United Biscuits (UK) Ltd v Revenue & Customs [2011] UKFTT 673 (TC) (22 September 2011)
[2011] UKFTT 673 (TC)
TC01515
Appeal number: TC/2009/16451
TC/2010/06928
Zero
rating – food – savoury snacks made of a wheat and potato blend – Excepted Item
5 Group 1 Schedule 8 VAT Act 1994 – are they similar products to potato crisps
- no – are they made from the potato – no – appeal allowed.
FIRST-TIER TRIBUNAL
TAX
UNITED
BISCUITS (UK) LTD Appellant
-
and -
THE
COMMISSIONERS FOR HER MAJESTY’S
REVENUE
AND CUSTOMS Respondents
TRIBUNAL:
LADY MITTING (TRIBUNAL JUDGE)
ALBAN
HOLDEN (MEMBER)
Sitting in private in Manchester on 12 and 13 July and 31 August 2011
Nigel Gibbon of counsel for
the Appellant
Raymond Hill of counsel for
the Respondents
© CROWN COPYRIGHT
2011
DECISION
1. This
appeal concerns the liability to VAT of two savoury snack food products
manufactured by United Biscuits (UK) Ltd (“UB”), namely Discos and new recipe
Frisps. UB maintain both should be zero rated whilst the Commissioners contend
both should be standard rated.
Legislation
2. Group 1 of
Schedule 8 to the VAT Act 1994 zero-rates:
“The supply of anything comprised in the general items
set out below, except –
(a)
a supply in the course of catering: and
(b)
a supply of anything comprised in any of the excepted items set out
below, unless it is also comprised in any of the items overriding the
exceptions set out below which relates to that excepted item.
General items
Item No
1. Food of a kind used for
human consumption.
…..
Excepted items
Item No
…..
5. 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 food products obtained
by the swelling of cereals or cereal products; and salted or roasted nuts other
than nuts in shell.”
Case Law
3. We were
referred by the parties to the following cases:
Customs & Excise Commissioners v Ferrero UK Ltd
[1997] STC 881
Proctor & Gamble UK v HMRC [20205]
Proctor & Gamble UK v HMRC [2009] EWCA Civ 407
For ease we will throughout this Decision refer to the
Proctor & Gamble litigation as “Regular Pringles”.
4. The
Commissioners accept that neither of the two products are “potato crisps,
potato sticks or potato puffs” and that neither is “obtained by the swelling of
cereals or cereal products” and that they are not “salted or roasted nuts”. UB
accepts that both products are packaged for human consumption without further
preparation. The issue before the tribunal is therefore whether either or both
of the products are “similar products made from the potato or from potato flour
or from potato starch”.
5. The
Commissioners called no oral evidence. For UB, we heard oral evidence from
Julian Ogden, UB’s Indirect Tax Controller and Doctor Olivier Sevenou, UB’s
Ingredients Technology Manager. We also had before us on behalf of the
Appellant, a witness statement from Catharine Hall, UB’s Technical Legislation
Manager, her witness statement being in the main unchallenged after two
comments to which the Commissioners took exception were withdrawn. On behalf
of the Commissioners we had before us two unchallenged witness statements from
the decision making officer, Ms Peta Siddall.
The Evidence
6. From the
evidence both oral and documentary and from the array of products put before
us, we find the following facts:
7. Both
Discos and new recipe Frisps are savoury snacks, intended to be eaten on their
own without dips or sauces. Both have been in production for some years and
their recipes have changed over the years. Discos were originally an all
potato product. In 2000 the recipe was re-formulated with a proportion of the
potato flakes being replaced by wheat flour. A further reformulation to its
current recipe took place in 2006. The current recipe is as follows:
Recipe for Discos (since 2006):
Wheat starch 31.17%
Dried Potato 27.87%
Sunflower Oil 25.65%
Wheat Flour 7.13%
Other Ingredients 8.18%
UB had been treating Discos as zero rated since 2006 but
following the Regular Pringles judgment in the Court of Appeal, UB, in
a review of its portfolio of products, sought a confirmatory ruling from the
Commissioners who ruled that it should be standard rated, hence this appeal to
the Tribunal.
