VAT on Everyday Items: The Small Business Survival Guide

If there’s one thing that keeps accountants on our toes (and shaking our heads), it’s VAT. Specifically, it’s what VAT rates apply to. Because in this great nation, where biscuits can become cakes and cakes can become court cases, VAT has a way of turning the ordinary into the absurd.

What Are VAT Codes?

In plain English, VAT (Value Added Tax) is the tax you pay on most goods and services in the UK. Businesses charge it, collect it, and send it off to HMRC if they’re VAT-registered.

Each transaction you record in your accounting software needs a VAT code. This tells HMRC how that sale or purchase should be treated.

Here’s the quick guide:

• Standard Rate (20%)- The default for most goods and services.

• Reduced Rate (5%)– For certain items like children’s car seats and domestic energy.

• Zero Rate (0%)– Still taxable, but no VAT charged. Covers most essentials like food and children’s clothes.

• Exempt– Goods and services that aren't taxable, like insurance services, rent, and fundraising for charity.

• Out of Scope– Not subject to UK VAT, including wages and tax payments.

Sounds simple? Oh, just you wait.

The Jaffa Cake Saga

Once upon a time (in 1991, to be exact), McVitie’s found itself in court over the humble Jaffa Cake. HMRC argued it was a biscuit, not a cake, meaning it should be charged at the standard 20% VAT rate. McVitie’s insisted it was, in fact, a cake, and therefore should be zero-rated for VAT.

You might be asking what the difference is between a cake and a biscuit in terms of VAT. Well, back in 1972, when VAT rates were decided, cakes were typically made at home, whereas luxury biscuits were made in factories. VAT was brought in as a tax on luxury products, so biscuits were taxed while cakes were left alone.

So, how did the court decide? The judge, in one of the more surreal moments in British tax history, decided the test was this:

Cakes go hard when stale. Biscuits go soft.

McVitie’s won the case in the end, and the Jaffa Cake was officially declared a cake. And somewhere deep within HMRC, an inspector probably questioned every career decision that led them there.

Essentials That Aren't (Apparently) Essential?

Speaking of outdated classifications, did you know that for years, sanitary products were classed as “luxury, non-essential” items, and included VAT at 20%? Because, of course, nothing says 'treat yourself' quite like a tampon!

After years of campaigning (and quite a bit of public outrage), the so-called “Tampon Tax” was finally abolished in 2021. Sanitary products are now zero-rated- a victory for common sense!

Also, if you thought toilet roll would be classed as an essential and zero-rated, then think again. It’s taxed at the standard 20%, because apparently, HMRC considers it an optional expense.

VAT Codes on Everyday Items (That Might Catch You Out)

For business owners dealing with VAT on everyday items, here are some head-scratchers worth noting:

• Catering vs. Cold Food: Buy a cold sandwich to take away? Zero-rated. Ask for it toasted or eaten in? Now it’s 20%.

• Energy Bills: Domestic energy = 5%. Commercial energy = 20%.

• Imported Services: Digital services from abroad can trigger reverse charge VAT. Most commonly, software subscriptions.

The golden rule: check with HMRC’s guidance (or your accountant) before you post the transaction, not when your VAT return is due. It’ll save you time, stress, and a few grey hairs.

Why This Matters for Your Business

VAT isn’t just a “tick-the-box” task; it directly affects your pricing, cash flow, and profit margins.

Getting your VAT codes right means:

• You don’t overpay HMRC (or underpay, they’re not keen on that either).

• Your accounts are accurate

• You avoid penalties that can easily snowball from innocent mistakes.

When in doubt, your accountant (👋) is your best friend here. We’ve probably already argued with HMRC about something more ridiculous than your query, and lived to tell the tale!