to the Appellant’s course of action with the proviso that the Appeal be dismissed in respect of the second argument for jumbo savoury Snack a Jacks retailed under the old packaging.
6.	Within the second issue the Appellant raised a subsidiary argument of apportionment between zero-rated and standard rated supplies if it failed on the substantive issue of whether the jumbo savoury Snack a Jacks were packaged for human consumption without further preparation. According to the Appellant apportionment would be appropriate if we decided that the intention of the legislation was to tax goods that were in fact eaten without further preparation but not to tax goods that were eaten with further preparation.
The Law
7.	The law relating to the zero-rating of food is found in group 1 schedule 8 of the VATA 1994 which provides so far as is relevant to this Appeal:
“The supply of anything comprised in the general items set out below, except –
a)	a supply in the course of catering; and
b)	a supply of anything comprised in any of the excepted items set out below, unless it is also comprised in any of the items overriding the exceptions set out below which relates to that excepted item.
General items
Item No.
1.	Food of a kind used for human consumption.

Excepted items
Item No.
5.	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”.

General Principles dealing with the Construction of the Zero Rating Provisions for Food
8.	Article 28.2 of the Sixth Directive permits Member States to maintain  zero or reduced rate provisions provided the requirements of Article 17 of the Second Directive are met, namely:
“…. Provide for reduced rates or even exemptions with refund, if appropriate, of the tax paid at the preceding stage, where the total incidence of such measures does not exceed that of the reliefs applied under the present system. Such measures may only be taken for clearly defined social reasons and for the benefit of the final consumer, and may not remain in force after the abolition of tax on importation and the remission of tax on exportation in trade between Member States”.
9.	In view of the requirement of clearly defined social reasons for zero rating, the Appellant contended that it was vital to identify the underlying rationale for group 1 schedule 8 as a whole and specifically Excepted Item 5 when construing the provisions in relation to this Appeal. The rationale for group 1 as a whole was the zero-rating of supplies of food of a kind used for human consumption. According to the Appellant the purpose of enacting Excepted Item 5 was to exclude street food, bar food and food eaten on the move from the benefit of zero rating. 
10.	 The Respondents cautioned against seeking an underlying rationale, in particular for Excepted Item 5. In their view such an exercise would be fruitless in the context of legislation which adopted an approach of making lists of foodstuffs which were zero rated and those which were not. The boundaries were drawn by the legislation rather than by precise policy considerations. According to the Respondents attempts have been made in the past to find unifying policy themes underlying the provisions dealing with food but without success.
11.	Both parties agreed on the general principle of interpretation that exemptions from VAT which included zero rating should be construed strictly but not restrictively. However, the particular provision which was the focus of this Appeal, Excepted Item 5, was an exception to the exemption and fell within the normal rule that VAT was charged on all supplies. In those circumstances a strict construction of  the provisions of Excepted Item 5 did not apply (Elizabeth Blasi v Finazament Munchen [1998] ECR 1 – 481 at paragraph 19).
12.	The principal guidance from the Higher Courts on the approach to issues concerning the zero rating of food was found in  CCE v Quaker Oats [1987] STC 683 and in  CCE v Ferrero UK Ltd [1997] STC 881. The Appellant drew the following principles:
(1)	The relevant factors for determining whether particular foodstuffs fell within the relevant statutory provision were ingredients, manufacturing process, appearance and taste, and marketing.
(2)	Where the relevant statutory concept was similar to another statutory concept, it was important to identify the factors that determined the similarities.
(3)	The words in statute must be given their ordinary meaning, as applied by the ordinary reasonable man.
(4)	The Tribunal should be cautious about drawing principles of general application from other Tribunal cases dealing with different products.
13.	The Respondents summed up the guidance from the Court of Appeal in Ferrero UK Ltd as: setting out the statutory test, finding the facts and deciding whether the product fulfilled the statutory test or not. 
The Hearing
14.	We heard evidence from Jonathan Goldstone, Vice President of the Walkers Business Unit of PepsiCo UK and Peter Ian Usher, Technical Brand Manager of PepsiCo  UK.  Mr Goldstone supplied commercial and marketing evidence on Snack a Jacks, whilst Mr Usher provided the technical manufacturing evidence on the product. We received in evidence an agreed bundle of documents. A contemporaneous record of the proceedings was kept by a stenographer.
15.	A selection of mini and jumbo savoury Snack a Jacks with and without toppings were sampled by the Tribunal. The Appellant exhibited 56 products before the Tribunal, of which five were Snack a Jacks and 51 were said by the Appellant to be competing products.
Discussion
16.	We followed the approach as laid down by the Court of Appeal in Ferrero UK Ltd  which was summed up by the Respondents as: setting out the statutory test, finding the facts and deciding whether the product fulfilled  the statutory test or not. 
17.	We have decided in our reasons to deal with the second disputed issue first, whether the jumbo savoury Snack a Jacks were packaged for human consumption without further preparation because that issue involved the wider principles of construction raised by the Appellant.
18.	We took into account our observations of the product which could be justified on objective grounds. We ignored our subjective taste preferences between the un-topped and topped product.
19.	Topping the product involved adding a range of food products on top of the jumbo Snack a Jacks before consumption. The Respondents did not contest that topping constituted further preparation. 
20.	There appeared to be no dispute about whether the mini and jumbo savoury Snack a Jacks were savoury. However, for the avoidance of doubt we set out below our findings of fact on the nature of the product. 
The Products
21.	Snack a Jacks was a food product range of rice and corn cakes which were sold in two sizes: the mini, three centimetres in diameter, and the jumbo, ten centimetres in diameter. 
22.	Snack a Jacks were light with a bumpy texture. The mini had the physical appearance of a crisp or prawn cracker. The jumbo was round with the appearance of a thick large uneven biscuit. Both mini and jumbo Snack a Jacks were edible on their own.
