Ahead of National Biscuit Day, The Institute of Chartered Accountants in England and Wales explains why the much-loved Jaffa Cake is a cake and not a biscuit...
Ahead of National Biscuit Day which falls on Bank Holiday Monday (29 May), the ICAEW explores the VAT rules on the nation's favourite biscuits and reveals why the much-loved Jaffa Cake is a cake and not a biscuit.
Caroline Miskin, the ICAEW's technical tax manager explains: “VAT is complex and full of anomalies, some of which could save businesses money. It can be confusing when items are combined.
"For example, what happens when a standard rated item, such as chocolate, mixes with a zero-rated product such as a plain biscuit?
"The answer may be an over complicated VAT system, but if you are smart cookie you can reap the rewards of these quirky biscuit rules.”
Jaffa Cakes – are they a cake or a biscuit?
No VAT is charged on plain biscuits or cakes. But when a biscuit is covered in chocolate it becomes a luxury and standard rate VAT at 20% is added to the price.
Mcvities, the market leaders for Jaffa Cakes added chocolate to the cake and tangy orange base, so classifying them as cakes, not biscuits.
Although HMRC challenged this, claiming chocolate biscuit status, the court ruled in favour of Mcvities and we don’t have to pay VAT on our Jaffa Cakes.
Chocolate chip, chocolate digestive or bourbon?
Chocolate chip biscuits where the chips are included in the dough or pressed into the surface before baking are zero-rated. Bourbon and other biscuits with a chocolate sandwich layer between two halves also escape VAT.
However, if your biscuit is wholly or partly coated in chocolate then VAT will be added at the standard rate.
Gingerbread men – don’t overdress
Unfortunately, in the biscuit world, not all Gingerbread men are born equal. No VAT is charged for gingerbread with just two chocolate spots for eyes.
However, if your gingerbread man is dressed with any chocolate-based additions, such as trousers, 20% VAT will be added.
Caroline adds: “These examples emphasis how complicated the UK tax system can be. It’s not only biscuits, but rules like these apply to a number of day to day household goods too.”