I cannot think of anyone who, having received a basket of goodies as a present, would not be pleased. So, if you run a business, hampers given as gifts are often considered an ideal choice largely because:
- They tend to be not overly expensive and most are in the range of around £35 to £100
- Under HMRC’s trivial benefits exemption, gifts worth £50 or less, are tax exempt, with tax only payable on any amount above the £50 threshold
- They contain a variety of yummy treats and usually a nice bottle of wine
- Even for the pickiest of individuals, it’s near certain that some of the hamper’s contents will appeal
- It’s egalitarian with everyone, be it client or employee, given the same thing
So, what is the problem you ask, well it’s those perennial party-poopers HMRC and their fixation with squeezing every penny of VAT from any transaction, often with little or no logical thought involved.
Background
Clearwater Hampers Ltd (CHL) is an online retailer of gift hampers containing a variety of food and drink products, all of which were sold in one of four types of container; which range from cardboard boxes up to wicker baskets.
As VAT was due on some of the items, such as wine and chocolates, CHL applied a composite VAT rate to its sales based on the relative value of the standard-rated and zero-rated items in each container. So far so good, as HMRC accepted the split between 20% and 0% items as fair and reasonable.
CHL then poked the sleeping bear (or HMRC), by claiming two VAT refunds on the value of the containers, which the yummy treats are supplied in, which they considered merely packaging. Firstly, they claimed on the cardboard boxes, bamboo trays and open baskets and were repaid £1,220,000 VAT in 2024.
Thus, emboldened CHL then poked the sleeping bear a second time and requested a refund of £425,529 on their highest quality containers, namely lidded wicker baskets. This time HMRC woke up and decided to refuse CHL’s request, so off to the First Tier tax Tribunal (FTT) everyone went.
The Arguments
CHL’s argued that as the lidded baskets and various containers were ancillary to the supply of the food and drink, they were not therefore a separate supply of goods. They also argued that the lidded baskets were an indivisible part of a single supply of the product.
HMRC countered with their view that the baskets were not in fact ancillary, being capable of separate supply and seen as a distinct product by consumers. They followed this up by reference to two of their VAT Public Notices (701/14), which states that hampers must be treated as a supply in their own right, as well as Notice 700, which states if packaging is “more than is normal and necessary” it is a multiple supply.
Intriguingly, HMRC had included the Notice 701/14 point in the legislative framework section of their written submissions to the FTT, ignoring the fact that the Notice did not have the force of law.
HMRC shoot themselves in the foot
Both HMRC and CHL agreed that each product represented a mix of standard-rated and zero-rated supplies; the sole point of disagreement was therefore whether the lidded wicker baskets represented a third (standard-rated @ 20%) supply.
Rather surprisingly HMRC did not contest CHL’s argument that the baskets could be ancillary to both a standard-rated and zero-rated supply at the same time. This meant that they had, perhaps unwittingly, but effectively accepted CHL’s main argument that the baskets were not a separate supply of goods.
What did the Tax Tribunal think?
The FTT judge said that he and his panel had considered at length, who would be an ‘average consumer’ of the products and found it to be a person purchasing a basket as a gift. He went on to say that having established the purchaser’s motive in buying the basket, the said purchaser would not consider the basket to be an aim in itself, rather a way to ‘present and protect’ the food and drink within.
It followed that the basket was a means to better enjoy its contents and was found to be ancillary to the supply of said contents. The VAT should therefore be calculated based on the value of the product as a whole, with the rate based purely on the relative values of the standard-rated and zero-rated food and drink within.
This was the killer blow for HMRC, as it therefore followed that the FTT’s findings on the motives of the average purchaser of the basket’s meant that CHL’s updated figures in support of the VAT reclaim were correct and CHL’s appeal was allowed in full.
Accountant’s view
Court cases involving the VAT treatment of single/multiple supplies for the purposes of VAT, regularly end up before the courts; but as the judge observed in this case, there is no absolute or hard-and-fast rule that will determine such disagreements, with every decision turning on the individual facts.
The key element in these type of cases is that the transaction must always be considered through the eyes of a ‘typical consumer’. HMRC guidance echoes this and also places importance on whether the makeup of the supply can be said to be ‘artificial’. It’s also interesting that the FTT judge found HMRC’s reliance on its own VAT Notices, which are only guidance and do not have the force of law, to be “disappointingly naive”.
My final thought on this case is that HMRC should think long and hard before they follow their normal practice of automatically appealing any decision that goes against them, especially so, as in effect, they have already conceded on CHL’s main argument.
