Procter & Gamble UK v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | MR JUSTICE WARREN,Mr Justice Warren : |
| Judgment Date | 04 July 2008 |
| Neutral Citation | [2008] EWHC 1558 (Ch) |
| Docket Number | Case No: CH/2007/APP/0432 |
| Court | Chancery Division |
| Date | 04 July 2008 |
[2008] EWHC 1558 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
ON APPEAL FROM THE VAT & DUTIES TRIBUNAL
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Justice Warren
Case No: CH/2007/APP/0432
Mr Roderick Cordara QC and Mr Edward Brown (instructed by Robert Newey & Co.) for the Appellant
Mr Raymond Hill (instructed by the Solicitor for The Commissioners for Her Majesty's Revenue and Customs) for the Respondent
Hearing date: 14th May 2008
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Introduction
This is an appeal from a decision dated 23 May 2007 (“the Decision”) of the VAT & Duties Tribunal (Dr John Avery Jones and Catherine Farquharson) (“the Tribunal”). The Tribunal dismissed the appeal of Procter & Gamble UK (“P&G UK”—a partnership of companies whose ultimate parent is The Proctor & Gamble Company of Ohio) against a decision letter dated 4 January 2006 upheld on review on 6 March 2006, that P&G UK's product, Regular Pringles (also known as Base Pringles) is standard-rated.
The issue before the Tribunal was whether Regular Pringles are standard-rated as being within the words “potato crisps, potato sticks, potato puffs and similar products made from the potato, or from potato flour, or from potato starch” in excepted item 5 of Group 1 of Schedule 8 to the VAT Act 1994. As the Tribunal observed, the appeal related only to Regular Pringles. The formulation had changed in the autumn of 2004 but the Tribunal were not concerned with the status before then. The status of another product, Pringle Dippers, had been the subject of a previous appeal to the VAT & Duties Tribunal. I shall refer to that case as “Pringle One”. Reliance is placed by Mr Cordara, who appears for P&G UK on this appeal (as he did before the Tribunal), on Pringle One, in which the tribunal decided that Pringle Dippers were zero-rated. One ground for this decision was that Pringle Dippers were not packaged for human consumption without further preparation (as required by the opening words of excepted item 5), and were thus outside the exception; but another ground was they were not a similar product made from the potato etc lacking both similarity and the necessary potato content.
Legislation
The domestic legislation is found in the VAT Act 1994. Group 1 of Schedule 8 zero-rates, among other things, a supply of anything comprised in the general items set out except a supply of anything comprised in the excepted items unless it is also comprised in any of the items overriding those exceptions. Included in the general items is “Food of a kind used for human consumption”: generally speaking, therefore, food is zero rated.
Paragraph 5 of the excepted items reads as follows:
“5. Any of the following when packaged for human consumption without further preparation, namely, potato crisps, potato sticks, potato puffs and similar products made from the potato, or from potato flour, or from potato starch, and savoury products obtained by the swelling of cereals or cereal products; and salted or roasted nuts other than nuts in shell.”
These items are standard-rated.
Zero-rating, as the Tribunal pointed out, is permitted in certain circumstances by Article 28.2 of the Sixth Directive (now Article 110 of the Recast Directive). The permitted derogation from standard-rating is to be found in earlier legislation, namely Article 17 of the Second Directive which provides that Member States may:
“….provide for reduced rates or even exemptions with refund, if appropriate, of the tax paid at the preceding stage, where the total incidence of such measures does not exceed that of the reliefs applied under the present system. Such measures may only be taken for clearly defined social reasons and for the benefit of the final consumer, and may not remain in force after the abolition of the imposition of tax on importation and the remission of tax on exportation in trade between Member States”
It might be noted that the measure which may only be taken for clearly defined purposes is the zero-rating of the supply; it is not the exception from zero-rating which needs to be so justified. Thus there is no need to discover a clearly defined social purpose to except potato crisps and the other items in paragraph 5 (or indeed the items in the other paragraphs) of Schedule 5 from the zero-rating which would otherwise apply to them as items of food.
The Decision
After setting out the legislation, the Tribunal make a number of findings of fact in 22 sub-paragraphs of paragraph 5. I set those out in the Annex to this judgment.