23.	The individual cereal ingredients of Snack a Jacks were identifiable in the final product. The areas of yellow represented the corn grits with the white areas, the rice grains or pellets
24.	The mini savoury Snack a Jacks came in a range of flavours: cheese, barbeque, prawn cocktail, roast chicken (now deleted from the product range), sour cream and chive, salt and vinegar, and cheese and onion. The flavourings for the jumbo savoury range were barbeque and cheese. A sour cream and chive jumbo variety was launched around 2005 but without success.
25.	The finished product specification for mini and jumbo savoury Snack a Jacks contained significant flavouring compounds by weight, nine to twelve per cent of the final product weight for cheese and 13 per cent for barbeque. 
26.	We are satisfied that the flavours for the minis and jumbos fell within the ordinary meaning of savoury, as salty and or spicy. We find that mini and jumbo savoury Snack a Jacks with substantial savoury flavouring components constituted savoury products within the meaning of Excepted Item 5.
Disputed Issue: Whether the jumbo savoury Snack a Jacks were packaged for human consumption without further preparation?
 The Facts
27.	The Snack a Jacks range was launched in the United Kingdom in 2000, following a successful launch in the United States of America and Canada. The range was marketed as a low fat and low calorie product targeted at customers who were health conscious. From 2000 the Snack a Jacks range enjoyed significant growth in sales, 40 per cent growth in both 2001 and 2002. However, by the end of 2003 the growth in sales levelled off which was due in part to the brand becoming established but more a result of intense competition in the low fat and low calorie sector of the food market. The decline in sales growth prompted the Appellant to commission two qualitative research projects, Headlight Vision and Blue Banana, with a view to developing a new strategy for future growth of the Snack a Jacks range. The new strategy involved the introduction of additional flavours and redesigned packaging. The strategy produced dividends in terms of 10 per cent growth in 2004 and 25 per cent growth in 2005. 
28.	The success of the product was determined by the measure of household penetration.  About 25 per cent of all households in the United Kingdom, five million in total, bought Snack a Jacks over the course of a year. This compared with 25 per cent penetration for Walkers’ sensations and 65 per cent for Walker crisps.
29.	The Snack a Jacks range was sold in the Cracker Aisle of major retailers, which consisted of crisp breads, crackers, rice cakes and savoury biscuits. The Appellant exhibited before the Tribunal 56 products purchased from the Cracker Aisle at Tesco Extra at Stockport on 2 December 2007. The 56 products were made from varied ingredients and production processes, and came in numerous flavours and varieties. Of the 56 products produced, seven comprising five types of Snack a Jacks and two brands of crisp-bread were standard rated for VAT, as indicated by the asterisk on the receipt. 
30.	The composition of the competing rice cakes in the group of 56 exhibits consisted in one case of 100 per cent whole grain rice and in the other 67 per cent brown rice, 16 per cent maize and 15 per cent yeast extract. 
31.	The Appellant’s website stated that the flavoured Snack a Jacks were great on their own or topped with a favourite topping.  
32.	The Appellant supplied copies of articles on Snack a Jacks in various magazines which included The Grocer, Dorset Echo, Girl About Town, Sainsbury’s Magazine, Slimming World, Health and Fitness Magazine, and Weight Watchers Magazine  published from year  2000 to  January 2004. The overwhelming majority of articles were known as advertorials, which were paid for by the Appellant through a public relations agency, Clarion, to promote its product.
33.	The articles gave key messages about Snack a Jacks emphasising that they were light and crispy rice and corn snacks with less than ten per cent fat. They were tasty and versatile, and could be eaten on their own or with a range of toppings. Some of the articles supplied menus of various toppings ranging from hummus crunch consisting of hummus with freshly grated carrot, wild rock leaves, sultanas and a drizzle of fat free salad dressing to Danish Delight comprising blue cheese, one pear,   mixed salad and garlic flavoured olive oil. The articles conveyed the message that consumers could snack without guilt.
34.	The bundle included an extract of the marketing strategy of Clarion to promote Snack a Jacks. The key messages for the Consumer Press Office were ranked in a hierarchy of three with key message one being the most important. The three messages were:
1. Snack a Jacks have less than ten per cent fat
2. Snack a Jacks fully satisfy the snack craving because they are deliciously flavoured, light and crunchy.
3. Snack a Jacks come in two sizes and a variety of sweet and savoury flavours.
35.	The marketing strategy also contained sections on recipe release and competitions. Key message 1 under these sections was that Snack a Jacks were versatile providing the perfect base for any low fat toppings. Key messages 2 and 3 were the same as messages 2 and 3 for the Consumer Press Office.
36.	In 2003 and 2004 the Appellant commissioned two separate qualitative research projects from Headlight Vision and Blue Banana to discover the reasons for the fall in sales and identify a new sales strategy. Each research project involved interviewing about 50 persons who were regular consumers of Snack a Jacks in focus groups of six to eight.
37.	The Headlight Vision research identified that the respective markets for minis and jumbos were distinctive demographically and different in their use of the product. The principal users of jumbo Snack a Jacks were older and slightly more conservative consumers comprising largely home based mothers who bought into the savoury product primarily for health reasons and as an alternative to bread. The second main  users of the jumbo product were consumers who purchased the sweet product as a hot drink accompaniment and as an alternative to biscuits. 
38.	The Headlight Vision research project identified that the savoury product had good flavour that could be “dialled up with toppings”. It was used as a bread replacement at lunch and for afternoon and evening snacking often topped with “debit style flavour,(e.g cheese)”. The focus groups identified the following images and associations with jumbo Snack a Jacks: lower fat than minis, healthier alternative to bread, light plain (polystyrene), satisfying and or addictive for some, lacking flavour and taste, for people on a restricted diet, and versatile: can be topped. The packaging was seen as bright and cheap; artificial flavourings versus white finish of competitor rice cakes. 