8. The
position of Frisps is somewhat different in that the product currently marketed
is made from potato flakes but a new recipe has been formulated for the product
but has not yet been launched and a pre-launch ruling as to its liability has
been sought from the Commissioners. It is this new recipe which is the subject
of the appeal and throughout this Decision we refer to the product under appeal
as New Recipe Frisps. The product currently on the market, we refer to just
as ‘Frisps’. The recipe for New Recipe Frisps is as follows:
Recipe for New Recipe Frisps:
Wheat Flour 34.70%
Sunflower Oil 33.11%
Dried Potato 22.56%
Other Ingredients 9.63%
9. Discos are
sold in salt and vinegar, cheese and onion and barbeque beef flavours and
Frisps in ready salted, salt and vinegar and cheese and onion flavours. Frisps
are sold in 28 gram sealed foil bags and Discos in 28 and 64 gram packs. They
are to be found in the same supermarket aisle as potato crisps and the vast
array of other snack products both standard and zero rated, but would be in the
section devoted to niche savoury snacks.
10. New Recipe Frisps are
approximately 5cms in diameter. They are of a round ridged design and very
slightly wavy. Their appearance throughout the pack is more or less uniform
and they are of a consistent light golden brown colour. They are described as
having a light melty texture. Discos are of a uniform thin round shape, again
with a slight waviness and are approximately 4.5 cms in diameter. Their
colouring in the pack produced to us was again of a light golden brown.
Discos are described as having a thick dense texture with crunchy bite.
11. Potato crisps and sticks are
produced from the raw potato which is peeled, sliced into its designated shape
and fried, the moisture in the potato being replaced during the frying process
by oil. The potato content of the crisp in its final form would be in the
region of 60 to 70 percent. Discos and Frisps (and the manufacturing process
will be identical for New Recipe Frisps), in common with all other dough based
products whether made predominantly from potato or wheat or other cereals, are
made from a dough produced by mixing the dry ingredients which is pushed
through a series of rollers to reach the desired thickness. In the case of
Frisps, in common with all other ridged products, one of the rollers will be
ridged to produce that ridged shape. The resultant dough sheet is then cut
into shapes which are briefly fried following which oil and flavouring are
added before being packaged. It is the addition of the oil and flavouring
which create the taste of the finished product. The base of Discos and Frisps
are designed to remain as neutral as possible so as not to negatively impact on
the external flavour. It was Dr Sevenou’s evidence that it is not the potato
which is the key to delivering the taste in either Discos or New Recipe Frisps
but the predominance of the wheat flour which, unlike for example, maize flour,
is sufficiently bland to bring out the strong flavouring. Dr. Sevenou’s
evidence, which we accept, is that it is the wheat content which is responsible
for delivering the key characteristics of both products.
12. A by-product of reducing the
potato content is to improve consistency in colour. Because the level of
sugars in a potato varies from 0.3 percent in early season to 1.2 percent in
late season, there is in potato based products a gradual deepening in colour
over the calendar year. As the potato content reduces the variation in colour
lessens and a more uniformly pale colour will result.
13. Dr Sevenou’s aim in the
creation of New Recipe Frisps was to retain as near a perfect match as possible
to current Frisps so the consumer would notice as little difference as
possible, ideally none and this he felt he had achieved. The use of the same
manufacturing equipment maintains an identical shape, size and curvature
(which, as Dr Sevenou says, are matters of commercial choice). The taste,
texture and flavouring are a product of the blend of ingredients and again in
New Recipe Frisps and the 2006 Discos recipe, Dr Sevenou feels that he has
achieved a near perfect match. In the case of New Recipe Frisps, the consumer
research to which we were referred all shows a near perfect match to the
current product in the approximately one dozen elements which were tested
including for example crispness and crunchiness.
14. Dr Sevenou was of the view
that he would in due course be able to create a blend of ingredients which
would create a similarly matched product but with an even smaller potato
content. The potato content included within both Discos and New recipe Frisps
was retained for a variety of commercial and economic reasons including, for
instance, the equipment currently in use is not new and was designed to work
with potato dehydrates. The impact of a larger quantity of the other ingredients
would cause excessive damage to the equipment and thus colossal replacement
expenditure. Given these factors Dr Sevenou explained that in terms of
functionality the retention of potato was no more than incidental. It was not
key in producing any of the key characteristics of the products.
15. The evidence on labelling
was derived from Ms Hall’s witness statement. The labelling requirements for
all foods are derived from the requirements of Regulation 8 of the Food
Labelling Regulations 1996. Food to be delivered as such to the ultimate
consumer or caterer – and which does not otherwise have a name prescribed by
law or a customary name – must have a name which “shall be sufficiently precise
to inform a purchaser of the true nature of the food and to enable the food to
be distinguished from products with which it could be confused.” It was
accepted by Dr Sevenou that there is a lot of leeway in compliance with the
Regulation but Ms Hall’s evidence was that Discos and New Recipe Frisps could
not be described as potato snack products without misleading the consumer
although they could both be described as “wheat and potato snacks.” This was a
matter of commercial choice. The current packaging for Discos refers on the
front to their being “big flavoured crunchy snacks” with no mention of the
ingredients and in the statutory information given on the reverse they are
referred to as “crunchy wheat snacks” with wheat starch being given as the
first named ingredient given that it is the major ingredient in terms of
quantity. The packaging and labelling for New Recipe Frisps has not yet been
designed but in contrast to Discos, the current Frisps packaging and labelling
describes the product as, on the front, “a potato snack” and on the reverse
side as, a “reformed potato snack.” As the major ingredient, dried potato is
named first in the listed ingredients.
