High Court confusion about the definition of confectionery for VAT purposes is giving manufacturers a headache, says Ian Hyde, tax partner at Pinsent Masons.
The dilemma follows a High Court ruling that Premier Foods' Hartley's fruit bars did not qualify as confectionery and so were not liable for VAT. Legally, products have to have been cooked and have to contain sweetener to be defined as confectionery.
But despite the fruit bars not meeting either of these criteria, the High Court is now backing HM Revenue & Customs in contesting the decision. A further VAT tribunal, yet to be scheduled, will decide the outcome.
The move could cause problems for those making products that could be deemed confectionery under the broader definition that could be established.
"Under the old definition, a food manufacturer could predict where the price of a product could be," says Hyde. "Now you may have to rely on what the man in the street thinks. It's virtually impossible to use this method to predict the tax on a product."
Cereal bars and products such as bagged dried fruits could end up being classed as confectionery and have VAT slapped on them. "What's the profit margin on a cereal bar? Probably not 17.5%, so it could be wiped out," said Hyde. "Manufacturers need to be asking HM Revenue & Customs for information. It's no good bringing out a product and discovering in a year's time that it's liable for VAT. You will have to decide while still in research and development. Where the issue is borderline, you will have to consult your customers. I would tend to take a precautionary approach. You can't rely on HM Revenue & Customs or a tribunal viewing things the same way you do."
The challenge was also politically off-message, said Hyde. "This could put naturally sweetened products into the same category as stuff dripping with synthetic sweetener. It's not moving in the right direction."