39.	The Blue Banana research was used to develop the learning from the Headlight Vision project into growth strategies. Blue Banana found that Snack a Jacks was but one product in a large range of similar low fat, low calories foodstuffs. The Snack a Jacks brand was strong and generally perceived as more exciting than its competing products. The sector in which Snack a Jacks competed operated as a carousel with consumers constantly searching around for better or different options on the premise that none of the healthier foods were satisfying in themselves. Blue Banana concluded that the growth strategy should incorporate new savoury flavours for jumbos which were more adaptable for topping, different packaging and better visibility in stores.
40.	The Appellant and Mr Goldstone stated that jumbo Snack a Jacks were consumed primarily with toppings. Mr Goldstone’s source for his statement was the qualitative research projects conducted by Headlight Vision and Blue Banana. Mr Goldstone, however, accepted in cross examination that the evidence of the projects contained no statistical analysis of consumer preferences. The Appellant supplied no evidence of quantitative studies about whether jumbo Snack a Jacks were consumed with or without preparation.
41.	In 2004 the Appellant introduced new flavours for the jumbo: lightly salted and sour cream and chives which were specifically adapted for topping. The new flavours failed. The Appellant put the failure down to competition and poor marketing. The Appellant did not consider that the new flavours’ association with topping was a contributor to the unsuccessful launch of the products.
42.	The jumbo Snack a Jacks were packaged 14 to a pack. There were two layers of packaging:  inner bag providing  the barrier properties for the shelf life of the product; and outer packaging commonly referred to as the bread bag. The inner bag essentially stopped moisture getting into the product and was sealed. The bread bag comprised an outer sleeve which was sealed at the top with a tag, in the same way as a loaf of bread. The shelf life of Snack a Jacks was typically seven months
43.	The original design of the bread bag for the jumbos which operated until 2004 incorporated on the front the name of the product and flavour with tag lines of less than 10 per cent fat; light and crispy rice and corn snacks and pictures of two un-topped Snack a Jacks.  The reverse of the bag restated the name of the product with the tag line of less than 10 per cent fat together with details of nutritional and contents information and the quality promise. The bags for the cheese and barbeque flavours were coloured differently yellow for cheese and red for barbeque.
44.	The new packaging for jumbos from 2004 retained the inner and outer sleeves and the distinctive colouring for the different flavours. The front of the outer sleeve or bread bag was completely re-designed. It contained the name of the product and flavour but with a tag line of less than 3 per cent fat (barbeque) or 5 per cent fat (cheese).  The product was described as flavour rice and corn cakes.  Information on calories, sugar, fat, saturates and salt contents was stated in pictorial form on the front. There were three partial pictures of Snack a Jacks: one topped, two plain.
45.	The reverse of the bag repeated the name and tag line of less than 3 per cent fat. It set out detailed nutritional and ingredients information in small print with guideline daily amounts. A large amount of space was devoted to presenting Kama Snackra with the tag line of may seriously improve your snack life accompanied with an invitation to consume the Snack a Jacks in various positions. The cheese flavour advertised position 28: in bed which was reinforced by a drawing depicting a pair of ladies’ legs on a bed with a bottle half full of blue liquid and a pack of jumbos on a bedside cabinet. The barbeque flavour promoted position 56: with a cup of tea. A pair of ladies’ legs on a chair with a cup of tea and a pack of jumbos on an adjoining coffee table formed the drawing. 
46.	A picture of a serving suggestion was also displayed on the back of the bag. The picture on the cheese flavour showed a jumbo with low fat mozzarella cheese and tomato topping.  The picture for the barbeque flavour appeared to portray a jumbo with a topping of cheese spread and cucumber. The cheese flavour included the words: try cheese flavour Jumbo topped with low fat mozzarella, slice tomato and fresh basil. They are great with nothing on too. These words were not on the barbeque flavoured packaging. Both packages, however, advertised, the sweet variety of jumbos with the invitation of fancy something sweet. 
Parties’ Submissions
47.	The Appellant submitted that the words when packaged for human consumption without further preparation were about what did the packaging say and what was the packaging for. The statutory test was not about whether the savoury Snack a Jacks could be eaten with or without preparation. In this respect the Appellant commended the VAT and Duties Tribunal construction in  Proctor & Gamble UK v CCE  (2003) (VAT decision 18381) at paragraph 60:
“The test is not whether a product can be eaten without further preparation  but whether it is packaged for human consumption”.
48.	The Appellant considered that packaged for had an element of purpose, which included an examination of the Appellant’s purpose for the packaging set in the context of the reasons for the enactment of Excepted Item 5.  The Appellant contended that Excepted item 5 was directed at street or bar food which could be eaten on the move or whilst holding a drink. The Appellant’s averred purpose for Excepted Item 5 was derived from the 1962, 1969, 1973 and 1974  Budget Statements as reported in Hansard, and a policy statement for the 1969 Budget. The documents charted the history of taxing specific foodstuffs, in particular confectionary, soft drinks, ice cream, potato crisps and salted peanuts, first under purchase tax, and then under VAT.  Examination of the various Budget statements showed that the wording of Excepted Item 5 originated from the purchase tax legislation. According to the Appellant,  the statements revealed a  policy of taxing inessential food which did not require additional preparation before  consumption . Finally the concept of street food provided the rationale for making sense of Excepted item 5, and fitted with the longstanding policy of taxing inessential food.
49.	The Appellant suggested that packaging of street food would be geared towards consumption on a single occasion and capable of being put in a pocket or handbag. The packaging for jumbo Snack a Jacks, comprising 14 Snack a Jacks in a packet which was re-sealable to maintain freshness was designed for multi-occasions and ill-suited to eating on the move. 
