What a case at the Tax Tribunal about the supply of 8g canisters of nitrous oxide (N20) for culinary use tells us about the VAT rules.

The N20 - sometimes known as laughing gas - was supplied by taxpayer business, Telamara Limited. Telamara sold it to wholesalers and catering companies for use as cream chargers, to make whipped cream, foams and mousse.

The case hinged on whether or not it was right to classify the supply as being one of ‘food of a kind used for human consumption’. Telamara said the N20 was food. HMRC said it was not.

And far from being a theoretical exercise, this type of classification matters because of the VAT at stake. In this instance, Telamara faced VAT assessments of just over £1.4 million for zero rating supplies that HMRC said should have been standard-rated.

Rules for classification: two main groups and the odd ones out

The VAT rules specify that food of a kind used for human consumption is usually zero-rated. This is the first main group.

Then there is a list of exceptions: including ice cream, frozen yogurt; and confectionery - but not cakes or biscuits, other than biscuits wholly or partly covered with chocolate. These exceptions are standard-rated, with VAT due at 20%.

Finally, there are items overriding the exceptions, like yogurt unsuitable for immediate consumption when frozen, and herbal tea. These default to being zero-rated.

VAT and the average person

At the Tribunal, HMRC maintained that all this was ‘uncomplicated’. It said that working out whether the N20 in the charger was food of a kind used for human consumption was ‘a short practical question calling for a short practical answer’.

In fact, HMRC’s short, practical question is really anything but - and HMRC’s own guidance on the meaning of ‘food of a kind used for human consumption’ proves the point. This says that a product qualifies as such food if the average person, knowing what it is and how it’s used, would think it was food or drink: and it’s fit for human consumption. The definition is then followed up by inclusions and exclusions. Products eaten as part of a meal or as a snack qualify as food, for example, but dietary supplements, food additives and ‘similar products’, which, though edible, are not food, do not. At least, not usually.

Nothing to do with fairness

The problem is, of course, that the average person needs a mind like HMRC’s to be confident that they’re dealing with the rules correctly, and unfortunately, by the time that a case gets to the Tax Tribunal, the damage has often been done.

That was what happened in this case. Having digested over 1,000 pages of evidence, including previous decisions on the status of edible flowers; algae derivatives and linseed oil, the Tribunal ruled against Telamara. N20 was held not to be a food, and the supply of canisters should therefore have been standard-rated.

It was an expensive mistake, and the taxpayer felt it was an unfair one. He had contacted HMRC when he started to supply the canisters, asking how they should be rated for VAT purposes, and felt that other than referring him to its general guidance, HMRC had not been able to help. But while this was noted by the Tribunal, it had to remind him that its remit is not about fairness: it’s about applying the law.

Navigating the rules

Telamara makes sobering reading. The VAT rules can be a minefield, and errors can be costly. We are always on hand to help you steer a way through.