In July Marks and Spencer’s launched a new (and frankly delicious) sandwich, called the Strawberries and Cream Sandwich. It was inspired by the Japanese fruit sando, and while it looks delicious, it was rather divisive in terms of taste. A bit like marmite, you either love it or hate it.
But flavour wasn’t the only issue this sandwich caused. It also raised an old debate on categorisation, and on VAT. The big question being – is it a sandwich, or is it a cake?
What’s The Dispute?
The big dispute is between M&S and HMRC, who are arguing about whether the strawberry and cream sandwich should be zero-rated for VAT like most cold takeaway food, or standard-rated at 20% because it’s considered a ‘confectionery’ or ‘sweet treat’. HMRC’s VAT rules are notoriously complex and often subjective, which is why these arguments happen. After all, this isn’t the first time something like this has happened. Remember the Jaffa cake?
So, who says what?
HMRC Says: The sandwich is made with sweetened bread and a sweet filling, which puts it in the category of ‘sweetened prepared food which is normally eaten with the fingers.’ This falls under the definition of confectionery items, which means a 20% VAT rate applies.
M&S say: Their strawberry sandwich is marketed, sold and shaped like a sandwich, and is sold chilled and eaten cold, and therefore it should be treated like one. This would mean it falls under the standard zero-rating for cold food items like most sandwiches do, rather than the 20% rate for confectionery.
The Law Says: This situation is very similar to previous arguments, like the Jaffa Cake debate, where the classification of an item as a cake (standard 20% rated) vs a biscuit (zero-rated) turned into a legal battle. The out come of the M&S case will probably depend on how the courts interpret the existing VAT legislation and legal precedent.
From a consumer point of view, it all comes down to price. If the courts decide the sandwich is, in fact, a confectionery, then it will have 20% VAT added to the price. If they decide it can be still be classified as a sandwich, the price will stay the same.
What Businesses Should Do
If you’re a VAT registered business, then this is a good time to refresh on your VAT knowledge. In particular, here’s a few things to do:
Know your VAT categories: VAT isn’t just charging 20% on everything and calling it a day. Every item will have a specific VAT rate – some will be zero-rated, some at a reduced rate, usually only utilities (5%), some at 20%, and some will be exempt altogether. The way you charge and classify VAT within your business matters, and getting it wrong could make your VAT return incorrect. So, make sure you take the time to understand which VAT categories your offerings fall into. This is especially important if you’re working in food, hospitality or retail.
Be diligent with expense tracking: Remember that VAT isn’t just about what you charge, but what you reclaim too. Make sure you’re recording VATable expenses correctly, including the right VAT amount on invoices and receipts. Just one mismatched or mis-recorded entry could lead to serious problems if you ever have a VAT inspection.
Keep proper documentation: Whether it’s a restaurant bill, subcontractor invoice or a delivery charge, make sure you always keep the paperwork. HMRC will expect you to have a clear audit trail to back up any VAT claims you make. That doesn’t mean you have to keep a pile of paperwork in a box though – you can scan it and keep it safe in your accounting software as a digital copy instead. Give me a shout if you’re not sure how to do this.
Double-check your accounting software: A lot of modern cloud-based accounting software will have VAT categorisation tools built in. They can make pretty accurate guesses at what VAT category things should fall into on your invoices and receipts. But the tools do rely on you setting them up correctly, and they don’t always get things right. So, make sure you double-check the VAT is at the right rate.
Get advice: If in doubt, ask an expert. Bookkeepers in particular (like me) spend all day working with both accounting software and HMRC, so we really are the go-to for all things VAT. We can tell you whether your VAT amount is right, what you can reclaim, and how it all works. If you’re not sure about something, ask for help rather than hit submit.
At Bluebell Bookkeeping and Admin, I specialise in helping business owners understand their numbers and get things right the first time. Or, digging them out of a mess if they haven’t! I know that VAT can be confusing, but it doesn’t have to be stressful. I can take care of which codes to use, preparing and submitting your VAT returns accurately, and making sure you stay compliant with HMRC and avoid any nasty surprises. Plus, I save you a ton of time waiting on the phone to HMRC every time you have a question. If you’d like some help, or just have a question, give me a call and I’ll be happy to help.