1. Purpose of this brief

This brief sets out HMRC’s position following the decision of the First-tier Tribunal in Phoenix Foods Ltd (“Phoenix”). The issue in this case was whether bicarbonate of soda sold in small tubs to supermarkets qualified as zero-rated food or was subject to the standard rate of VAT.

2. Readership

Businesses that manufacture or sell bicarbonate of soda.

3. Background

Phoenix supplied small 200g tubs (and 25g sachets) of food grade bicarbonate of soda to supermarkets. The labelling on the tubs referred to its use as a leavening agent in baking and also to its non-culinary uses such as a cleaner, deodoriser and mild abrasive.

HMRC argued that bicarbonate of soda should be standard-rated as it is a product with multiple uses, and that it was only added to food for ‘technological purposes’ as a leavening agent, not for its nutritional value.

Phoenix argued that the product should be zero-rated as the:

marketing of the product indicated that it was a food ingredient

product contained sodium which is an essential nutrient

4. The Tribunal Decision

The Tribunal decided that the supplies of bicarbonate of soda in this case qualified as a zero-rated food ingredient. The Tribunal accepted that bicarbonate of soda has many uses, but in this case it was appropriate to consider how the bicarbonate of soda would be used. Based on the packaging and placements by the supermarkets in their baking sections, the Tribunal found that the supplies were primarily used as a baking ingredient.

It pointed out that the product was an essential baking ingredient for some types of bread and cakes, and contains an essential nutrient, sodium, which is retained in the bread or cake after it has been baked. The Tribunal ruled that when sold in this form and packaging it should be zero-rated.

5. Changes to HMRC’s policy

HMRC accepts that the product in question is zero-rated. In particular, it satisfies the conditions in paragraph 3.2 of Food products and VAT (VAT Notice 701/14) for zero rating, namely that it:

has some measurable nutritional content (sodium)

is used solely or predominantly, in the particular form in which it is supplied, for baking (as evidenced by the way in which it was held out for sale)

is not an excepted item

In considering how a product is held out for sale, HMRC will consider a range of factors including the way in which a product is:

labelled

packaged

displayed

invoiced

advertised

marketed

Supplies of bicarbonate of soda that are similar to those made by Phoenix, where the bicarbonate of soda is in small tubs that are held out for sale as a baking ingredient, are zero-rated for VAT purposes.

Supplies of bicarbonate of soda that are sold in larger, industrial-sized quantities, or which are held out for non-culinary purposes, remain standard-rated.

HMRC will change the relevant guidance and Food products and VAT (Notice 701/14) to reflect this change in the VAT treatment of certain supplies of bicarbonate of soda.

6. Unjust enrichment

HMRC reserves the right to refuse claims on the ground of unjust enrichment where it can be shown that the claimant passed the economic burden of the VAT charge on to their customers. If a customer is registered for VAT and entitled to recover input tax on their purchases, HMRC will normally regard the burden as having been passed on. Claimants will then have to agree to use the Reimbursement Scheme before HMRC makes any payment. This is explained further in sections 9 and 10 of VAT Notice 700/45: how to correct VAT errors and make adjustments or claims.

7. Making a claim

All claims must be made in writing, stating the amount of the claim and the method by which it has been calculated by reference to documentary evidence in the possession of the claimant. Claims must also be broken down by prescribed accounting period.

Only the person who incorrectly accounted for the VAT is entitled to make a claim to recover it. Any other supplies or claims made on a different basis must be excluded from these arrangements.

All claims will be subject to the 4-year time limit in section 80(4) of the VAT Act 1994.

8. Penalties

In circumstances where claimants have not taken due care in submitting valid claims, they may be charged a penalty. They may therefore incur a penalty if, as a result of a failure to take reasonable care, their VAT return shows either too little tax due or a repayment that is too large.