Ferrero wins VAT dispute over Nutella Biscuits

Sara White, Editor, Business & Accountancy Daily - Croner-i

Maker of Nutella biscuits wins appeal as tribunal rules sweet treat was not partly covered in chocolate so qualifies for excepted item status for VAT purposes.

The dispute arose in connection with several HMRC decisions over the taxable status of Ferrero UK’s new Nutella Biscuits, adding to the long litany of food related VAT cases and saving the company a charge for standard 20% VAT.

This appeal to the First Tier Tribunal (FTT) concerned whether ‘Nutella Biscuits’ manufactured by Ferrero UK Limited were ‘biscuits… partly covered with chocolate or some product similar in taste and appearance’ for the purposes of the Value Added Tax Act 1994 (VATA) Schedule 8 Group 1 Excepted Item 2 (Excepted Item).

At the tribunal, Ferrero attempted to overturn two decisions by HMRC that the product was rateable at 20% VAT, and as such, a charge for output tax for various periods covering tax years 2022-23 and 2023-24 was payable.

The first issue in dispute was a liability ruling sent to Ferrero in a letter dated 26 August 2022 stating that ‘the biscuits were properly taxed for VAT purposes at the standard rate of 20% as they meet the description within the Excepted Item’.

Secondly, Ferrero UK appealed against assessments to VAT for accounting periods 04/22 to 04/23 issued by HMRC on 6 July 2023 and amended on 23 August for output tax related to sales of the biscuits.

As with all VAT food cases, the tribunal panel was treated to complex explanations about the technical chocolatey content of the biscuits to assess the exemption position. They were also shown numerous samples with the ruling detailing comments about the composition of the biscuits and even the tray of 30 empty cups.

In essence, the Nutella biscuits are made up of a circular biscuit cup with a filling of Nutella approximately 5mm deep, a ring of ‘a substance which the tribunal stressed that ‘the appellant accepts has the appearance and taste of a product similar to chocolate’, and a biscuit disc topping with an embossed heart.

The tribunal stated: ‘The Biscuits are manufactured such that the biscuit elements (the circular biscuit cup and the biscuit disc) are baked and the final Biscuits are assembled from the component parts by reference to a patented process,’ adding they were shown ‘confidential evidence about the product design, development and manufacture’.

As is standard practice with these VAT cases, the statutory test was at the centre of the decision making process, with the tribunal required to ‘interpret the meaning of the phrase “partly covered” in the context of the biscuits’.

Ferrero’s barrister, Valentina Sloane KC, of Counsel, appointed by EY, cited the Court of Appeal judgment in LIFE Services Ltd v HMRC [2020] EWCA Civ 452 paragraph 99, arguing that ‘where a term is undefined in VAT legislation the meaning of the term is to be determined by considering its usual meaning in everyday language while also taking account of the context in which it occurs and the purposes of the rules of which it forms part’.

This went to the hub of the question of whether the biscuit was partly covered in chocolate.

As usual definitions were at play with Ferrero’s counsel drawing on Google, the Oxford English Dictionary et al to argue that ‘in order to be covered (even partly) the asserted cover must be over the thing being covered, usually for the purpose of protecting or concealing that which is covered’.

Ferrero challenged the basis on which HMRC’s decisions were taken as ‘applying the wrong test’.

For HMRC, barrister Edward Hellier rejected Ferrero’s position, arguing that the tribunal only had to decide ‘from the perspective of the ordinary and informed person in the street, or put another way taking a reasonable view of all the facts (see HMRC v Proctor & Gamble UK [2009] EWCA Civ 407), whether the biscuits are “partly covered” by the ring’.

Pushing on with his argument, Hellier submitted that ‘whether a biscuit is “partly covered” is uncomplicated to discern and can clearly be seen by the approach adopted in Blissfuls’.

Judge Amanda Brown stated: ‘None of the cases concerning the VAT liability of biscuits nor HMRC’s guidance evaluates the statutory test in exactly the way the appellant invited us to approach it, ie, to reflect on the common usage of the words “partly covered”.

‘It is not our role to put a gloss on or otherwise define what “partly covered” means’ simply to satisfy the view of an ‘informed consumer’.

After lengthy discussion about the merits of lids, outer surfaces and baked biscuit elements, the tribunal made a decision, ruling in favour of the appellant.

‘Having carefully considered the facts as we have found them, we have concluded that the biscuits are not partly covered in a substance similar in taste and appearance to chocolate.

‘In our view the two baked biscuit elements of the biscuit are not dissimilar to a traditional sandwich biscuit where the two baked biscuit elements contain (but not fully) the filling element which is plainly visible when the finished product is examined.’

This was a win for Ferrero this time, but yet again flagged the nonsensical VAT rules which cause such utter confusion and complexity for companies and HMRC.

At the end of the ruling, it appeared the tribunal panel were pre-empting a further appeal with confirmation the issue of ‘fiscal neutrality’ was not addressed at the hearing, as they harked to the similarity to Blissfuls.

Judge Brown concluded: ‘Whilst we accept that the biscuits are similar to Blissfuls they are not the same product. We do not consider, to the extent that the concept is relevant in this appeal (noting that HMRC contend that it is not) that our decision breaches it.’

HMRC told Business & Accountancy Daily that they will not be appealing the decision.

An HMRC spokesperson said: ‘The tribunal’s decision sets no precedent as it was based on the specific facts of the case. We’ve decided not to appeal it.’

Glyn Edwards, VAT director at MHA said: ‘This decision seems sensible and contrasts with the harsher decision of the Tribunal concerning the VAT treatment of McVitie’s Blissfulls.

‘Chocolate biscuits are an endless source of argument between taxpayers and HMRC but shows how VAT hasn’t aged well – legislation which causes debates over such minute details is bad law.’