Food for thought! Now is the time to review the VAT burden to help the food manufacture, catering and hospitality sectors

The Government has confirmed that the Chancellor will provide an update on the economy during the week commencing Monday 6 July. A review of the current complexity of the VAT rules applying in the food and drink sector would be welcomed by food manufacturers, retailers, and catering and hospitality businesses who have been hit hard by the impact of Covid-19 and the closure of the hospitality sector during lockdown.

Jeremy Oliver, Partner at Garbutt + Elliott, says with the impending 31 December deadline fast approaching bringing to an end the transitional arrangements for trading with Europe this could be an ideal opportunity to consider a reduction in the rate of VAT and also simplify the complex VAT rules currently in existence to provide a boost to the food and hospitality sectors.

Many of our food manufacturer clients have been successful in obtaining additional orders from retailers to at least partly replace lost orders from customers in the catering and hospitality sector. A temporary cut in the standard rate of VAT rate should encourage consumer spending in the short term. A permanent cut to the VAT rate for the catering and hospitality sector would, however, be more effective in helping a sector that has been severely damaged by the lockdown restrictions and provide long term benefits to all businesses in the supply chain, including Yorkshire food manufacturers. This could, for example, be achieved by extending the 5% rate that currently applies to some construction services to all catering and hospitality services.

Another issue that we would like to see addressed is the complexity of the VAT rules. For example, a retailer, selling a biscuit that is subject to VAT at 20% must in effect discount the net of VAT selling price by one sixth (20/120) compared to the selling price of a similar biscuit that is subject to VAT at 0%. This VAT cost is often passed on to the manufacturer.

In the above example, the standard rate of VAT applies to biscuits that are wholly or partly covered with chocolate or some product similar in taste and appearance to chocolate and the zero rate of VAT applies to other biscuits. What makes matters more complicated is that HMRC may decide that what is being sold is not a biscuit but is an item of confectionary for VAT purposes. Jaffa Cakes are partly covered in chocolate, but because HMRC now accepts that Jaffa Cakes are cakes, Jaffa Cakes are zero-rated.

HMRC publishes guidance with detailed tables in VAT Notice 701/14. The guidance is updated from time to time, but how useful is that to businesses at the cutting edge of food manufacturing? Many Yorkshire businesses develop new food products which have not yet reached the market and navigating the current complex rules is an added burden.

Alex Millar, VAT specialist at Garbutt + Elliott, highlights the complex issues following another Tribunal case published recently and comments “whether a product is a biscuit with a chocolate coating, or a cake, or an item of confectionery, is not always obvious, but it is this distinction that determines the VAT treatment and ultimately the profit margin of the manufacturer”

In Corte Diletto [2020] UKFTT 75 (TC) the Tribunal decided that products made from natural ingredients, which had no added sugar, and which were not covered in chocolate, were items of confectionary and therefore subject to the standard rate of VAT. The Tribunal spent time considering the detailed statutory provisions in the VAT legislation before making its decision and commenting: “It is difficult to see any logic in these convoluted provisions but they are the rules which we must apply.”

A link to the Tribunal case and its detailed findings can be found here and a brief summary of the general VAT treatment of biscuits, cakes and confectionary is set out below.


Biscuits not wholly or partly covered with chocolate or

some product similar in taste or appearance


Zero rate of VAT


Biscuits wholly or partly covered with chocolate or

some product similar in taste or appearance


Standard rate of VAT




Zero rate of VAT





Standard rate of VAT


The Judge’s comments in the case make interesting reading and refer to other items sold in supermarkets, to which some retailers apply the zero rate of VAT and some retailers apply the standard rate of VAT, demonstrating that there is a great deal of confusion about how the items should be treated for VAT purposes.

It is important to note that all food sold in a catering context is currently subject to VAT at the standard rate. The rules regarding when food is sold in a catering context are also complex. For example, the effect of the current rules means that sandwiches sold from a kiosk that no customer can possibly enter are subject to the standard rate of VAT because the sandwiches can be eaten in the food court in which the kiosk is situated.