Ferrero UK has successfully overturned a VAT assessment on its Nutella Biscuits in a case that shines a light on the complex tax implications of product design in the food industry.
Manufacturer Ferrero took the case to a first-tier tribunal after HMRC ruled that Nutella Biscuits did not qualify for the zero VAT rating applied to biscuits and most other non-luxury foodstuffs. Specifically, HMRC argued that Nutella Biscuits are “partialy covered with chocolate or a similar product”, meaning they fell within the zero-rating exception set out in Schedule 8 of the Value Added Tax Act 1994, and should therefore be liable for VAT at the standard 20% rate.
However, the tribunal accepted Ferrero’s argument that the chocolate component is not a covering or coating but a filling sandwiched between two biscuits. As the outer surface is plain biscuit, with just a thin strip of Nutella visible between the two halves, it ruled that the zero-rating exception cited by HMRC did not apply, and that Nutella Biscuits therefore should be exempt from VAT.
Why It Matters
For food manufacturers and importers, this case sets an important precedent for how HMRC’s guidance is interpreted in practice. The outcome underscores that presentation and construction of a product are key to VAT treatment – although comparison with another recent case shows how subtle the distinctions can be.
In 2023, a tribunal upheld HMRC’s classification of McVitie’s Blissful biscuits as liable for VAT on the same ‘partially chocolate covered’ basis. Blissful biscuits feature a single cup-like biscuit base with a chocolate filling mostly but not completely covered by a stylised McVitie’s logo made out of biscuit.
In both cases, the adjudicating panel leaned heavily on consumer perception of the products, noting in the Nutella Biscuits case that a typical customer would not see the product as chocolate-covered. In the Blissful case, however, the panel found that ‘the ordinary man in the street’ would perceive the top of the product as partially consisting of chocolate, therefore pushing it into the exemption from zero-rating.
These examples serve to highlight the fine margins involved in the VAT treatment of certain foodstuffs, and how even very minor differences in product design can have major VAT implications.
What Businesses Should Do
VAT on food is one of the most complex areas of UK tax. Not only are the rules on zero-rating and exceptions very specific to different product classes, as the cases cited above show, they are also open to very nuanced interpretations. This can make it difficult for manufacturers to know whether certain products are or are not liable for VAT.
It’s good practice to always keep accurate, detailed product descriptions, including extensive product photography and ingredient breakdowns. These can prove critical should there ever be a dispute over the VAT status.
If you are in any doubt about the tax treatment of a product, review the design against the relevant part of Schedule 8 carefully. VAT Notice 701/14 provides useful, accessible guidance.
However, given the complexities involved and the fact that VAT treatment can swing on the smallest technical details, your best bet is to seek advice from a VAT specialist. Proactive reviews carried out by an expert can save the time and expense of misclassifications and disputes.
If you need further advice or if you’ve already received correspondence from HMRC regarding the VAT classification of your products, Xeinadin’s team of VAT specialists is ready and available to help. Get in touch to speak to an expert today.
