It comes as little surprise that the Labour Party front bench works on a one-week basis, with little regard to consistency of message or coherent policy making, but today’s policy of the day (doubtless dreamt-up this morning over a bowl of granola and grapefruit) couldn’t help but make this author chortle.
Last year, this blog featured a defence of the Government’s so-called “Pasty Tax”. In addition to the various good tax-economy reasons for the proposed budgetary measure; taxing pies, pasties, and sausage rolls made good sense as they’re generally bad for you and their consumption ought to be discouraged. Of course, the two Eds clearly disagreed – visiting a Greggs to highlight the fatty, salty, pastry goodness of a good meat pie.
How, therefore, does this square with Shadow Health Secretary Andy Burnham’s call, today, for unhealthy breakfast cereals to be banned? It is undoubtedly concerning that breakfast cereals targeted at children could contain as much as 40% sugar. Burnham’s proposal (which isn’t a ban, but a modest cap of 30% on the amount of sugar in a breakfast cereal) is a welcome contribution to the debate as to how to tackle the UK’s woeful health record. But perhaps Mr Burnham should have a word with his bosses before they next get a greasy whiff of an opportunity to score a cheap win over the Government by endorsing the virtues of the foods that are high in salt and almost 25% fat.
The Value Added Tax Act 1994 provides that food is generally zero-rated for VAT purposes, except for food which is provided in the course of catering and other specific exempt or zero-rated items. Food in the course of catering includes all food to be consumed on-premises and hot food to be consumed off-premises. Hot food is defined as:
Food which, or any part of which—
(i) has been heated for the purposes of enabling it to be consumed at a temperature above the ambient air temperature; and
(ii) is at the time of the supply above that temperature.
Such a definition therefore excludes food which is incidentally hot by virtue of being freshly baked – such as pies, pasties and sausage rolls of the sort which you would purchase in a Greggs bakery shop.
The 2012 Budget however proposed a new definition of hot food:
“Hot food” means food which, or any part of which, is above the ambient air temperature at the time it is provided to the customer, other than freshly baked bread.
Crucially, such a definition catches Greggs pasties, and hence the “Pasty Tax” was born.
On Monday 28th May 2012 HM Treasury announced that following the consultation period on VAT measures announced in the 2012 Budget the proposed revision of the definition of “hot food” shall not be implemented. The so-called “Pasty Tax” caused a political uproar. The Prime Minister was forced to recollect the last time that he had consumed a pasty (which he failed to accurately so do) while the rest of us were forced to endure a staged visit to a Greggs by Ed Miliband and Ed Balls.
However, the proposed revision to the definitions contained within VAT Act made sense, both in terms of public policy and tax efficiency. I offer, therefore, a defence of the Pasty Tax.
Pasties are generally bad for you and their consumption ought to be discouraged
Public policy has for some considerable time tended towards discouraging the consumption of things that are bad for you. In the past this has been achieved largely by levying high levels of excise duty on tobacco and alcohol. Scotland has recently enacted a minimum price for alcohol, in order to prevent supermarkets from selling alcohol as a loss leader, while the UK Government is consulting on similar plans for England.
Denmark enacted the world’s first “fat-tax” on retail sales of items with a saturated fat content of higher than 2.3%. David Cameron himself has publicly countenanced such a tax for the United Kingdom. I remain sceptical about the merits of such a tax, however it does seem reasonable, given the political will to use fiscal means to influence consumption, to end a VAT exemption which chiefly benefits pies, pasties and sausage rolls*.
The “Pasty Tax” removes an arbitrary distinction in law
VAT law is full of anomalous and seemingly arbitrary distinctions. Such distinctions are inevitable if you operate a series of zero-ratings and exemptions, as the UK and Ireland do.
For example, if I sell you a ham and cheese sandwich (from my VAT registered delicatessen) it comes zero-rated for the purpose of VAT. Unless, however, you choose to eat your sandwich in the seating area in my delicatessen, in which case I’d have to add on VAT at 20%. If I pop that ham and cheese sandwich into a toasting oven and sell you a ham and cheese toastie then it would be subject to VAT at 20% regardless of where you intended upon eating it.
If your cold sandwich to take away comes with a packet of crisps on the side then the sandwich is VAT free but the crisps are chargeable at 20%. If you ask me to put the crisps on the sandwich (which is delicious, by the way) then the whole sandwich, including the cost of the bread, butter, cheese and ham, is chargeable at 20%.
Unless, of course, the crisps are Pringles – which aren’t crisps at all, they’re cakes** – which are VAT free. Which makes them unlike Jaffa cakes, which aren’t cakes – but biscuits. Some biscuits are free from VAT however Jaffa Cakes are liable for VAT at 20% as – crucially – they have chocolate on the top. Similarly, a Plain Hob Nob will be VAT free but a Chocolate Hob Nob is chargeable at 20%.
The point of the above soliloquy is to demonstrate just what an odd beast VAT can be at times. In the case of hot pies, pasties and sausage rolls the law at present prescribes that food which is freshly cooked and intended to be sold for consumption at that point is chargeable for VAT. However, food that is only hot by virtue of having been freshly cooked and is in the process of cooling down is zero-rated – even if it is freshly cooked and piping hot. Food that has cooled down substantially but is still being kept warm by a hot lamp or cabinet is standard rated, however if it is not being kept above the ambient air temperature then it’s zero-rated.
The result is that when you go to a chip shop and buy a freshly cooked battered sausage it’s standard rated, while if you go next door to Greggs that freshly baked sausage roll is VAT free. This distinction gives a clear advantage to one of these two enterprises both of which are engaged in substantially similar trades.
Justification for this distinction could be made on public policy grounds if we somehow wished to encourage the consumption of pies, pasties and sausage rolls. However, as I discussed above public policy has tended away from favourable treatment for any unhealthy foods.
One is therefore led to the conclusion that there is no good justification for the favourable tax treatment of pasties, and thus that the “Pasty Tax” is justified – both on grounds of tax efficiency and of public policy.
*For the record: I love pies, however my favoured choice of pie – a Melton Mowbray Pork Pie – has always been free from VAT.