Making GST variable for foods a bad idea
Is jelly with raspberries in it made from jelly?
This is the question being asked in the Britain as the debate over the zero rating of certain food items for VAT (GST) purposes continues.
In Britain no VAT is charged on food for human consumption. However, food that is considered a snack, unhealthy or a "luxury" food attracts VAT at the standard rate.
In general terms healthy food items include bread, cereals, eggs, fish, fruit, vegetables, meat, poultry, dairy products and tea and coffee.
While it sounds straightforward the UK courts have been musing on the boundaries for many years costing Her Majesty's Revenue and Customs and the taxpayer millions of pounds in tax litigation and compliance costs.
The Pringle case had the UK courts considering whether Pringles are made from potato and whether they are similar to potato chips. This was referred to as the "potatoness" of Pringles. The UK Court of Appeal rejected asking "what is potatoness" and instead concluded that a child would know if Pringles are made from potato just as well as a food scientist or culinary scholar.
Comparing Pringles to other party food, the court went on to consider whether most children would consider jelly with raspberries in it to be "made from jelly". It concluded most children would have the good sense to say "yes", despite the raspberries.
The Court of Appeal ruled that Pringles are made from potato similar to potato chips and are therefore subject to VAT at the standard rate.
Unfortunately, when the court systems become clogged with questions around a food item it raises questions about the usefulness of tax policy.
Unlike Britain, New Zealand does not differentiate the GST treatment of food. All food is subject to GST regardless of its nature.
Recent calls for differential treatment of certain food items in New Zealand have focused on the impact of increasing food prices, a higher GST rate and growing obesity problems. While this may sound sensible such a move would cause significant definitional and interpretative problems.
We don't need to complicate our tax system further with arguments about raspberries and jelly.
Greg Harris is a specialist tax partner in the Hamilton office of Deloitte. Email email@example.com