50.	The Appellant considered that, even if its street food proposition was wrong, the Respondents’ opposition to zero rating was seriously flawed. On the evidence heard the most favourable construction of the facts in favour of the Respondents was that the packaging was equally user-friendly for use with preparation and without preparation.  This construction was not good enough to meet the statutory requirements of Excepted Item 5, in that it acknowledged that Snack a Jacks was clearly packaged for consumption with further preparation.
51.	  The Appellant stated that the evidence clearly demonstrated that the packaging communicated substantial messages about topping Snack a Jacks with particular reference to the serving suggestions.  These messages were backed up by evidence of widespread topping of Snack a Jacks by consumers. The Appellant accepted that the statutory test was packaging not use. The analysis of the purpose of packaging, however, could not disregard the extensive consumption of topped Snack a Jacks. In addition the round shape and flat top of jumbo Snack a Jacks were conducive to topping.  The Appellant contended that the taxing of Snack a Jacks was not the correct outcome, particularly as they were eaten with toppings in large numbers
52.	The Respondents urged the Tribunal to follow the approach favoured by the Court of Appeal  in Ferrero Ltd  of finding the facts, adopting the ordinary meaning of the words of the statute, and applying that interpretation to the facts found. The statutory question posed by Excepted Item 5 was whether jumbo Snack a Jacks were packaged for consumption without further preparation. The statutory question was not answered by performing a retrospective analysis of the number of people who topped Snack a Jacks but by an objective forensic examination of the nature of the product itself.  The Appellant was posing the wrong question when it submitted that the appropriate test was what did the packaging say. The statutory test was not concentrating on marketing or packaging but on the state and characteristics of the product as packaged for the consumer. In this respect the Respondents adopted the approach applied by the VAT and Duties Tribunal in United Biscuits (UK) Limited v CCE (2005) (Decision No. 18947) at paragraph 8:
“In our view the phrase ‘packaged for human consumption without further preparation should be considered as a whole; if it is the manner in which the product is presented for sale, and what the ordinary customer would do with it before eating it are material considerations”.
53.	The Respondents contended that jumbo Snacks a Jacks were packaged for consumption without further preparation. The jumbos were designed for that purpose in that they were substantially flavoured with a strong taste, and ready for instant snacking. It was not obvious from the product itself that they required further preparation before eating.  The packaging carried a constant message that the jumbo Snack a Jacks were great on their own, and the jumbos were apt to be used in that way. The Respondents did not accept that the addition of a photograph and a serving suggestion involving a topping fundamentally changed the tax treatment of Snack a Jacks, particularly as the product has not altered since its launch. The Snack a Jacks were presented more generally as a snack.
54.	The Respondents accepted that jumbo Snack a Jacks were topped by consumers, although they expressed strong reservations about making quantitative conclusions from qualitative research.  The Respondents, however, contended that topping was a matter of individual preference for consumer. The fact that Snack a Jacks may be  topped did not mean that they were packaged for further preparation.  The legislation dealing with Excepted Item 5 was not there to prevent consumers from exercising choice about how they ate a particular product. The legislation simply highlighted the products which met the criteria, and sets a test in respect of them.  Jumbo Snack a Jacks met the statutory test because it was actually packaged for consumption without further preparation, notwithstanding that consumers could do other things with them.
55.	The Respondents acknowledged that the overall regime of group 1 schedule 8 VATA 1994 was set up for a clearly defined social reason of zero-rated food supplies for the benefit of consumers. The Respondents, however, considered that the social reason would not be of assistance in construing the specific provisions of group 1 schedule 8 which adopted an approach of making lists of foodstuffs either included or excluded from zero rating. The boundary lines of those lists were defined by the wording of the legislation rather than by identifiable policy considerations. The Respondents considered the Appellant’s suggested rationale of street food for Excepted Item 5, did not stand up to detailed analysis. 
Reasons for Decision
56.	We were not persuaded by the Appellant’s argument that the underlying rationale for Excepted Item 5 was to exclude street food from the zero-rating provisions. The Hansard references to the taxing of food under purchase tax and VAT relied upon by the Appellant did not support its proposition on street food.  The Appellant cited in particular a speech by Mr Dennis Healey in April 1974 about restricting tax relief to essential foodstuffs. The contents of the speech did not define the characteristics of essential foodstuffs. The speech contained no reference to single occasion food or food eaten on the move which were critical concepts of the Appellant’s street food proposition.  The Respondents pointed out that the essential food quotation had generated several theories for the exclusions under the Excepted Items list ranging from luxury items to unhealthy foodstuffs. None of these theories had stood the test of detailed analysis against the statutory list of Excepted Items.   
57.	The Appellant supplied no other documentary evidence to support its construct of street food. We considered that the street food rationale suffered the same fate as the other theories for the enactment of the list of Excepted Items, in that it had no expressed policy foundation and did not give a comprehensive explanation for the foodstuffs included in the list.  The boundaries of Excepted Item 5 were drawn by the legislation not by policy considerations.  The street food rationale distorted the process of interpreting the words of the legislation in accordance with their ordinary meaning by introducing additional words, such as single occasion food, and construing meaning against a non-existent policy.
58.	 We disagree with the Appellant’s submission that it was necessary to find a defined social reason for Excepted Item 5. The concept of defined social reason was associated with the justification for zero rating not for exceptions to zero-rating which were governed by the normal principles underpinning VAT ( Elizabeth Blast v Finazament Munchen).  We acknowledge that the social reason for group 1 schedule 8 as a whole, zero rating food for human consumption, was in the Appellant’s favour. However, we considered that it would only have an effect on the margins where the factual decision was finally balanced.  We agree with the Respondents that the defined social reason for zero-rating food generally was not of assistance in construing the words of Excepted Item 5. We, therefore, followed the approach advocated by the Court of Appeal in Ferraro which was  setting out the statutory test, finding the facts and deciding whether the product fulfils the statutory test or not. 
