When the Courts decided that VAT wasn’t due on M&S Teacakes because they were zero rated cakes, not VATable biscuits, M&S got a £3m rebate. One year on, £100m could have been Procter & Gamble’s due if they had won the argument that Pringles were not crisps. Elena Baranova reports on the crunch verdict.
Who: Procter & Gamble UK v. Revenue & Customs
When: 20 May 2009
Law stated as at: 30 June 2009
Are Pringles "similar to potato crisps and made from the potato?" This is the question that the judges of the Court of Appeal provided the answer to by declaring that Pringles have enough "potato-ness" to be classed as a crisp, leaving Procter & Gamble ("P&G"), makers of the snack, without a hoped-for nine figure tax rebate.
Under VAT rules in the UK most foodstuffs are exempt from Britain's 17.5% sales tax, but Revenue and Customs argued that Pringles fell within the "potato crisp" exception under the VAT Act 1994 which singles out the snack for tax purposes with the words:
"Any of the following when packaged for human consumption without further preparation, namely, potato crisps, potato sticks, potato puffs and similar products made from the potato, or from potato flour, or from potato starch, and savoury products obtained by the swelling of cereals or cereal products; and salted or roasted nuts other than nuts in shell."
P&G's Pringles only contain around 42% potato. Does this percentage amount to a product made from potato and "similar" to potato crisps?
Test of "potato-ness"
The London VAT Tribunal ruled that P&G's Regular Pringles should be classed as crisps. However a High Court judge, overturned that decision by saying that Pringles don't fulfil the legal definition of "potato crisp,'' allowing them to be sold tax-free in the U.K.
P&G pointed out at the High Court hearing that Pringles don't look like a potato crisp, don't feel like a potato crisp, and don't taste like a potato crisp. They also claimed the snack isn't made like a potato crisp since it is cooked from baked dough and packaged in tubes. Potato crisps "give a sharply crunchy sensation under the tooth and have to be broken down into jagged pieces when chewed" argued P&G' lawyers. "It is totally different with a Pringle, indeed a Pringle is designed to melt down on the tongue."
A High Court judge Nicholas Warren agreed that, for the purposes of the tax office's exemption, Pringles aren't "made from the potato" within the definition of the VAT Act 1994. To fall within the exception, Warren J said, a product "must be wholly, or substantially wholly, made from the potato". Pringles, he said, did not so qualify as they were made from potato flour, corn flour, wheat starch and rice flour together with fat and emulsifier, salt and seasoning, with a potato content of around 42%.
The Court of Appeal judges disagreed with the High Court decision. Lord Justice Jacob said the VAT Tribunal was right to find Pringles are sufficiently similar to potato crisps to bring them into the tax net. He rejected the test of potatoness and added that the issue raised " an Aristotelian question: does the product have an essence of potato?" His opinion was that this question is "not capable of elaboration or complex analysis", and asked instead whether a reasonable man on the street would conclude that Pringles are similar to crisps and made from potato. He concluded that the answer will be "yes".
Despite detailed legal arguments about the fact that Pringles contain ingredients other than potato, Lord Justice Mummery thought that the answer to the crisps question was very simple: "most children, if asked whether jellies with raspberries in them were "made from" jelly, would have the good sense to say "Yes", despite the raspberries."
Why this matters:
This is not the first time that the shape or content of a vegetable has become a subject for debate. The Food and Agricultural Organisation and the World Health Organisation spent seven years before deciding what qualifies as a proper tomato.
To put their VAT point, manufacturer McVities had to create a giant Jaffa Cake to demonstrate that they are merely small cakes, not chocolate covered biscuits. The Marks & Spencer chocolate teacakes litigation run for more than ten years in order to decide that they are cakes, not biscuits.
When is a crisp not a crisp? When it is more like a cake or biscuit? And when its shape is derived not from nature but nurture? For manufacturers, it is clearly a concern that the profitability of a product can be affected by complex VAT rules.
As things stand, P&G will not need to pay any back tax to HMRC as VAT is currently included in the Pringles price, but this may not be the end of the debate. Although the judges of the Court of Appeal refused P&G leave to appeal, the Pringles maker may now approach the House of Lords direct to seek permission to appeal.