20905

VAT – ZERO RATING – CONFECTIONARY – whether Crunchy Granola Bars biscuits – no – Appeal dismissed

LONDON TRIBUNAL CENTRE

	GENERAL MILLS UK 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 13 & 14 October 2008

Geoff Tack, VAT consultant, Ernst & Young, for the Appellant

Ben Watson counsel instructed by the Solicitor for HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2008

DECISION
The Appeal
1.	The Appellant was appealing against the Respondents’ decision on review dated 21 August 2007 to classify Nature Valley Crunchy Granola Bars (Crunchy Granola Bars) as standard rated for the purposes of VAT.
The Dispute
2.	The Appellant contended that Granola Bars were biscuits and, therefore, zero rated. In the Appellant’s view, the taste, appearance and manufacture of   Crunchy Granola Bars were indistinguishable from that of a biscuit.  Crunchy Granola Bars were more Hobnob than Digestive. Crunchy Granola Bars fell within the healthier biscuit category characterised by reduced calories and fat, and high in whole-grain. In short the ordinary reasonable person in the street would consider Crunchy Granola Bars to be biscuits.
3.	 The Respondents, on the other hand, argued that Crunchy Granola Bars did not have the essential characteristics of a biscuit. They were not made from flour, and did not have the typical round shape associated with biscuits. The comparison with Hobnobs was misplaced. Hobnobs were dough based giving it a less compacted structure than Crunchy Granola Bars. Hobnobs had a higher fat content which meant that they dissolved more quickly when eaten.  Further the Appellant did not market and package Crunchy Granola Bars as biscuits. The Respondents concluded that Crunchy Granola Bars fell within the standard rated category of non-biscuit and non-cake confectionary. Crunchy Granola Bars were most accurately described as cereal, muesli and similar bars with honey or other added sweetening material.
The Evidence
4.	We heard evidence from Jorge Alberto Ulate Rodriguez and Thomas Dillon for the Appellant. Mr Rodriguez gave evidence about the manufacturing process, whilst Mr Dillon’s evidence concentrated upon the marketing of Crunchy Granola Bars. A bundle of documents was presented in evidence. The Tribunal was provided with samples of Crunchy Granola Bars to inspect and taste. We adopted Mr Dillon’s evidence on the description of the product including taste which was not challenged in cross-examination by the Respondents.
The Legislation
5.	Section 30(2) of the VAT Act 1994 provides that a supply is zero-rated if it is of a description specified in schedule 8.
6.	Group 1 of schedule 8 of the VAT Act 1994 so far as is relevant zero rates the supply of food of a kind used for human consumption except a supply of anything comprised in any of the excepted items. 
7.	Confectionary is one of the excepted items, item 2 states that 
“confectionary, not including cakes or biscuits other than biscuits wholly or partly covered with chocolate or some product similar in taste and appearance”.
8.	Note 5 to group 1 of schedule 8 defines confectionary as
“confectionary includes chocolates, sweets and biscuits; drained, glace or crystallised fruits; and any item of sweetened prepared food which is normally eaten with fingers”.
9.	Under excepted item 2 biscuits other than those wholly or partly covered with chocolate come out of confectionary and go back into the zero rated category of food generally.   
The Facts Found
10.	The Crunchy Granola Bar was a compressed oblong thin bar with a crumbly and rough texture, which could be eaten with the fingers.  The bar had a golden hue with the oats ingredient clearly visible, giving an impression of a baked product.  The bar came in four varieties: oats ’n honey, Canadian maple syrup, apple crunch, and roasted almond.
11.	The bar produced a crunchy noise when eaten. The bar tasted dry in the mouth, with a sweet flavour but not overwhelmingly sweet. The bar was “moreish” and filling once eaten. 
12.	The ingredients of the bar included whole grain rolled oats, sugar, sunflower oil, syrup and or honey, nuts, dehydrated fruit, salt, molasses, soya lecithin and sodium bicarbonate. Oats constituted the principal ingredient. The bar did not contain any wheat flour. The nutritional information for the bar revealed that it had a relatively high sugar content but a low fat content. 
13.	The Appellant specifically excluded wheat flour from the Crunchy Granola Bar because it would detract from the wholesomeness of the product, and effectively cheapen it. Flour was the principal ingredient found in biscuits and had the effect in the manufacturing process of making the mixture more doughy which held the product together. Crunchy Granola Bars used rework which was broken Granola Bars ground into a coarse powder instead of flour to bind the product.
14.	The manufacturing process of Crunchy Granola Bars commenced with mixing the dry and wet components in a mixer. The mix was then poured into a hopper which spread the mix evenly onto a wide conveyor belt passing the mix through two rollers. They compacted the product to its final thickness. The next stage was to heat the mix in an oven at temperatures of 200 degree centigrade or above for up to 18 minutes. Once out of the oven the baked slab was cut with a knife into strips along the slab’s length. The strips were cut with a guillotine into the final size of the product.
