HMRC targeted Dodadine Ltd (trading as toucanBOX) on craft products and associated reading materials, produced for young children between the ages of three and eight years old.
The company produce craft materials consisting of reading matter and components for craft activities. These materials are linked to a theme, e.g. kings and queens or dinosaurs and come in three different sizes.
Unfortunately for Dodadine and their customers, HMRC decided to increase the VAT on the smallest size, known as the ‘petite’ box.
Book or Magazine Background
On the two biggest boxes supplied by Dodadine, (‘super’ 19.90 and ‘grand’ £12.90) HMRC accepted there was a mixed supply of a zero-rated book and standard-rated craft activities. So the book was zero-rated, and VAT charged at 20% on most of the craft materials supplied.
However, with the smallest size, ‘petite’, the book was replaced by a magazine so that it could slide through a letterbox when delivered to the customer, this package sold for £5.95. HMRC in their wisdom decided to treat the whole package as standard rated and charged 20% on the lot.
I am genuinely at a loss as to how HMRC came to this decision, as there is no material difference in VAT terms between the packages. Under current VAT legislation, both books and magazines are both zero-rated, so why was the ‘petite’ box treated differently?
Apparently, according to HMRC, they deemed the magazine to be an incidental part of the supply. They, therefore, ignored it, so levied a 20% VAT on the full payment for the ‘petite’.
This genuinely bizarre conclusion led to Dodadine Ltd being assessed for an additional £697,656 VAT for the three years up to July 2017.
Book or Magazine Critical evidence
Very impressively, the company carried out a customer survey and respondents in 91% of cases stated that they considered the magazine was an “important” or “very important” part of the package. The importance of the magazine was critical because many of Dodadine Ltd customers were nurseries and primary schools.
VAT Tribunal decision
The tribunal focused on the concept of how the typical consumer viewed the product. Satisfied that the magazine was an independent supply in its own right: “Each item is capable of standing alone”. The magazine consisted of 14 pages of educational material, not an instruction book about how to use the craft materials. Consequently, the appeal was allowed with the presiding judge extremely critical of HMRC’s actions.
Tax Accountant’s Lessons to be learnt
I find this case very worrying as the company had adopted a consistent and sensible approach to its VAT decisions. HMRC then put a spanner in the works by singling out one product for different treatment.
It is genuinely inexplicable that HMRC accepted that a book qualified for zero-rating with two of the packages but bizarrely did not like the fact that the petite package substituted a magazine for the book.
The truth of the matter is that the books and the magazines were both a vital part of the product being sold, with the clear intention to extend the children’s learning.
I hope that HMRC accepts the criticism of the judge that their decision-making process was fundamentally flawed and did not seek to appeal.
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