Pasty tax - the cold factsPosted on: 16 April 2012 by Andrew Stallard
Our guide to the crazy government ruling on pasties by which ambient temperature dictates whether or not you pay VAT.
In the recent budget it wasn’t the cut in the higher rate of tax, the granny tax even the new child benefit rules that most irritated most people, and especially those in Cornwall. What was possibly the last straw was the attack on the iconic Cornish pasty! (1)
As financial advisers, we are often asked to help clients navigate through the complex taxation system so they can minimise the amount of tax they need to pay. So we'd like to offer you here a quick guide to the 'pasty tax'.
To clarify: prior to the latest budget, pasties and other freshly baked products were exempt from VAT, or more correctly, they were zero rated. (2) Now the rules have changed and VAT at the full 20% will be payable if the pasty is sold at above ambient (room) temperature. So VAT is payable as the pasty comes out of the oven and becomes exempt as it cools.
What this means in theory is that the price of a pasty could fall from £2.40 to £2 as its temperature drops. Ambient temperature depends on the weather, the season or whether the shop is air conditioned. A pasty sold at 20c in the summer would most likely be below the ‘ambient air temperature’ and VAT free. On the other hand, during winter it would be warmer than the surrounding air and therefore liable for VAT.
There is potential here for several absurd scenarios: one being that people at the front of a long queue could in theory pay a different price than those at the back of the queue for the same product as the pasties cooled!
It seems likely that bakers will be responsible for keeping separate records of VAT paid on warm pasties and exempt cold pasties with separate cabinets for each sort. Will this cooling process be inspected by the pasty police? Who will be the first baker to go to prison as a pasty martyr? On a more serious note though, there is also the potential for people to reheat pasties incorrectly at home and contract food poisoning. And of course, the whole point of buying a pasty is to eat it fresh from its paper bag.
A little sense has prevailed, however, as some freshly baked products such as bread will still be exempt from VAT. But that does beg the question, in the interests of simplicity and to avoid bringing the whole taxation system into disrepute, why not exempt all food from VAT? After all, it was first introduced as a “luxury tax”.
The problem with all these indirect taxes, which governments of all shades are increasingly relying on, is that the millionaire pays exactly the same tax as the unemployed person. Even though their ability to pay is vastly different. It's difficult to see VAT as a 'fair' tax. David Cameron was keen to tell us how much he enjoyed his holiday pasty, but will his next one be hot and with VAT, or cold and VAT free?
Tax is currently a 'hot' topic (if you'll pardon the pun) so perhaps we should suspend judgement until we know all our politicians’ tax records as Boris Johnson and Ken Livingstone are intent on doing in the race to be London Mayor.
If so, we wouldn't be the first nation to do so. In Norway, the nation’s tax records are published online. (3)
There, every citizen's income, income tax paid and total wealth are published annually online. But not how many pasties they eat or how much indirect tax they pay through taxes like VAT.
Would that be a good thing? We're not so sure. If everyone knew how much you earn and how much tax you pay, a trip to your local for a pint of Guinness could be marred by the landlord asking “How do you survive on your wages?”
Your answer might well be “I eat my pasties cold!”
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