The Approach to be taken by the Tribunal
16. Both counsel addressed us on
this point, expressing, in part, somewhat differing views. Both agreed that
there was one single statutory test which posed a composite question, as set
out by Jacob LJ in paragraph [13] of his judgment in Regular Pringles.
“[13] As Toulson LJ observed in oral argument, it
is a composite question. So although it is convenient to ask separately
whether Pringles are ‘similar’ to potato crisps etc and whether they are ‘made
from potato’, one must also take into account the composite nature of the
question. Moreover it is, to my mind precisely the sort of question calling
for a value judgment of the sort to which the Biogen principle applies
(see Biogen v Medeva [1997] RPC 1, 38 BMLR 149).”
Mr Hill’s approach to the
question was that so long as the Tribunal took into account the composite
nature of the question then the two elements can be taken individually as sub
issues.
17. Mr Gibbon saw a danger in
this approach in that if the two sub questions were answered individually, a
combined answer could be arrived at rather than a composite one and he
therefore advocated that the Tribunal should answer the single composite
question namely “are either of the products similar products made from the
potato, or from potato flour or from potato starch.”
18. We prefer and will adopt Mr
Hill’s approach but will take care once we have considered the two discreet elements,
to draw the strands together to answer the composite question. This approach
was considered to be acceptable expressly or implicitly by all three members of
the Court of Appeal in Regular Pringles.
19. Both Mr Hill and Mr Gibbon
stressed the comments of Jacob LJ at paragraphs [14] and [35] of his judgment,
namely:
“[14] Before going further, I
have this general observation. This sort of question-a matter of
classification-is not one calling for or justifying over-elaborate, almost
mind-numbing, legal analysis. It is a short practical question calling for a
short practical answer. The tribunal did just that.
[35] To my mind the judge’s
test (not advanced primarily by Mr Cordara before him or supported as his
primary argument on this appeal) suffers from that wooliness objection, but the
real objection is that it is just too elaborate. The statute is simply posing
a kind of jury question ‘Is it similar to a potato crisp etc. and made of
potato?’ The question is not capable of elaboration or complex analysis.”
20. As put to us by both
counsel, we the Tribunal should take into account all of the facts of which we
have been informed, and we should then take a reasonable view on the basis of
those facts as to the nature of the products and whether or not either or both
fall within the relevant statutory description.
Submissions
21. It was common ground that,
as stated by the Court of Appeal, similarity is a matter of overall impression
and involves a question of degree and a multi-factorial assessment. The
Tribunal is therefore entitled to take into account the products’ appearance;
taste; ingredients; process of manufacture; marketing and packaging. Mr Hill
however suggested, and this was accepted by Mr Gibbon, that certain factors
should be excluded from consideration as having been found by the Tribunal in Regular
Pringles, for varying reasons, to be of little assistance. To be excluded
would be process of manufacture; packaging; added flavourings; placement and
competition. Those factors remaining to be considered would therefore be
shape; appearance; texture; taste; labelling and ingredients. Both Counsel
stressed that from the whole range of savoury snack products, the comparison
the Tribunal has to make is with potato crisps and not with other products
which may be standard rated because they themselves were similar products. Mr
Hill however believed that it was permissible to “keep in mind” other products
which had been judged to be or accepted to be similar to potato crisps such as
Regular Pringles and Hula Hoops. We see nothing wrong with this approach
provided it is only used as a cross check to avoid inconsistency in assessment
or in Mr Hill’s words as a means of “calibrating the level of generality”.
22. In assessing similarity, Mr
Hill proposed that the comparison in respect of New Recipe Frisps should be
with McCoys crinkle cut crisps; Walkers Crinkles and Seabrook’s crisps. In
relation to Discos he believed the comparison should be with Walkers potato
crisps. Mr Hill carried out a detailed analysis and comparison in respect of
shape; appearance; texture and base taste and in summary found marked
similarities. He conceded that in terms of labelling and ingredients the
similarity was not nearly so marked and those two features would arguably
support the Appellant. He did however believe that labelling was of minimal
importance given the leeway which is open to a manufacturer in how it describes
its products and the very different test which is applied to labelling, both in
terms of purpose and effect.