59.	The first disputed issue was whether savoury jumbo Snack a Jacks were packaged for human consumption without preparation. The Appellant contended that this question could be answered by what did the packaging say. The Respondents, on the other hand, considered it to be a wider question which incorporated the nature of the product itself. The precise wording of Excepted Item 5: Any of the following (savoury food products obtained by the swelling of cereals or cereal products) when packaged for human consumption without further preparation supported the wider construction advocated by the Respondents. The use of the phrase when packaged highlighted that the packaging was not to be examined in isolation but in conjunction with the food product itself.   Thus we decided that the disputed issue was essentially a factual matter embracing all relevant aspects of the final product including packaging as presented to the consumer.
60.	 We found that the essential characteristic of savoury jumbo Snack a Jacks was that they were ready to eat. They required no additional ingredients, no work and no cooking to make them edible. The jumbo Snack a Jacks were strongly flavoured which made them palatable to eat on their own without a topping. We did not consider that the flat top implied that they required further preparation before consumption. 
61.	The predominant message conveyed by the packaging was that jumbo Snack a Jacks was a low fat snack. The word snack defined the product and the brand, and invited instant consumption to satisfy a craving for food. The low fat tagline minimised the guilt associated with eating between meals. The new packaging emphasised the low fat content stating a lower percentage of fat than that recorded on the old packaging. We found that the new packaging accentuated the snacking theme, introducing Kama Snackra with the by-line of May seriously improve your snack life supported by a graphic of a reclining female person relaxing with a drink and significantly a bag of jumbo Snack a Jacks. The new packaging continued to display pictures of savoury un-topped Snack a Jacks. We decided that the serving suggestion and the picture of the topped jumbo Snack a Jack on the new packaging was incidental and carried no implication that they required further preparation. The packaging re-affirmed the message to the consumer that jumbo Snack a Jacks were ready to eat.
62.	We considered that the two layers of packaging, an inner and outer bread bag, which was resealed supported the consumption of jumbo Snack a Jacks without preparation because it maintained the freshness of the product. The packing arrangements were about keeping jumbo Snack a Jacks fresh which enabled them to be eaten without topping.
63.	The Appellant relied on the evidence of its marketing strategy, in particular the extracts from various magazines, which showed that jumbo Snack a Jacks were consumed with a wide range of toppings. We placed weight on the extract of the public relations strategy from Clarion which underpinned the marketing strategy rather than the self selecting advertorials and press cuttings from which it was difficult to draw conclusions about their representativeness. Under section 1 of the Clarion document the key messages to the press were about a low fat snack and fully satisfying the snack craving because they were deliciously flavoured, light and crunchy.  The key messages reinforced the presentation of jumbo Snack a Jacks as a tasty snack ready to eat. 
64.	The Clarion document identified additional strategies which communicated the versatility of the product. The additional strategies, however, were joined with the statement about the various qualities of Snack a Jacks being deliciously flavoured. We found that the versatility message was subordinate to the principal press relations strategy about the inherent qualities of the product as a snack. There was no evidence that the Appellant abandoned the Clarion public relations strategy with its re-launch of the product in 2005. The evidence on the new packaging confirmed continuation of the low fat snack strategy. The launches of the sour cream and chive flavoured  and slightly salted Snack a Jacks which were apparently more suited to topping were unsuccessful. 
65.	We conclude that the marketing strategy was wholly consistent with our findings on the product and packaging that savoury jumbo Snack a Jacks were for human consumption without preparation. 
66.	Both parties accepted that use of Snack a Jacks was not part of the statutory test. The Appellant, however, relied on the evidence of use in conjunction with the packaging by suggesting that it would be perverse to tax something which was in fact being prepared on a very wide scale. The Appellant’s proposition was predicated on its assumption that the evidence adduced at the hearing demonstrated widespread topping of jumbo Snack a Jacks, in particular Mr Goldstone’s evidence that the primary use of jumbos by buyers of a certain age was to top, which according to the Appellant went unchallenged. We did not share the Appellant’s confidence about the evidence adduced. The source of Mr Goldstone’s statement was the qualitative studies carried out by Headlight Vision and Blue Banana which involved about 100 regular consumers from a user population of five million households. Mr Goldstone in cross-examination could not point to any quantitative findings in the Headlight Vision and Blue Banana studies.  We found that Mr Goldstone’s use of the word primary and the Appellant’s assertions on majority use were conjecture. At the highest the evidence adduced showed that jumbo Snack a Jacks were consumed with and without toppings with no indication as to which was the predominant use. We found the evidence on use inconclusive, and agreed with the parties that use was not part of the statutory test.
67.	The Appellant submitted that it had crossed the boundaries of the statutory test on the evidence of use and packaging with a serving suggestion. The Appellant contended that the Appeal was won if it proved on the balance of probabilities that the packaging invited consumption with and without preparation. The Appellant referred to this as the 50/50 proposition, arguing that 50/50 was not good enough for the Respondents. The statutory test was when packaged for human consumption without preparation not when packaged to any extent for consumption without further preparation.  The Respondents countered that 50/50 was good enough but applying a different rationale from the Appellant.
68.	We agree with the Appellant that if the facts found demonstrated that the product when packaged was for human consumption with and without preparation that would be sufficient for the Appeal to succeed because the findings would not meet the statutory test of when packaged for human consumption without preparation.  Our findings of fact on the product, packaging and marketing, however, were unequivocal that savoury jumbo Snack a Jacks were a snack ready to eat which met the statutory test of when packaged for human consumption without preparation. The fact that the new packaging contained a recipe suggestion carried no implication that the product required preparation before consumption and did not detract from our finding that the packaging was designed for consumption without preparation. The fact that the product was eaten with and without topping was about consumer choice and had no  relevance for the statutory test. As the Appellant pointed out the test was not whether a product can be eaten with or without further preparation but whether the product when  packaged was for consumption  without preparation.