The Tribunal then set out in summary form the arguments on behalf of P&G UK and HMRC.
The arguments recorded on behalf of P&G UK are as follows:
a. Regular Pringles are not similar to potato crisps on the ground of regularity of shape, having a shape not found in nature, uniform colouring, texture, taste particularly “mouth melt”. Crisps do not contain non-potato flours as does Pringles. Crisps are not normally packaged in tubes.
b. No one ingredient of Regular Pringles is over 50 per cent.
c. The manufacturing process is different from potato crisps and more like that of a cake or biscuit, being made from a dough, then cut into a standard shape, and then cooked separately.
d. Customers do not see Regular Pringles as potato crisps. The ingredients of products in the modern snack market are largely irrelevant to purchasers, as is demonstrated by the labelling requirements.
e. The approach of the Tribunal in the Pringles Dippers case should be followed both as to similarity to potato crisps and whether Regular Pringles are made from potato flour.
f. The World Customs Organisation categorises Regular Pringles with other savoury snacks and separately from potato crisps, which is merely a factor to be taken into account.
The arguments recorded on behalf of HMRC are as follows:
a. The Tribunal in the Pringle Dippers case had made two errors. First, it considered that it was possible to make potato crisps almost entirely out of potato. The maximum potato content of a normal potato crisp is in the 60s and 70s per cent range. There was no need for the draftsman to say partly made from the potato etc because none of the potato crisps, potato sticks or potato puffs could be made wholly from potato. The “made from the potato, from potato flour or from potato starch” part of the test implies that the product is partly made from such products. The degree is determined by whether the product is similar to a potato crisp.
b. Secondly, the Tribunal confused two tests. The reason that potato cakes (or farls) which are made almost wholly from potato, remain zero-rated is that they fail the test of being similar to potato crisps. That cannot support the argument that the comparative amount of potato is not conclusive and therefore the product must be made almost wholly from potato products in order to satisfy the “made from” test.
c. The similarity of Regular Pringles with potato crisps consists of the following: potato is the main ingredient; they are not intended for dipping as are tortilla chips; they are intended to be eaten as a snack and are not purchased primarily for nutrition; they are intended to be eaten on their own; the texture is more similar to potato crisps than tortilla chips; they broadly resemble the shape of potato crisps rather than the triangular shape of tortilla chips; any product made from potato flour will have to be manufactured from a dough; not all potato crisps are sold in bags, some are sold in canisters.
d. The World Customs Organisation categorisation is based on different criteria. Food labelling regulations are also irrelevant as they apply also to non zero-rated non-potato products.
It is self evident, I think, that the factors relied on by each party in these summary submissions support the contention of each party. The submissions on behalf of P&G UK point to the alleged lack of similarity and suggest that Regular Pringles are not “made from” potato etc. In contrast, the submissions on behalf of HMRC highlight the alleged similarities and suggest that Regular Pringles are indeed “made from” potato etc.
The Tribunal then give their reasons and state their conclusions in paragraphs 8 to 18 of the Decision. It is necessary to set out in some detail what they say since an important part of the appeal against their decision is that (a) they do not explain what test they were applying (b) they apply an incorrect approach to the knowledge of the reasonable man in assessing similarity and (c) they fail to identify the separate elements which weigh in the balance and thus fail to explain which way each factor points or the weight they attach to it.
In relation to the correct approach to adopt, the Tribunal referred in paragraph 8 to the decisions in C&EC v Ferrero UK Ltd [1977] STC 881 and C&EC v Quaker Oats Ltd [1987] STC 683. Since the parties do not agree about what, if any, assistance can be derived from those decisions in the present case, I should say something about them before looking at how the Tribunal applied them.
The approach to construction of the statutory provisions
Ferrero raised the issue whether the wafer products concerned were biscuits within excepted item 2 in Group 1 “Confectionery, not including cakes or biscuits other than biscuits wholly or partly covered with chocolate or with some product similar in taste and appearance…”. In this context, a note to item 2 expressly states that “confectionery” includes chocolates, sweets and biscuits…; and any item of sweetened prepared...
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