23. In looking at the “made
from” element, Mr Hill’s contention was that both products could still be
regarded as being made from the potato even though potato was not their
principal ingredient. He highlighted the rejection by the Court of Appeal that
to be “made from the potato” the product should be 100 percent potato and drew
upon paragraph 27 when Jacob LJ pointed out that “if it were right a marmalade
made using both oranges and grapefruit would be made of neither – a nonsense
conclusion.” His submission was that these two products, being made from wheat
flour and potato could therefore be “made from the potato” in the sense
required by the statutory test. Mr Hill stressed that both the Tribunal and
the Court of Appeal in Regular Pringles had rejected the suggestion that
a minimum percentage level could be set to determine whether or not something
was made from the potato. He cited Jacob LJ at paragraph 32 that “you do not
have to know where the precise line is to decide whether something is one side
or the other.”
24. In essence, Mr Hill’s
submission was that in all the circumstances, in presentation, appearance and
impression, both Discos and New Recipe Frisps are products which are similar to
potato crisps etc. and are both made from the potato, in the sense required by
Excepted Item 5.
25. Mr Gibbon imposing his
single and composite test drew on the evidence of Dr Sevenou seeking to
highlight the differences between New Recipe Frisps/Discos and potato crisps in
terms of shape, appearance, texture and taste but his principal submission in
relation to these factors was that in focussing on these characteristics at the
requisite level of generality, the same qualities and descriptions could be
applied to a range of savoury snack products both standard rated and zero rated
alike. He therefore saw these characteristics as being unhelpful and thought
the focus should be on labelling and ingredients. The base comparator, the
potato crisp, had a potato content, its principal ingredient, of some 70
percent as opposed to the 27.87 percent for Discos and 22.56 percent for New
Recipe Frisps. Mr Gibbon highlighted that of all the standard rated savoury
snacks to which we had been referred (and there were many) they all had potato
as their principal and defining ingredient from which their essential
characteristics were derived. This contrasted with Discos and New Recipe
Frisps in which not only was wheat the major ingredient but it was also the
defining ingredient in terms of characteristics. Mr Gibbon submitted that at
its most basic and fundamental level, the ingredient content, neither Discos
nor New Recipe Frisps could be described as similar products made from the
potato because the principal and defining ingredient was wheat.
26. In terms of the labelling
and presentation of the packaging, Mr Gibbon contended that this was an
essential and important difference. His point was that both products could
legally be labelled as a wheat snack without including any reference to
potato. They could be labelled as a wheat and potato snack but they could not
legally be labelled as a potato snack. This contrasted with the potato crisp
and all the other products on the standard rated side of the line which could
properly and legally be labelled as potato snacks. Both were wheat products
because wheat was their largest and defining ingredient and they could both
properly and legally be labelled as a wheat snack.
Conclusions
27. As reference throughout this
hearing was made to the Regular Pringles litigation in both the Tribunal
and the Court of Appeal, it may be useful to summarise the basic
characteristics of that product. Its potato content was approximately 42
percent, other flours around 15 percent and the fat content approximately 33
percent. In considering similarity, the Tribunal concluded
“ standing back and taking
all the factors of appearance; taste; ingredients; process of manufacture;
marketing and packaging together…and applying the ‘reasonable man’ test in test
(a), we consider that while in many respects Regular Pringles are different
from potato crisps and so they are near the borderline, they are sufficiently
similar to satisfy that test.” In relation to test (b) (the ‘made from’ test)
the Tribunal’s conclusion was:
“17.
Here, the potato flour content
is over 40 percent; it is the largest single ingredient by about 9 percentage
points; and it is nearly three times larger than the other flours in the
ingredients taken together. We have to give a yes or no answer to the question
“are Regular Pringles [partly] made from the potato, from potato flour or from
potato starch” and we are bound to say yes. There are other ingredients but it
is made from potato flour in the sense that one cannot say that it is not made
from potato flour, and the proportion of potato flour is significant being over
40 percent. The fact that it is also made from other things does not affect
this. Accordingly we find that Regular Pringles are made from potato flour and
satisfy test (b).”