15.	Crunchy Granola Bars were manufactured in Spain for the United Kingdom market. The Appellant used a former biscuit factory for the processing of the bars. The manufacturing of the Crunchy Granola Bars was consistent with methods of making biscuits.
16.	Crunchy Granola Bars were retailed in a sealed foil packet consisting of two bars. The packaging described the product as Crunchy Granola bars made with whole grain oats. A picture of the bar was portrayed on the front of the wrapping. The packaging did not use the word biscuit. The sealed wrapping and its size enabled the bar to be carried in a pocket.
17.	 The Appellant engaged Orchard Insight & Strategy Limited to conduct consumer research of the bars before they were launched. Mr Dillon in his witness statement which was admitted as evidence in chief stated that the conclusion of the Orchard Report showed that consumers saw the product as a biscuit. The Report’s conclusion, however, was not as categorical as Mr Dillon’s interpretation saying that
“Whilst at first sight (pack codes and format), its natural family seems to be that of cereal bars, the product experience itself leaves consumers unsure how to categorise the product. It appears torn between being a cereal bar and a biscuit. Unsure as to whether to categorise it as a biscuit or a cereal bar, consumers tend to refer to Nature Valley as a snack bar”. 
18.	 Mr Dillon considered that the consumer research indicated that Crunchy Granola Bars were often consumed with a hot beverage, usually mid morning and to a lesser extent mid-afternoon. The basis for this statement was derived from a graph identifying consumption rates during a 24 hour period of Crunchy Granola Bars with breakfast bars, and healthier biscuits including cereal bars. The source for the data included in the graph, however, was different between Crunchy Granola Bars and the other bars. The source for Crunchy Granola Bars was an estimate based on answers from a limited number of consumers about when they might eat Crunchy bars in December 2005 prior to the national launch of the product, which was less robust than the two years of data for the other bars. The Appellant has done no consumer research of actual consumption since the launch.
19.	Mr Dillon’s portrayal of Crunchy Granola Bars as a biscuit consumed mid morning with a hot drink was at odds with the Appellant’s advertising strategy for the product. The bar was on the whole advertised in newspapers when they featured outdoor activities, and the National Geographic. Recent advertising campaigns included a 16 page supplement in the Daily Telegraph featuring details of 50 walks, the London 10 kilometre run where each participant was given a complimentary Granola Bar, and a promotion involving a well-known outdoor enthusiast. The variety pack carried pictures of people in the outdoors and the words that Nature Valley bars are a delicious snack for your active lifestyle. Mr Dillon’s explanation for the link with  the outdoors  was to depict the eating opportunity of the bars to a time out experience and thereby inspire consumers to escape if only for a few minutes. 
20.	We concluded from the evidence on consumer research and marketing strategy that there was no substance to Mr Dillon’s claim that consumers saw the product as a biscuit consumed mid-morning with a hot drink. In our view the evidence pointed towards a perception of Crunchy Granola Bars as snack bars which were eaten by persons engaged in outdoor activities.
21.	Mr Dillon stated that the Appellant actively pursued the biscuit buyer at the supermarket, and encouraged the retailer to place Crunchy Granola Bars in the biscuit aisle. Mr Dillon produced photographs which showed that Crunchy Granola Bars were not sited in the cereal aisle at the Sainsburys’ supermarket at Farnham, and located in the biscuit aisle at the Tesco supermarket in Slough. Mr Dillon accepted that the Appellant offered financial incentives to selected retailers to secure a favourable location of its product, particularly a placement on an eye level shelf, but stated that it was at the retailer’s discretion as to where a product was stacked within the store. Further the photograph of the Tesco supermarket revealed that Granola Bars were placed with cereal bars in the biscuit aisle.
22.	The Appellant described Granola Bars as more Hobnob than Digestive. As a result a packet of Hobnobs manufactured by McVities was produced in evidence. The principal ingredients of Hobnobs were rolled oats and wholemeal flour. They had a higher fat content than Crunchy Granola Bars resulting in a shorter texture enabling Hobnobs to dissolve more quickly when eaten. Hobnobs were less compacted than Crunchy Granola Bars. Some varieties of the bars had distinctive flavours which were not found in Hobnobs.
23.	The Appellant in its evidence sought to downplay the association between Crunchy Granola Bars and Granola, the breakfast cereal. Throughout the case the Appellant referred to the product as Crunchy Bars. Mr Dillon considered the Appellant’s statement made to the Respondents in their letter dated 3 May 2007 did not accurately reflect the marketing differences between Crunchy Bars and Granola. We consider the following description of the product in the 3 May 2007 letter to be an accurate statement of fact:
“….granola is traditionally a breakfast food or snack food consisting of rolled oats, nuts, and mixed with honey or other ingredients…. Granola bars are identical to normal Granola except in their shape. Instead of a loose breakfast cereal consistency, granola bars are pressed into a bar shape and baked into that shape. The result is a more convenient snack that can be eaten on the move”.
