What a case at the Tax Tribunal about the supply of 8g canisters of nitrous oxide (N20) for culinary use tells us about the VAT rules:
VAT dispute with HMRC
Telamara Limited sold 8-gram canisters of nitrous oxide (N2O), commonly known as laughing gas, to wholesalers and catering companies. The product was used as cream chargers: essential tools for creating whipped cream, foams, and mousse in professional kitchens.
The dispute centred on a simple question: was the N2O “food of a kind used for human consumption”?
Telamara said “Yes”; it’s used in food preparation, therefore it’s food-related and should be zero-rated for VAT. HMRC disagreed and said it’s not food itself and should be standard-rated at 20%.
This difference in opinion led to Telamara facing a VAT assessment of just over £1.4 million for zero rating supplies that HMRC said should have been standard rated.
Rules for VAT classification of food
VAT rules specify that “food of a kind used for human consumption” is usually zero-rated. There is then a list of exceptions to this rule:
The general rule: Food of a kind used for human consumption is usually zero-rated (no VAT).
The exceptions: Certain items are carved out and made standard-rated (20% VAT), including:
- Ice cream and frozen yogurt
- Confectionery (but not cakes or biscuits, unless those biscuits are wholly or partly covered in chocolate)
Further exceptions: Some items override the exceptions and revert to being zero-rated, such as:
- Yogurt unsuitable for immediate consumption when frozen
- Herbal tea
What would the “Average Person” think?
At the Tribunal, HMRC maintained that all this was ‘uncomplicated’. It said that working out whether the N20 in the charger was food of a kind used for human consumption was ‘a short practical question calling for a short practical answer’.
According to HMRC’s own guidance, a product qualifies as “food of a kind used for human consumption” if the “average person,” knowing what it is and how it’s used, would consider it food or drink and fit for human consumption.
There are caveats to the above definition including that dietary supplements, food additives, and “similar products” that are edible but not actually food don’t qualify.
The tribunal’s verdict
After considering over 1,000 pages of evidence, including previous decisions on edible flowers, algae derivatives, and linseed oil, the Tribunal ruled against Telamara. It concluded that N2O was not food and the canisters should have been standard-rated.
The taxpayer had, in fact, contacted HMRC when they started to supply the cannisters to ask how they should be rated for VAT purposes. HMRC pointed him to their general guidance and didn’t give specific advice.
The Tribunal acknowledged this, but ultimately reminded the taxpayer that the Tribunal’s job isn’t to rule on fairness. It’s to apply the law.
Why this case matters
The Telamara case is a stark reminder of three truths about VAT:
- The rules are more complicated than they appear
What sounds like a simple question such as “Is this food?” can hinge on obscure distinctions, previous case law, and technical definitions. - Getting it wrong is expensive
Misclassifying supplies doesn’t just mean paying the VAT you should have charged. It can also mean penalties, interest, and assessments. - HMRC’s guidance won’t always save you
Even if you reach out to HMRC for clarity, their general guidance may not cover your specific situation, and relying on it doesn’t guarantee protection if things go wrong.
How Ormerod Rutter can help
VAT rules are a complex, and even businesses acting in good faith can find themselves on the wrong side of an assessment.
Our experienced VAT team are on hand to help you navigate the complexities, classify your supplies correctly, and avoid the kind of expensive surprises that Telamara experienced.
Get in touch today on 01905 777600 or email hello@ormerodrutter.co.uk.