69.	We found the following facts:
(1)	 The essential characteristic of savoury jumbo Snack a Jacks was that they were strongly flavoured and ready to eat. They required no additional ingredients, no work and no cooking to make them edible. 
(2)	The packaging conveyed the message that jumbo Snack a Jacks was a low fat snack ready to eat.
(3)	The packing arrangements were about keeping jumbo Snack a Jacks fresh which enabled them to be eaten without topping.
(4)	The marketing strategy presented the jumbo Snack a Jacks as a tasty snack ready to eat.
(5)	The evidence on use was inconclusive, and not part of the statutory test.
70.	We, therefore, hold that savoury jumbo Snack a Jacks when packaged were for human consumption without further preparation.
Apportionment
71.	The Appellant suggested that if it failed with its principal submission on zero rating, an alternative solution would be to apportion the supplies of jumbo savoury Snack a Jacks between zero and standard rated supplies to reflect the different uses of the product by consumers. The Appellant contended that the European Court of Justice decisions of Centralan Property Limited v CCE Case C63/04 [2006] STC 1542) and Talacre Beach Caravan Sales Ltd v CCE Case C -251/05[2006] STC 1671 had endorsed an implied doctrine of apportionment to give effect to the underlying purpose of the legislation. In this Appeal it was open to the Tribunal to conclude that  Parliament intended with the enactment of Excepted Item 5 to tax only those goods that were eaten without preparation. The Appellant considered that the practical problems with apportionment were not insurmountable. According to the Appellant apportionment was a common occurrence when dealing with the tax status of mixed food products.
72.	The Respondents submitted that apportionment was not an appropriate route to follow. Excepted Item 5 laid down an all or nothing statutory test. Savoury jumbo Snack a Jacks  were  either within or outside the statutory requirements.
73.	We agreed with the Respondents’ construction of Excepted Item 5 and that apportionment was inappropriate. In our view the Appellant was introducing the concept of consumer use which was not part of the statutory test.  
74.	The authorities cited by the Appellant were not relevant to the circumstances of this case.  Talacre Beach Caravan Sales Ltd concerned the supply of zero rated caravans and their standard rated removable contents. The domestic legislation  expressly provided for the different tax treatment of the components of the single supply. The Court of Justice decided that the different rates of VAT were justified to prevent an unwarranted extension of the zero rating provisions. Further it was possible without significant difficulties to separate out the taxable component of the supply, the removable contents, from the zero rated component, the caravan. Centralan Property Limited involved the apportionment of input tax between two distinct supplies under the capital goods scheme. In this Appeal we were concerned with a single supply of foodstuffs which was not subject to different rates of VAT within the legislation. The supply was either standard rated or zero-rated. 
Equal Treatment
75.	The Appellant submitted in evidence 51 products from the cracker aisle which it said were in direct competition with Snack a Jacks. Of those 51 products, 49 were zero rated and two were standard rated. The Appellant complained of the unfair competition suffered by Snack a Jacks, in particular from lightly salted rice cakes, which in its view offended the Community law principle of equal treatment. The Appellant contended that it was incumbent upon the Respondents to provide a substantive reason to justify the difference in tax treatment of similar products. The Appellant maintained that if all else was equal the Tribunal should favour a construction of Excepted Item 5 which removed the irrational tax boundary between similar competing food products.
76.	The Respondents submitted that there was nothing offensive to any policy or principle in having statutory criteria distinguishing between products which for other purposes may be thought to be very similar. The Respondents approved of the approach taken by the VAT and Duties Tribunal in Proctor and Gamble UK v CCE  (2003) (VAT decision 18381) at paragraph 45  where equal treatment was raised:
“From the authorities cited to us we derive the principle that equality of treatment is a principle of Community law. We cannot re-write our national legislation in order to remove differences in treatment, and if such a re-writing were required, it would have to be in the direction of taxing all similar food products rather than zero rating them. However, we can interpret the words of our national legislation if possible in such a way as to give effect to the Community principle of equal treatment, so that similar goods, which are in competition with each other, are not treated differently for the purpose of value added tax”.
77.	The ruling of the VAT and Duties Tribunal was derived from the Court of Justice decision in Ideal Tourisme SA v Belgian State [2001] STC 1386, which the Appellant accepted as good law. 
78.	We considered our construction of Excepted Item 5 based on the ordinary meaning of the words used in the statute was unambiguous and produced identifiable distinctions for the different tax treatments of cereal products. Further we decided that if we followed the approach urged by the Appellant we would be re-writing the national legislation to give effect to the outcome desired by the Appellant. 
79.	The Appellant placed particular reliance upon the difference in tax status between slightly salted rice cakes and savoury Snack a Jacks. The Appellant pointed out that the salt content in the two products were similar, and that in effect the slightly salted rice cakes were savoury products. The Respondents considered that slightly salted rice cakes were plain not savoury and required further preparation before consumption which justified their zero-rating. We consider the distinction drawn by the Respondents was logical and followed the wording of the legislation.  We found that jumbo Snack a Jacks were significantly flavoured which was not present in the slightly salted rice cakes exhibited before the Tribunal. The jumbo Snack a Jacks clearly fell within the savoury category. Snack a Jacks were ready to eat and did not require further preparation before consumption.  We, therefore, concluded that the application of the ordinary meaning of the words used in Excepted Item 5 to our  findings of fact  produced a rational result which justified  the difference in tax status between slightly salted rice cakes and savoury jumbo Snack a Jacks on objective grounds. We were not in the all else was equal situation which favoured a construction of Excepted Item 5 removing the tax boundary between slightly salted rice cakes and savoury jumbo Snack a Jacks.
