Cake or biscuit? The Scottish court decides

HM Revenue & Customs is forced to defend its policy of charging VAT on biscuits and not cakes in what is a tough taste challenge for the Scottish courts

It wasn’t too long ago that retail giant Marks & Spencer (M&S) fought HM Revenue & Customs in the courts over the revenue’s historic decision to class its marshmallow teacakes as biscuits, meaning that VAT had to be paid on the product. M&S won its battle to have the product reclassified as a cake in 2009 after the House of Lords accepted the chocolate covered snack was indeed a cake.

Last week the legal debate came to the fore again. This time around the Scottish court was asked to decide if the same marshmallow-based confectionary should be classed as biscuit or cake in Scotland. HMRC, which had officer Luke Connell defending the claim, once again insisted that it should be deemed a biscuit.

Two Lanarkshire-based confectioners, Lees of Scotland and ThomasTunnock, instructed Terra Firma Chambers’ Philip Simpson to challenge the classification. According to Lees, the snack in question, Snowballs, are a “soft fluffy mallow with a chocolate coating and sprinkled with the finest flakes of coconut to create a delicious sweet treat”.

The court had rejected a £2m VAT rebate claim by Lees of Scotland and for £800,000 by ThomasTunnock in 2012. The pair had appealed the ruling to the First-Tier Tax Tribunal.

For Judges Anne Scott and Peter Sheppard this turned out to be a tough case. Not only were they treated to a display of complex legal debate, but they were also challenged to taste the biscuits/cakes in question.

The taste test turned out to be a killer blow for HMRC.

In her ruling Judge Scott described the ordeal the two judges were subjected to: “We […] were each provided with a plate comprising a number of confections including one each of a Jaffa cake, Mr Kipling Bakewell Tart, Waitrose meringue, a tea cake manufactured by each appellant, a Lees snowball and a mini jam snow cake.”

Each snack was tasted “in moderation”, leaving the judicial pair “with very sticky fingers”, the kind one might get if they were “eating a cake such as a vanilla slice”.

As well as applying the taste test the judges also examined the manufacturing process, best occasion to eat a Snowball and positioning on a supermarket aisle.

Eating a Snowball in the street would be ill advised, they concluded. The age of the consumer, their gender and background might help to determine whether they would eat it off a “plate, a napkin or a piece of paper or even just a bare table so that the pieces of coconut which fly off do not create a great deal of mess”.

The Snowball would be best consumed with a beverage, and could be a cake of choice at an office birthday party, the judge continued. The product was not dissimilar from the marshmallow-based teacake, which was already deemed to be a VAT free cake.

HMRC, the court concluded, should refund the £2.8m in VAT paid by the two manufacturers. A sweet victory, no doubt.