Pringles and Preferences from the Value-Added Tax Base?

Legislators put many preferences in tax laws with many different objectives in mind: to alter the distribution of tax burden for reasons of equity and to favor certain pro- ducers or consumers, to name two. Effects may sometimes be clear-cut, but there may be surprises in their application. There are interesting effects in the conflict between the UK tax authorities and Procter & Gamble UK, the producers of Pringles, as the following describes. Consider These Questions 1. Explain why Procter & Gamble wanted zero rating and not exemption.

2. Why would the VAT legislation not have explicitly covered Pringles?

3. Tax analysts counsel against tax preferences. How does this case provide support for that position?

4. What are the reasons for the food preference, and what are the reasons for the special treatment of potato crisps? Are there better alternatives for achieving those objectives?

5. Are there lessons for design of a consumption tax in this case?

The VAT and Pringles “Are Pringles ‘similar to potato crisps and made from the potato’? That is the ques- tion.1 Not as weighty as Hamlet’s musing, but that is how Lord Justice Jacob (England and Wales Court of Appeal) began His judgment in a case between the Commissioners for Her Majesty’s Revenue and Customs and Procter & Gamble UK, the makers of Regular Pringles. And that is what ultimately determined the decision regarding a tax preference in the United Kingdom value-added tax. Preference is always a tricky business because the tax authorities have to draw a line between what gets preference and what doesn’t, and, accordingly, people end up paying relatively more and others pay relatively less because of where the line is drawn. in the law have to be put into practice in a world of brands, product distinctions, and a consistent desire to reduce tax burdens. The trick- iness gets more challenging as activities initially on the wrong side of the preferen Ce work to get moved to the other side. That is how, after all, that many tax lawyers and accountants justify their pay. Although the maneuvering with every preference, it gets more frantic when the tax wedge is high, when the tax involves excises (a nar-row base), and when substitute alternatives for taxed items are easily available. The UK value-added tax is levied at a standard rate of 17.5 percent. However, the law makes special provision for sales of food for at-home consumption in an effort to reduce the regressivity. In the UK VAT, “Food of a kind used for human consumption” is zero-rated, meaning it is subject to a tax rate of zero. However, the tax preference is limited and not applicable to everything that humans might eat. An exception is the following: Any of the following when packaged for human

consumption without further preparation, namely, potato crisps, potato sticks, potato puffs and similar products from the potato, or from potato flour, or from potato starch, and savory products obtained by the swelling of cereals or cereal products; and salted or roasted nuts other Those products are subject to the standard tax rate of 17.5 percent. Now the question is: What are Pringles? Many people have pondered this question in the United States as well as in the United Kingdom, although not in court and not with regard to their taxation, since their arrival on the market in 1968. However, such philosophical questions were not what the Procter & Gamble representatives were concerned about here; it was tax rates. Procter & Gamble argued that Pringles should be taxed at zero rate, not the standard rate, because they really are not potato crisps. “Their argument primarily hinged on the fact that the Pringle is only around 40 percent potato and the majority was something else, although no other single ingredient made up as much of the total as potato. Therefore, they argued that it wasn’t a potato crisp and should be zero rated along with other items for human

consumption. Strictly, Pringles were not “made of” potatoes. That would allow con sumers of Pringles to pay less and would also allow Pringles a price advantage in the snack food market (although Procter Gamble did not point that out in their argu ment). It should be noted, however, that there are other vegetable crisps available on the UK market (e.g., turnip crisps), and they were not excluded from the preference. The judge was not impressed: “the VAT legislation uses everyday English words, which ought to be interpreted in a sensible way according to their ordinary and natural meaning. The ‘made from’ question would probably be answered in a more relevant and sensible way by a child consumer of crisps than by a food scien tist or a culinary pedant. 183 The ruling meant around $ 155 million in back taxes (which had not been collected from purchasers because of an earlier ruling) and much more to be collected in the future. If it crunches like a potato crisp, looks generally like a potato crisp, and pretty much tastes like a potato crisp, it should be treated like a potato crisp, no matter what the lawyers make their living by arguing. Child consumer trumps food experts.