Disputed Issue: whether mini and jumbo savoury Snack a Jacks  were obtained from the swelling of cereals.
The Facts
80.	The final composition of the mini savoury Snack a Jacks by weight was approximately 50 per cent brown rice, 33 per cent maize, 12 per cent seasoning and 4 per cent sunflower oil. The composition for jumbo savoury Snack a Jacks by weight was approximately 46 per brown rice, 45 per cent maize and 9 per cent seasoning for cheese, 13 per cent for barbeque flavour. The seasoning consisted of flavouring compounds which were much more than just salt.
81.	 The production process for the mini and jumbo savoury Snack a Jacks was broadly the same. The principal difference between the two processes was that the mini savoury Snack a Jacks used rice pellets rather than whole rice grains as in the jumbo variety. Rice pellets were made from rice, flour, salt and water. The pellets were pliable, eliminating the process of tempering which was the first step in the manufacture of the jumbo Snack a Jacks.   Tempering involved mixing the corn grits and the rice with a controlled amount of water which was then heated to increase the moisture level in the ingredients having the effect of softening the outer walls of the rice grain and pre-gelatinising the starch within the grains. The outcome of the tempering was to produce a pliable product fit for the mould stage of the process.
82.	Corn grits which essentially consisted of broken down kernels were used in the manufacture of both minis and jumbos. The mini savoury Snack a Jacks used sunflower oil as an adhesive for the seasoning. 
83.	The mould stage of the process was the same for both minis and jumbos except that larger moulds were used for the manufacture of jumbos. Precise amounts of the mixed ingredients were inserted into the various moulds. Once inside the mould the mixture was subjected to high pressure and at the same time heated to a temperature of about 250 degrees Celsius which caused the starch within the rice and corn to liquefy and the ingredients to fuse together to form a very thin flat pancake which filled the mould. The pancake was not a homogeneous liquid but more akin to a rubbery compound in which the ingredients retained their individual character. The pressure was then released which had the effect of converting the residual moisture within the mould into steam. The superheated steam pushed outwards taking the pancake mixture with it causing the pancake to expand in all directions and folding on itself within the space permitted by the shape of the mould. The outcome of the mould stage was a product where the individual ingredients fused together to form a crispy (mini) or a cake (jumbo) in which the individual ingredients could still be identified. The areas of yellow represented the corn with the white areas, the rice. In the case of the mini Snack a Jacks Mr Usher estimated that the original rice pellet expanded eight to ten times of its original size as a result of the moulding process.
84.	 The Tribunal was shown separate bags of the amount of corn grits and rice pellets (minis) or grains (jumbos) which went into making one mini and one jumbo Snack a Jack. The Tribunal compared the sizes of the ingredients with the sizes of the identifiable white and yellow areas in the finished products, and concluded that the ingredients had expanded significantly.
85.	 After the mould stage the mini and jumbo Snack a Jacks were seasoned which involved drying them in an oven with the seasoning being applied either pre or post oven depending upon the type of seasoning used.  The effect of the drying process  was to make the Snack a Jacks less chewy. It had no effect on the size of the product. Once dried the Snack a Jacks were sent off for packaging which completed the manufacturing process.
The Representations
86.	The disputed issue was whether the savoury food products were obtained by the swelling of cereals or cereal products. There was no dispute that the principal ingredients of Snack a Jacks, rice and maize, were cereals. The Appellant queried whether the rice pellets used for the manufacture of minis fell within the definition of cereals or cereal products. 
87.	The Appellant contended that the expansion undergone by the ingredients of Snack a Jacks in the mould did not constitute swelling as contemplated by the legislation. The process caused the rice and the corn grits to fuse not only between themselves but with each other.  In effect the ingredients exploded under the release of the pressure to produce a soufflé which completely destroyed the identity of the original ingredients.
88.	The Appellant referred to the Respondents’ Public Notice on Food (701/14/87) which stated that:
“Snacks made by the swelling of cereals. This applies only to products produced by the puffing of internal kernels or by an extrusion process where air is introduced under pressure into the cereal flour or starch or starch paste during manufacture to produce an expanded aerated product”
89.	Similarly the Respondents’ Internal Guidance Volume 1-7 Chapter 1 at paragraph 10.4 advised under Cereal Based Products:
“The second part of Excepted item 5 standard rates “savoury food products obtained by the swelling of cereals or cereal products”. Cereals or cereal products are edible grains such as wheat, maize or rice, and the flours and pastes made from them. This part of the term applies to:
•	savoury popcorn; and
•	savoury snack products made from cereal flour, which are expanded or aerated during the process of manufacture, known in the trade as light products. These are usually made from cereal paste which is extruded and fried.
Because the law specifies “swelling”, these products must be distinguished from others made from cereal products which do not involve swelling. Flat savoury snacks such as tortilla chips are in this category and are zero-rated. The process of manufacturing biscuits is also considered not to involve swelling, so biscuits are never within excepted item 5: savoury biscuits are zero-rated”.
90.	The Appellant pointed out that the expansion of the Snack a Jacks’ ingredients was not due to the processes of puffing or extrusion, which were the two processes named in the Respondents’ advice documents with the Public Notice specifically restricting the scope of Excepted Item 5 to swelling from the named processes. The Appellant considered that the Respondents were effectively abandoning their stated policy with their opposition to the Appeal, which was a factor to take into account when interpreting swelling.  
