Teacakes and Tax Oops!

I can’t seem to wade through the legalese concerning this article on the BBC, all I know is that there is a huge picture of my new favorite chocolate snack–individually wrapped for my convenience–from my favorite store in the UK, the M&S food hall.  The article has something to do with millions of pounds in taxes (VAT, something I still don’t understand after 18 months in the UK) and  the  umm distinction (?) between a cake or biscuit:

Cake or biscuit

UK tax officials acknowledged that chocolate teacakes had been wrongly classed as biscuits in 1994, prompting M&S to launch a legal battle to have the wrongly-paid VAT returned.

Under UK tax rules, most traditional bakery products such as bread, cakes, flapjacks and Jaffa Cakes are free of VAT, but the tax is payable on cereal bars, shortbread and partly-coated or wholly-coated biscuits.

Yeah I don’t see the distinction, and it only adds to my sense that modern legal battles are mostly silly and full of tiny details that are completely opaque to the non-lawyer.  Oh well.  Regardless, the whole thing sure does make me crave an M&S chocolate thingy whatever it is (cake or biscuit?  we may never know)


4 responses to “Teacakes and Tax Oops!

  1. VAT is, quite simply, sales tax in the US. It might intrigue you that it appears to be an almost literal translation of “Mehrwert”, a Marxist term for profit. In practice, of course, a Socialist-sounding tax on profit is passed on straight to the consumer, becoming, in effect a regressive tax, which hits the least affluent most severely. Economists out there, please feel free to correct me on all of this!

  2. RB:

    I’m no economist but the link on Wikipedia for VAT states clearly that it is *not* a sales tax and that’s where they start to lose me. I can see differences from living in the US with a sales tax and the UK with VAT (VAT a larger % and added into the price that’s posted, not something that appears at the register) but I don’t get fundamentally the distinction that is made.

    I’d have to check, they might both be “consumption” taxes but even that I’m not sure about.

  3. Except that the VAT is, in classic VAT economic theory, collected (or accumulated; for efficiency purposes, collection is usually consolidated at one point after accounting at each stage) on each level of handling. For example- suppose I have a nice little home business in Cambridge where I gather stomes from the River Cam, polish them, and paint little scenes on them of the university buildings. I don’t do more because I am not equipped to handle more, so I sell the paintged rocks to RB for 10 pounds each, and he sprays them with disinfectant (carbolic acid or sodium hypochlorite), then coats them with acrylic to preserve the painting. Then he sells them to M&S for 15 pounds each, and M&S sells them to the Heathrow airport shops for 18 pounds, and they, in turn, finally sell them to sentimental tourists who forgot to shop for a souvenir for grandma and need something to take along home to Madrid, for 36 pounds.

    The tax on what I did would be applied to the 10 pounds of value I added. The tax on RB’s vaue added would be on 5 pounds (15 minus 10). The VAT on the M&S value added would be applied to 3 pounds (18 minus 15), etc . At each stage, a business is responsible for the value it has added to the item of commerce.

    There are two problems with this. First, philosophically, with a normal point-of-sale sales tax, the buyer sees the tax and knows how much of what she is buying and how much is tax going to other government uses. In this scheme, tax costs are added and buried in each stage of production, and this tends to increase the cost of production, making it wise for a person to do less int he country and more of the production using cheaper inputs outside of domestic economy. There are a varierty of ways governments try to get around that, mostly dumb (e.g., tariffs, etc.). But this leads to the second and worse issue- tyhe thing is a bureaucrqatic nightmare for the exact reason you point out, like trying to administer price controls and rationing schemes in WWII. You have brain-sclerotic civil servants sitting in green-walled offices trying to establish definitions, and figure out the difference between a cake and a biscuit. This is what they call brilliant government. What causes that is, of course, the fact that every special interest group in the land going to the politicians hat-in-hand lobbying for their commodity or product to be treated more favorably- and that leads to the usual horse-trading that sucks the life out of the economy and makes everyone give up and buy stuff made in Malaysia or somewhere else where the regulatory regimens aren’t so ridiculous.

    If you think this one is bad, go (seriously) check out the toothpaste specifications being drafted at EU headquarters in Brussels.

  4. Pingback: Taxes Redux « Not From Around Here

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