28. The Tribunal’s approach was
approved and upheld by the Court of Appeal, Jacob LJ commenting in regard to
paragraph 17. that
“I cannot begin to see
anything wrong with that, still less that that was not a conclusion which any
reasonable Tribunal could reach. There is more than enough potato content for
it to be a reasonable view that it is made from the potato. “
29. Looking first at
“similarity”, this comes down to, as pointed out by the Court of Appeal, a
matter of overall impression. In matters of shape, appearance and texture, we
see clear similarities with potato crisps but accept Mr Gibbon’s argument that
similar characteristics are shared by a number of zero rated and non potato
products. To consider shape, appearance and texture does not greatly assist in
answering the question. Labelling is a clear distinction between the two but
we accept Mr Hill’s submission that it is of minimal importance. As far as
taste is concerned, we found it difficult to identify a base taste, so strong
was the flavouring and this strength and taste of flavouring would almost certainly
be found in any number of products. This leaves a comparison of the
ingredients. Clear approval for taking the potato content into account in this
consideration is to be found in paragraph 24 of Jacob LJ’s judgment. A potato
crisp has some 70 percent potato content and Regular Pringles has some 42
percent. In each case the potato is the only significant ingredient other than
the cooking medium. Discos and New Recipe Frisps have a potato content of
27.87 percent and 22.52 percent respectively. Further, the potato content is
not the only significant ingredient. Each contain to a significant degree
wheat starch (in the case of Discos) and wheat flour (in the case of New Recipe
Frisps). Despite the similarities which clearly exist in shape, appearance and
texture between the potato crisp and these products, the difference in potato
content is so great that we find that Discos and New Recipe Frisps are not
similar products to the potato crisp.
30. Although this finding would
be sufficient to conclude that the statutory test is not met, we will go on to
consider the “made from” point. It is clear that the potato content does not
have to be the same or about the same as that of a potato crisp and that it is
possible for a product to be “made from the potato” even if it has a
substantially lower proportion of potato than a standard potato crisp – as in
Regular Pringles. We accept that it is possible for a product which is made
from two or even more ingredients to, in certain circumstances, be reasonably
said to be made from one of them but that does not follow inevitably and has to
be a matter of degree and a matter of fact. The proportions of wheat and
potato in these products are by no means equal, the potato content being
considerably lower. In terms of function, based on Dr Sevenou’s evidence, the
defining and essential ingredient is the wheat. If one asks what New Recipe
Frisps and Discos are made of the answer is that, excluding the cooking oil,
they are made from a blend of wheat and potato, the potato element being of
considerably less significance than the wheat in terms of both quantity and
function. Given this, in answer to the question are New Recipe Frisps and
Discos made from the potato, the answer has to be no.
31. Interestingly, Mr Gibbon’s
approach is largely that which is advocated in the Commissioners’ Internal
Guidance notes, the current version of which, in Chapter 10.3, looks at the
meaning of “made from potato”. The Guidance begins by saying:
“We interpret the term ‘made
from’ as meaning that potato must be the main ingredient: A product will not
fall under this heading if potato appears as a minor addition, for example, to
wheat flour, so a biscuit containing a small amount of potato flour remains
zero rated,”
the Guidance goes on to say:
“made from potato” etc. means
that potato, or potato flour or potato starch must be the main ingredient of
the product that gives the product its essential characteristics. The fact
that another ingredient other than potato may comprise the largest percentage
of the total weight of the product will not necessarily determine the matter.
If potato is the significant ingredient and clearly gives the product its
essential characteristics, we would regard that product as being made from
potato.”
32. Mr Gibbon made the reference
to the Guidance not as an argument in itself as he clearly recognised that it
had no legal authority but to support the approach which he was taking to his
consideration. It must be right, that the answer cannot be based solely on
the amount of the respective ingredients but regard has to be given to their
function, to their significance in the final product.
33. Drawing the two strands
together, and asking the single composite question, are New Recipe Frisps and
Discos similar to potato crisps and made from the potato, the answer has to be
no. Equally, if we were to have adopted Mr Gibbon’s approach and asked
ourselves the question “can Discos and/or New Recipe Frisps be classified as
similar products to potato crisps, potato sticks or potato puffs, made from the
potato or from potato flour or from potato starch?”, the answer again is no.
34. The appeal is therefore
allowed. Mr Gibbon made no application for costs but as asked, we give the
Appellant liberty to apply if it so wishes within 21 days of the release of
this decision.
35. This document contains full
findings of fact and reasons for the decision. Any party dissatisfied with this
decision has a right to apply for permission to appeal against it pursuant to
Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules
2009. The application must be received by this Tribunal not later than 56
days after this decision is sent to that party. The parties are referred to
“Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)”
which accompanies and forms part of this decision notice.
TRIBUNAL JUDGE
RELEASE DATE: 22 September 2011
