The Jaffa Cake VAT Case Explained

Jaffa Cakes: Cake or Biscuit? The age-old debate that was taken to court.

Who knew VAT could be interesting?

Who would have known that the bounds of confectionery, sweets, chocolates, chocolate biscuits, cakes and biscuits would be taken to court? And why is it so important whether the confectionary in question is a cake or a biscuit?

The significance of the borderline between cakes and biscuits is that a cake is zero-rated, meaning that you do not pay VAT. This means that even if the cake is covered in chocolate, it will always remain exempt from VAT. However, if a biscuit is wholly or partly covered in chocolate, it will be taxed at the standard VAT rate of 20%. This differentiation in VAT treatment between cakes and chocolate covered biscuits is crucial for tax purposes.

So just to clarify: a plain biscuit will not be charged VAT, meaning your standard rich tea or digestive will not be taxed. But, your chocolate digestive, which is partly covered in chocolate, is considered a luxury item and will therefore be taxed 20%. Cakes, including chocolate covered cakes, will not be taxed, regardless of their chocolate content.

In a famous legal dispute, a giant Jaffa Cake was used as evidence in a court battle between McVitie’s and Her Majesty’s Customs and Excise to prove that Jaffa Cakes were really cakes and not biscuits.

The legal case where the status of Jaffa Cakes was decided involved the humble Jaffa Cake itself. Factors such as texture, ingredients, and how they change when stale were considered. The case was a long and costly dispute, but it ultimately resulted in Jaffa Cakes being recognised as cakes rather than biscuits.

Jaffa Cakes were ultimately ruled to be not a biscuit, impacting their VAT treatment.

The legal dispute between McVitie’s and Her Majesty’s Customs and Excise centred around UK tax regulations, with implications for VAT rates and the categorisation of Jaffa Cakes based on criteria such as size, packaging, marketing, and texture. The court ruled that Jaffa Cakes are not biscuits.

If you’re wondering, the following biscuits are not considered to be wholly or partly covered and are therefore zero-rated (according to HMRC):

• Chocolate chip cookies
• Gingerbread men with chocolate eyes
• Cylindrical biscuits with chocolate on the inside
• Biscuits containing an internal chocolate flavoured filling, but none on the outside surface (for example, a Bourbon)
• Chocolate dip biscuits, where separate plain biscuits are sold with a chocolate sauce to be dipped into

Since VAT was introduced, Customs and Excise had accepted that Jaffa Cakes were zero-rated as cakes for VAT purposes. But, following a review in 1991, the department reversed its view of the liability. McVitie’s therefore had to defend this categorisation in a VAT tribunal.

In this review, Jaffa Cakes were ruled to be biscuits partly covered in chocolate and standard-rated. However, United Biscuits (representing McVities) appealed against this decision. The Tribunal listed the factors it considered in coming to a decision as follows:

• The product’s name: it contains ‘cake’
• The ingredients: Jaffa Cakes contain flour, eggs and milk, thus making them a cake
• The product’s texture: cakes are soft, whereas biscuits are hard and can be snapped. Jaffa Cakes have the consistency of a sponge cake
• The texture of the product when it goes stale: cakes go hard when stale, whereas biscuits go soft. When stale, Jaffa Cakes go hard
• The size of the product: Jaffa Cakes’ size is more akin to a biscuit
• How the product is sold in shops: Jaffa Cakes can be found in the biscuit aisle at the supermarket
• How the product is marketed: Jaffa Cakes are marketed as biscuits rather than cakes
• The sponge part of a Jaffa Cake is a substantial part of the product in terms of texture when eaten.

This case highlights the issue of VAT exemption in the context of food products, such as cakes and biscuits.

Considering all of these factors, it is clear that Jaffa Cakes have characteristics of both cakes and biscuits. Overall, the tribunal thought they had enough characteristics of cakes to be accepted as such, and they were therefore zero-rated for VAT purposes.

The Irish Revenue Commissioners also ruled in favour of them being cakes due to the fact that their moisture content is greater than 12%.

The application and implications of VAT rules are evident in this tribunal’s decision, showcasing the complexities surrounding VAT laws and regulations.

We hope you enjoyed reading this blog. We certainly found the distinction between biscuit and cake (according to HMRC) rather fascinating, and we are glad to have found an answer to the age-old question of the Jaffa Cake.

Do you agree?