The maker of Nutella biscuits has won its appeal after the tribunal ruled that the sweet treat was not partly covered in chocolate and therefore qualifies as an excepted item for VAT purposes.
The dispute stemmed from several HMRC decisions on the taxable status of Ferrero UK’s new Nutella Biscuits. This case adds to the long list of food-related VAT disputes and saves the company a 20% VAT charge.
The appeal to the First Tier Tribunal (FTT) focused on whether “Nutella Biscuits” manufactured by Ferrero UK Limited were “biscuits… partly covered with chocolate or some product similar in taste and appearance” under the Value Added Tax Act 1994 (VATA) Schedule 8 Group 1 Excepted Item 2.
Ferrero sought to overturn two HMRC rulings that applied the standard 20% VAT rate to the product, creating a liability for output tax for 2022–23 and 2023–24.
The first ruling, issued on 26 August 2022, stated that “the biscuits were properly taxed for VAT purposes at the standard rate of 20% as they meet the description within the Excepted Item.” The second involved VAT assessments for accounting periods 04/22 to 04/23 issued by HMRC on 6 July 2023 and amended on 23 August, covering output tax on biscuit sales.
As is typical in food-related VAT cases, the tribunal was presented with detailed explanations of the biscuits’ composition and numerous samples. The decision included observations on the product’s structure and even its packaging tray of 30 empty cups.
In summary, Nutella Biscuits consist of a circular biscuit cup filled with approximately 5mm of Nutella, surrounded by 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 topped with a biscuit disc embossed with a heart.
The tribunal noted: “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 that it had been shown “confidential evidence about the product design, development and manufacture.”
As with other VAT food cases, the key issue was the statutory interpretation of “partly covered” in relation to 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.”
The central question was therefore whether the biscuit was partly covered in chocolate.
Ferrero’s counsel referred to common definitions from Google and the Oxford English Dictionary, arguing 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 claimed that HMRC had “applied the wrong test” in reaching its conclusions.
Representing HMRC, barrister Edward Hellier disagreed, stating that the tribunal only needed 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.”
Hellier added 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 observed: “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’.”
She continued: “It is not our role to put a gloss on or otherwise define what ‘partly covered’ means” simply to align with the view of an “informed consumer.”
After lengthy consideration of lids, outer surfaces and baked biscuit components, the tribunal ruled in Ferrero’s favour.
“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.”
The decision was a victory for Ferrero, but it once again highlighted the confusing and inconsistent nature of VAT law on food products.
The tribunal noted that “fiscal neutrality” had not been addressed during the hearing, referencing similarities 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 confirmed it will not appeal the ruling.
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, commented: “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.’”
