A campaign to lower the rate of value added tax on fruit drinks has been launched by Innocent, the drinks manufacturer, highlighting the anomalies in the VAT system.
It says that the “madness” of VAT rules is that there is no VAT on “essential” foods, including doughnuts, frozen chips and meat pies, but beverages are taxed at 17.5 per cent.
Innocent points out that most of its products carry VAT at 17.5 per cent but yoghurt-based ones are zero- rated because the VAT regime allows milk-based drinks to be tax free.
The campaign highlights the apparent anomalies in the VAT system, which have been the subject of numerous court cases as manufacturers and retailers argue about the definitions of zero-rated foods.
In general, while all basic food is exempt from VAT, food supplied “in the course of catering” – including hot take-away food – attracts 17.5 per cent VAT. In addition, ice-cream, confectionery, crisps and other snacks and products for home brewing and wine-making attract VAT at 17.5 per cent.
The most notorious disputes about VAT on food have concerned the distinction between biscuits, cakes and chocolate-covered biscuits. The debate centred on whether certain products were cakes – in which case they are zero-rated – biscuits, zero-rated unless coated in chocolate – or confectionery, always standard-rated.
In recent years Jaffa Cakes have been judged by the VAT Tribunal to be cake and therefore exempt from VAT, despite being chocolate covered. Wafer cones filled with marshmallow were biscuits and therefore zero-rated. A Tropical Fruit bar was neither a biscuit nor a cake but was confectionery and therefore standard-rated. But a “Harvest Chewy Bar” was a biscuit and therefore zero-rated.
In addition to its argument on anomalies in VAT, Innocent says the government should use the tax system to encourage people to consume more fruit because its “five-a-day” educational campaign had reached the limits of its ability to change people’s behaviour. Jamie Mitchell, marketing director of Innocent, said he drew encouragement from the Treasury’s decision to reduce the rate of VAT on condoms to 5 per cent in the last Budget.
In response, the Treasury said: “All taxes are kept under review.” It added that it only applied reduced rates of VAT where the tax system could support social objectives that could not be targeted in other ways.
In general, the Treasury believes that although the tax system can be used to dissuade people from unhealthy activities such as smoking, other policy levers that can be more effective.
A 2004 report for the Treasury on improving the population’s health by Sir Derek Wanless, the former NatWest chief executive, highlighted difficulties in using the tax system to encourage healthier behaviour.
For example, subsidising gym fees would be ineffective and inequitable, partly because much of the subsidy would go to people who already used a gym.
