Why is VAT payable on chocolate covered biscuits but not on chocolate covered cake?
When VAT was introduced, certain goods and services were considered so essential that it was decided they should be subject to less tax, or none at all. This was done in two ways: zero rating and exemption.
In the eyes of UK law, biscuits and cakes are necessities and are zero rated. However, chocolate-covered biscuits are regarded as a luxury, which means the full rate of VAT is payable.
For reasons that are not entirely clear or logical, no distinction is made between chocolate-covered cake and cake without a chocolate coating.
All this might have passed us by as a quaint aspect of British legal thinking if McVities, the makers of Jaffa Cakes, had not gone to court, arguing that their product was a cake. To prove its case, McVities baked a special 12 inch Jaffa Cake which persuaded the court of its cake-like properties. As a result, no VAT is charged on Jaffa or other, more traditional chocolate covered cakes.
An equally eccentric VAT rule applies to gingerbread men. No VAT is charged if the figure has two chocolate spots for its eyes, but any chocolate-based additions, such as buttons or a belt, mean VAT is payable. So it’s cheaper to buy no-chocolate-frills gingerbread men.