Pringles Liable To UK VAT, Court Rules

by Robin Pilgrim, LawAndTax-News.com, London

26 May 2009

HM Revenue and Customs has won a legal battle with Proctor and Gamble over the liability for value-added tax (VAT) purposes of its ‘Pringles’ potato chips.

The Court of Appeal has ruled that Pringles are, in fact, a potato-based snack despite the fact that they are only 42% potato, and are therefore liable for VAT at the standard rate, currently 15%.

Procter and Gamble had attempted to prove in a long-standing battle that their crisps should be allowed VAT-exemption - due to the fact that they are really more dough than potato.

The argument was based around the fact that Pringles had been placed within the category of “potato crisps, potato sticks, potato puffs and similar products made from the potato, or from potato flour, or from potato starch," by a VAT and Duties Tribunal in 2007.

This ruling was overturned by the High Court last year when the presiding judge, Mr Justice Warren, argued that to attract VAT the product must be wholly, or substantially wholly, made from potato. However, ruling in the Court of Appeal, Lord Justice Jacob upheld the Tribunal’s decision, stating that there “is more than enough potato content” in Pringles “for it to be a reasonable view that it is made from potato.”

Generally, foodstuffs are zero-rated for VAT purposes in the UK, potato snacks being one of the few exceptions. However, the rules are unclear and they have been the subject of frequent litigation between HMRC and food retailers. Earlier this year, Marks and Spencer won a long legal battle with the Revenue over the classification of teacakes for value-added tax purposes. This dispute centred on whether M&S's marshmallow-based chocolate teacakes were 'cakes' and therefore zero-rated for VAT purposes because they are classified as 'food,' or whether they were chocolate covered biscuits, which are considered a 'luxury' by the tax authorities and therefore subject to VAT.

The latest ruling means that Proctor and Gamble may be liable to pay GBP100m (USD156m) in back taxes, although the company has entered into an agreement with HMRC which meant that it paid VAT while the case was being decided.

Unsurprisingly, the company said that it was “very disappointed” with the verdict, while HMRC was, naturally, “very pleased.”