91.	Finally the Appellant submitted that the mere existence of expansion did not  necessarily bring the facts within the scope of swelling as used in Excepted Item 5. In this respect the Appellant referred to the VAT and Duties Tribunal decision in United Biscuits (2001) (VAT Decision Number 17391) which found that at paragraph 20:
“In our view the phrase obtained by the swelling must be considered as a whole, and cannot be broken down into parts. We cannot read the words as if they meant obtained by a process which, whether or not intentionally, results in swelling, a necessary interpretation, if Miss Williams argument is right. Instead we prefer the view that swelling must be an integral part of the manufacturing process with out which the product cannot be made”.
92.	The Respondents’ basic proposition was that the ordinary meaning of the word “swelling” should be applied to the facts of the Appeal, in which case the Tribunal should not concern itself with technical definitions of “swelling”.  The Respondents contended that the words of Excepted Item 5 did not specify how the swelling of the cereal product should be achieved. As far as the Respondents were concerned the actual process for swelling the cereal product was irrelevant provided the product swelled as a result of and not incidental to the manufacturing process. The Respondents accepted that the words obtained by in Excepted Item 5 meant that the swelling  must be one of the aims of the process. In the Respondents’ view the facts of this Appeal clearly demonstrated that the rice grains and pellets had been substantially and deliberately swollen in order to produce the very shape, texture and crunchiness, characteristic of Snack a Jacks.
93.	 The Respondents pointed out that Public Notice 701/14/87 was intended for guidance only.  The Tribunal was concerned with the wording of legislation which did not specify the method for causing the swelling, and made no mention of aeration or extrusion unlike the Notice. The Respondents accepted that the wording of the Public  Notice could be improved.  However, the Respondents were not disassociating themselves altogether from the contents of the Notice, as suggested by the Appellant. The Notice provided a clear statement of the Respondents’ general policy as to where the dividing line was drawn between standard rated and zero rated goods.  
Reasons
94.	Our starting point was to consider the ordinary meaning of the words: were obtained by the swelling of cereals or cereal products as used in the legislation. We were not required to restrict ourselves to specific technical meanings of  swelling as there was no obligation to construe the provisions of Excepted Item 5 restrictively.
95.	The Shorter Oxford English Dictionary, third edition, defined obtain: as to procure or gain, as the result of purpose and effort; hence generally to acquire, get. Swell was defined in its intransitive form as: to become larger in bulk, increase in size (by pressure from within, as absorption of moisture, or of material in the process of growth, by inflation with air or gas etc.); to become distended or filled out, especially to undergo abnormal or morbid increase in size, and its transitive form as: to make larger in bulk, increase the size of, cause to expand, to enlarge morbidity.
96.	 We considered that the ordinary meaning of obtain could be summed up as an intended result from a particular activity.  The ordinary meaning of swelling was an increase in size and volume.
97.	We make the following findings of fact:
(1)	 The pre-gelatinised rice pellets for the minis were made from rice flour which fell within the definition of cereal products.
(2)	At the end of the manufacturing process there was a significant expansion in both the size and volume of the cereal ingredients for Snack a Jacks, particularly the rice grains and pellets (an estimated eight to ten times their original size, in the case of the rice pellets).
(3)	 The rice and corn retained their separate identities in the final  Snack a Jacks product. 
(4)	The expansion of the cereal ingredients was due to the sudden release of pressure after they had been heated to 250 degrees centigrade at the mould stage of the manufacturing process. 
(5)	The sudden release of pressure was an integral and planned part of the manufacturing process.
98.	Our findings of fact that the cereal ingredients for Snack a Jacks, particularly the rice grains and pellets,  expanded significantly  as a direct and intended result of the manufacturing process met the ordinary meaning of obtained by swelling.  The words of excluded item 5 did not restrict swelling to that caused by the processes of extrusion or aeration.
99.	We were not persuaded by the Appellant’s submission that the expansion of the rice grains and pellets caused by the manufacturing process for Snack a Jacks did not constitute swelling as contemplated by the legislation. The Appellant contended that an expansion resulting in a fused product which destroyed the identity of the original ingredients was not swelling. We considered the submission to be both legally and factually incorrect. The Appellant was effectively promoting an interpretation of swelling defined by outcomes which was restrictive and ran counter to the principle of giving the ordinary meaning to words in statute. Further the facts demonstrated that the ingredients retained their individual identities in the final product. The ingredients at no stage during the manufacturing process coalesced to form a homogenous liquid. In the final product the yellow and white areas representing the corn and rice respectively were plainly visible.  
100.	We note the concerns voiced about the wording of Public Notice 701/14/87, in particular the Respondents’ concession that the wording required improvement. We suggest to the Respondents that they may wish to revisit the contents of the Notice in the light of those concerns.
101.	We are satisfied that the  mini and jumbo savoury Snack a Jacks were savoury products that were obtained by the swelling of cereals or cereal products.
Decision
102.	We found that
(1)	Jumbo savoury Snack a Jacks when packaged were for human consumption without further preparation. For the avoidance of doubt our decision applies to the old and new packaging. 
(2)	Mini and jumbo savoury Snack a Jacks were obtained by the swelling of cereals or cereal products.
103.	We hold that the provisions of Excepted Item 5, group 1, schedule 8 of VATA 1994 apply to savoury mini and jumbo Snack a Jacks, rendering them standard rated for VAT purposes. We ruled that there is no legal or factual basis for apportioning the supplies of savoury jumbo Snack a Jacks between zero-rated and standard rated supplies.
104.	  We, therefore dismiss the Appeal. We note that the Respondents have reserved their position in respect of costs. We direct that the Respondents inform the Tribunal and the Appellant within 28 days from release of this decision of their intentions in respect of costs. If there is an application for costs, either party is at liberty to refer the question of costs to a Tribunal Chairman for determination 

                                

                                MICHAEL TILDESLEY OBE
CHAIRMAN
RELEASE DATE: 6 March 2008

LON/05/0238