Tax is something that every employer and employee has to pay. Whether you’re freelancing, picking up contract work, or running your own business – tax is simply something that won’t go away. Some may even try to avoid or evade paying tax, often with not so great consequences.

Alongside paying income tax, National Insurance contributions and Corporation Tax, we also find ourselves coughing up Value Added Tax (VAT) as well.

Introduced in 1973 by the then-Chancellor Lord Barber, VAT has now been adapted by over 130 countries and brings over £70 billion annually into the UK economy alone. Put simply, VAT is a system of legislation whereby a business is taxed on components that are used to make a product and recouped when the consumer makes a purchase.

Across the European Union, VAT is set at differing rates. For example, Luxemburg has a rate of 17%, Hungary pays a table-leading 27%, whereas in good old Blighty we’re somewhere in the middle with a 20% standard VAT rate.

Throughout the ages some products or items have been deemed “essential” and automatically declared exempt from VAT, or have a lower rate – sometimes resulting in bizarre scenarios and pieces of legislation.

Is a Jaffa Cake a biscuit or a cake?

Not as pressing as the famous food-based quandary of ‘Daddy or chips?’ but ‘cake or biscuit’ has nevertheless had many of us questioning just that: is a Jaffa Cake a cake, or a biscuit? It took a case in court to come up with a full answer.

Under UK law, VAT on cakes and biscuits is set at 0%. However, crucially, the law states that if a biscuit is partly or wholly covered in chocolate then it is to be taxed at the standard rate. HMRC clearly defines the difference as follows:

“The significance of the borderline between cakes and biscuits is that a cake is zero-rated even if it is covered in chocolate, whereas a biscuit is standard-rated if wholly or partly covered in chocolate or some product similar in taste and appearance.”

In 1991 Her Majesty’s Customs and Excise – HMRC as we know it today – challenged manufacturer McVities on their orange filled goodies, believing them to be biscuits. McVities fought back. The case eventually went to tribunal and, according to rumour, McVities even baked a 12” Jaffa Cake in their quest to prove the fact that they are a cake and not a biscuit.

Her Maj eventually ruled in McVities’ favour, and consumers of Jaffa Cake’s rejoiced! The cake would now not be subjected to a 17.5% VAT (the VAT rate at the time in the UK, currently standard VAT is 20% in 2024/25) price hike.

That really takes the biscuit

Aside from the issue of VAT on cakes and biscuits, other food companies haven’t had as much luck. The law states that potato crisps are subject to standard rate VAT, whereas maize and corn-based snacks are 0%. Procter & Gamble, manufactures of Pringles, thought they would try their luck and see if a court would rule their crisp a maize-based product.

Sadly, they lost their appeal to become VAT-exempt as Pringles were identified as 50% potato.

Large retailer Marks and Spencer fared better when their thirteen year battle with the taxman lead to a reimbursement of over £3.5million in VAT. HMRC had wrongly declared teacakes as a biscuit instead of cake.

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What a scandal!

You'll find that it isn't just food that often gets hit by a weird VAT law. Until 2021, HMRC classified items such as tampons and sanitary products as "non-essential" or "luxury items".

This means that once a month, up until the decision was overruled in 2021, women across the UK fell foul of EU tax legislation and tampons and sanitary items are taxed at a rate of 5%! Just to put this into comparison, these items were not classed as a "non-essential luxury":

• ‍crocodile meat,
• bingo,
• the aforementioned Jaffa Cakes,
• and herbal tea.

Just in case you're sat there bewildered - yes you did indeed read that right. Previously all those things are not classified as 'non-essential' or 'luxury', whereas sanitary products are.

There were many campaigns to get the HMRC to reconsider this, however, the ruling was not changed until the UK left the EU. This is because of an EU law that prevents individual countries dropping the VAT rate to 0%.

Can we really argue with VAT? In some cases, it seems that HMRC is willing to reconsider the classification of certain products, and in others stick to the years-old regimented rules and regulations. It goes without saying that the UK VAT system is tricky business, only made slightly simpler for business owners with the introduction of the Flat Rate Scheme.

VAT looks like it will be around for many years to come. After all, with all its intricacies and weirdness, VAT brings in the third highest tax revenue in the country and looks to be a money-spinner that’s here to stay.

VAT’s all for now

We hope this has shed some light on the subject, but if you’re a freelancer, contractor or small business owner and are still stumped by taxes, take a look at the link below and find out how a specialist online accountant like Crunch can help you!