Anthony Browne is MP for South Cambridgeshire, the Chair of the Conservative backbench Treasury Committee and a member of the Treasury Select Committee.
What is the difference between a gingerbread man with chocolate eyes, and a gingerbread man with chocolate feet? If you buy the one with chocolate eyes, you will pay no VAT, but if you buy the one with chocolate feet you have to pay VAT at 20 per cent.
How we have all laughed over the years at the crazy VAT system on food, which we had limited options to change when we were in the EU. Most food incurs no VAT – but some does, but the distinctions are often arbitrary.
In some of the most mocked court cases in history, judges have had to decide whether Jaffa cakes are biscuits or cakes (biscuits), whether a Pringle is a crisp (it is), and what a flapjack is. Why does Nesquick strawberry milk incur VAT but chocolate milk doesn’t? Why are Twiglets VAT free when Walker’s crisps aren’t?
There are other bizarre anomalies with VAT on food and drink, with healthier items taxed more heavily than less healthy ones. Mineral water, frozen yogurt, vitamins and muesli bars all incur VAT at 20 per cent and yet bourbon biscuits and chocolate chip cookies are VAT free (chocolate-coated biscuits do have VAT).
Earlier this month, the Government’s food strategy was attacked by health campaigners for dropping plans for a “sugar tax” as part of the fight against obesity. With the cost of living crisis raging, it is clearly not a good time to introduce a new tax on food, or scrap “buy one get one free” deals. Campaigners said it left the obesity strategy in tatters.
But there is a simple solution: reform the VAT system on food so that only the unhealthiest foods, whose consumption increases obesity, attract VAT. We don’t need a new tax system on food, but instead to reform the one we already have to make it more rational, and indeed simpler. It would help ensure the healthy option becomes the cheapest option, and give a huge incentive to food companies to reformulate to reduce sugar and fat content.
The Soft Drinks Industry Levy has shown how powerful aligning tax incentives with health objectives can be. Eight of the top 10 drinks companies reduced sugar content of their drinks by 15 per cent or more. Research from other countries shows a similar pricing effect: in the Netherlands, a 25 per cent discount on fruit and vegetables led to a 25 per cent increase in purchases of them.
Often this issue ignites angry debates about the role of the “nanny state”. But reform of VAT on food will not lead to any new nannying, but rather make the existing nanny more rational.
The basis of the current VAT system on food was laid down by the then Conservative chancellor, Selwyn Lloyd, in his 1962 budget, where tax was imposed on certainly unhealthy products such as sweets and ice cream, but most food was tax free. It as blunt, revised a few times, but when we joined the EU, our purchase tax was transformed into VAT, and we lost most of the flexibility to change it. Calls for a more rational system over the years have been blunted by the Government’s powerlessness.
The magisterial Mirrlees Review of tax in 2010 for the Institute for Fiscal Studies cautioned against reform of VAT on food because of the complications of EU membership. This is clearly no longer an issue. We have indeed a Brexit opportunity.
The arguments for aligning VAT on food and drink with health objectives are powerful, but what are the reasons for hesitation?
The first can be summed up in one word: “pasty”. The attempt in 2012 by George Osborne to impose VAT on pasties – the pasty tax – lead to such a heated row (pastygate) that he was forced to back track. The Government now will fear a repeat if it increases any VAT on any food, however unhealthy.
But the cases are totally different. The HMT raid on pasties was an attack on an iconic much love food for arcane justifications that were impenetrable even to tax experts, and it had absolutely no support from anyone else. Not even Government MPs could justify something they couldn’t understand.
By contrast, aligning VAT on food with health objectives to tackle the obesity crisis is a clear justification with massive external support. The ridiculousness of the current system and the obesity crisis are both well known reasons for reform. Health campaigners and food campaigners will strongly support it, and could be mobilised. It would be easy for ministers and MPs to explain in TV studios why it is being done.
It is also different from pastygate for two other reasons. First, Pastygate was essentially an attack on pasties to raise revenue. But reform of VAT on food and drink could be largely revenue neutral – as well as VAT going up on unhealthy items, it would be cut on healthy ones. VAT on muesli bars and low sugar cakes, as well as vitamin supplements, could be reduced. Reform can be presented as a package – cuts on VAT on healthier foods, in return for rises on seriously unhealthy food.
Second, manufacturers can escape rises by reformulating their foods to make them healthier, just as they reduced the sugar content in fizzy drinks to escape the sugar levy. If they complain about a new tax on their products, there is an easy political retort: just reduce the fat and sugar content.
Chocolate-covered biscuits could go from having VAT at 20 per cent as they currently do to VAT free if they just reformulate. A system could be devised with an interim rate of VAT, such as 10 per cent or 15 per cent, to make it easier for food companies to cut tax by reformulating.
Or you might end up with two versions of the same product: for example, full sugar Alpen (in the red packets) might incur VAT, but low sugar Alpen (in the blue packets) might be tax free. In the current system, food manufacturers have no incentive to cut sugar and fat content. That needs to change.
The second biggest cause for Government hesitation is defining what is healthy and what isn’t. Clearly this is complex, and disputed territory.
But we do have a Food Standards Agency which produces a traffic light system for food – red, amber and green depending on health status, such as sugar and fat content. The Government could require all red rated foods to have VAT at 20 per cent. If the Treasury doesn’t trust the FSA to have any input into tax policy, it could produce a simpler system, such as just imposing VAT on foods with sugar or fat content above a certain threshold (eg any food with either sugar or fat above a certain percentage incurs 20 per cent VAT). There would be no need for court cases to decide the legal definition of a biscuit.
The more I and my research team have looked into this issue, the more I have become convinced of the arguments. Clearly it is a massive and sensitive reform, and the Government would need to start with a consultation, followed by a Green Paper. Industry needs to be consulted, but I am sure can be brought on side. To help tackle obesity, to improve respect for the tax system, and to take advantage of Brexit, it is something the Government should do. We don’t need a new sugar tax: we just need to make the existing VAT system work as intended. Anyone for a VAT-free cereal bar?
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