Reasons for Decision
24.	The parties accepted that Crunchy Granola Bars were confectionary within the meaning of note 5 to group 1 of schedule 8 of the Vat Act 1994. The dispute was about whether Crunchy Granola Bars were taken out of confectionary by virtue of being biscuits and returning to the general category of food which was zero-rated for VAT purposes.
25.	Our starting point is the Court of Appeal decision in C & E Commissioners v Ferrero UK Limited [1997] STC 881 which concerned an appeal about whether two wafer products were biscuits. In the decision Lord Wolfe  MR urged Tribunals when considering issues of this kind  not to engage in an elaborate analysis:                          
“The Tribunal had to answer one question and one question only: was each of these products properly described as biscuits or not, which was one of fact and degree. The word biscuit must be given its ordinary meaning. What was relevant was the view of the ordinary reasonable man in the street”. 
26.	Thus the question for this Tribunal was whether Crunchy Granola Bars can properly be described as biscuits. In answering that question we must consider the view of the ordinary person, and what he or she would consider the nature of the product, and whether it fell within the category of a biscuit.
27.	 Ingredients, taste and appearance are properties common to all foodstuffs. We find that Crunchy Granola Bars as assessed against the core properties had little in common with biscuits. The bars did not contain flour which was regarded as an essential ingredient for a biscuit, and critical for making the dough for binding the biscuit. The bars tasted sweet but dry and did not dissolve readily in the mouth because of their lower fat content than biscuits. Their dominant appearance was one of a bar.  They were compacted forming a long oblong shape. Crunchy Granola Bars had every appearance of a snack bar rather than a biscuit which was the conclusion reached by the consumers who took part in the Orchard research. 
28.	Our finding that Crunchy Granola Bars did not share the properties normally associated with biscuits was enhanced by the Appellant’s own marketing strategy which promoted them as a delicious snack for a healthy lifestyle, with the word biscuit absent from its packaging and advertising of the product.  Although Crunchy Granola Bars were sold in the biscuit aisles of some well known supermarkets, they were found alongside other cereal bars rather than biscuits in those aisles which reinforced their association with snack bars. The fact that Crunchy Granola Bars were manufactured in the same way as biscuits was in our view immaterial. The method for making biscuits was not a process unique to biscuits but one that could be applied to a wide range of confectionary.
29.	  The Appellant sought to persuade us that Crunchy Granola Bars were more Hobnob than Digestive. The evidence, however, told a different story revealing a wide gulf between the respective properties of Crunchy Granola Bars and Hobnobs, in particular they differed in shape,  fat content,  use of flour, and  number of varieties.
30.	The Appellant asserted that Crunchy Granola Bars were healthy biscuits which were more in tune with the healthy lifestyles of the 21st century and carried the implication that the ordinary meaning of biscuit should not be frozen in time associated forever with the high fat sweet biscuit with a short texture and round shape. The Appellant’s assertion, however, was flawed in two respects. First, the Appellant adduced no evidence that it actively promoted Crunchy Granola Bars as a healthy biscuit. Its marketing strategy pursued a theme of a delicious snack suited to active lifestyles. Second, the law has not stood still, in 1988 an amendment to note 5 to group 1 widened the scope of standard rated confectionary items by defining confectionary as sweetened items of prepared food normally eaten with the fingers. This amendment was introduced to deal with the then developments in confectionary, in particular the proliferation of cereal bars, which under the amendment were categorised as standard rated supplies. In the Respondents’ view Crunchy Granola Bars were in effect another type of cereal bar, having originated from a breakfast cereal. They considered that it would offend the community law principle of equal treatment if Crunchy Granola Bars were classified differently for VAT purposes from cereal bars. 
31.	The Appellant’s assertion about  Crunchy Granola Bars  being a 21st century biscuit did not alter our view based on the facts that Crunchy Granola Bars had little in common with biscuits. We find that the experience of the ordinary person in the street with a Crunchy Granola Bar would comprise the long oblong compacted shape, the sweet but dry taste which did not melt readily in the mouth, and the sealed packaging of two bars with no reference to biscuit and no mention of flour in the ingredients. We are satisfied that the ordinary reasonable person in the street would conclude from that experience that a Crunchy Granola Bar was not a biscuit. 
Decision
32.	For the reasons given above we hold that Crunchy Granola Bars were not biscuits, and, therefore, standard rated for VAT purposes. We dismiss the Appeal and make no order for costs.

                                

                                 MICHAEL TILDESLEY OBE
CHAIRMAN
RELEASE DATE: 22 December 2008

LON/2007/1589