VAT exempt goods and services – two more cautionary tales

For the most part, Value Added Tax (VAT) is relatively simple. If your business is registered for VAT, you’ll normally sell your goods at the standard 20% rate. However, your company may be dealing in reduced rate or VAT exempt goods. Two recent news stories have once again highlighted the importance of confirming whether certain goods are VAT exempt before you start selling them. As you’ll see, if you don’t, you can end up with a huge bill for unpaid Value Added Tax, not to mention some hefty legal fees.

What are VAT exempt goods?

There are three main rates of VAT applicable to goods and services. Most of them are chargeable at a 20% VAT rate. Some goods and services attract a reduced 5% rate. These include things like children’s car seats and home energy. Finally, there’s a zero rate. Examples of VAT exempt goods include most food items and children’s clothes. You can find a fuller list of VAT rates here.

VAT rules aren’t always clearcut

There have been some high-profile VAT struggles between companies and HMRC. Two of the most famous involve food items.

Most food items are VAT exempt goods. However, there are exceptions. For example, items like confectionary, crisps, ice cream, hot food and hot takeaways are charged at the standard 20% VAT rate.

Unfortunately, the rules aren’t always clear. As we reported in Marshmallows and VAT: when size matters, there was a tussle between HMRC and a sweet wholesaler called Innovative Bites Ltd. This company sells a product called Mega Marshmallows. As you will have guessed, these are extremely big marshmallows. They measure 5cm in height!

HMRC took the line that the Mega Marshmallows were confectionary, and thus chargeable at 20% VAT. Innovative Bites Ltd disagreed. It claimed the marshmallows were ingredients, not confectionary. Therefore, they counted as VAT exempt goods.

A tribunal agreed with Innovative Bites Ltd, saving it from a £473,000 VAT bill. In a similar ruling some years before, a court ruled that McVitie’s Jaffa Cakes were cakes, not biscuits. As a result, they are also VAT exempt goods.

Recent VAT exemption disputes

If the cases of the Mega Marshmallows and Jaffa Cakes, the companies selling the goods won out over HMRC. However, two recent cases show that this is far from guaranteed.

The first case concerned a software product called ConquerMaths, provided by a company called Generic Maths Ltd. In a nutshell, the company argued that its software was VAT exempt because it was a supply of examination services. HMRC argued it was a standard-rated supply of education. A first-tier tribunal sided with HMRC, leaving Generic Maths Ltd with a VAT liability of over £80,000.

The second case involved a hair transplant company trading as the Farjo Hair Institute. HMRC had decided that the majority of the company’s services were cosmetic, not medical, for VAT purposes. Therefore, they should be charged at the standard VAT rate of 20%. A tribunal agreed with the taxman, saying ‘hair transplantation is not a cure for tax purposes’. There were a number of exemptions, such as when cancer patients received hair transplants. The tribunal ruled that HMRC and the company should decide which cases fell under the term ‘medical care’ and adjust the VAT claim accordingly.

However, as few of the cases fall under the ‘medical care’ remit, the company is expected to pay most of the outstanding VAT claim of £2,498,232.

Correctly defining VAT exempt goods and services

All of these cases highlight the importance of correctly defining VAT exempt goods and services. This is where THP’s VAT returns service can help you. We’ll not only make sure your VAT affairs are taken care of, but if there’s any doubt about whether a product or service is VAT exempt, we’ll confirm it with HMRC on your behalf. Get in touch today to learn more about how we can help you.