In the UK, cake is VAT zero-rated. But oh no, you surely can't be thinking it's as simple as that.

If there’s one thing Britain loves more than cake, it’s a completely unnecessary layer of bureaucracy. Not just any bureaucracy - the kind that is so needlessly convoluted, so deeply entrenched in its own contradictions, that it could pass for satire. Nowhere is this more evident than in our tax system, specifically VAT on food. Because in this country, whether a cake is really a cake isn’t decided by common sense, but by tax law, legal wrangling, and a level of government intervention so absurd it would make the Mad Hatter...well, mad.

The history of Britain’s tax obsession with food goes back further than you might think. In 1962, Chancellor Selwyn Lloyd introduced a “sweet tax” under the old Purchase Tax system, applying it to confectionery, soft drinks, and ice cream. It was, as he optimistically claimed, meant to be “welcomed by the medical professions.” This logic,  that some foods are essential and others are a dangerous indulgence, has haunted Britain’s VAT system (and diet culture...) ever since.

Let's say you’re in a bakery. You fancy a croissant. But watch out - if it’s plain, it’s VAT-free. If it’s a gorgeous flaky, aromatic almond croissant, still VAT-free. If it's a pain au chocolat with chocolate inside the pastry...still VAT-free! BUT if it’s chocolate-covered, then oops - you’ve just entered taxable territory. A fat 20% VAT whacked on. The logic? A chocolate croissant is a luxury, while an almond croissant is basic sustenance. But it's also only a luxury if the chocolate is on top, and not baked inside. Make sense? No, not to me either. While we're trying to make sense of this, let's also ignore the fact that almonds are generally more expensive than chocolate.

This nonsense doesn’t stop at pastries, it extends to pasties too, and pretty much everything else we eat or drink in between. The temperature of your food also determines its financial burden.

A hot pasty? Taxed.
A cold pasty? Not taxed.
A pasty that was freshly baked and still warm? Tax-free.
A pasty that was kept warm under a heat lamp? Fully taxed, you bougie fool.

Nowhere is this lunacy more famous than the Jaffa Cake Case of 1991, where McVities found itself in court defending its beloved snack. The government insisted it was a biscuit and therefore taxable, as it was covered in chocolate. McVities countered that, no, it was a cake, and therefore exempt even if covered in chocolate. Their winning argument? Cakes go hard when stale. Biscuits go soft. If you’re wondering whether we, as a nation, have wasted countless hours of legal expertise on the physics of baked goods, the answer is yes.

But it gets worse. The rules around drinks are just as whack. Buy a hot latte? That’s VAT-inclusive. Go for an iced coffee? That one’s VAT-free, because apparently, a steaming cup of coffee is a luxury, while its frigid cousin is an essential human right. The sense isn't sensing.

The UK’s confectionery tax logic is truly mystifying. A chocolate-covered biscuit is taxed, but a chocolate-chip biscuit is VAT-free (because the chocolate is baked inside rather than on the biscuit, a la the aforementioned pain au chocolat). Meanwhile, biscuits coated in caramel remain VAT-free. This means that a chocolate digestive is taxable, but millionaire’s shortbread - made of biscuit, caramel, and chocolate - escapes VAT entirely. 

It’s tempting to laugh this all off as classic British quirkiness, but the truth is this is an economic disaster. VAT should be one of the simplest and least distortionary forms of taxation, but the UK’s obsession with carving out exceptions has left us with one of the most complex VAT systems in the developed world. Only 48% of potential sales are covered by VAT in the UK, compared to an OECD average of 58%. That shortfall has to be made up elsewhere, which is why we end up with higher taxes on income, property, and investment - all of which do far more damage to economic growth than simply applying a flat, universal VAT rate. Furthermore, VAT is a regressive tax - it affects the poor more than it affects the rich. That extra 20% on chocolate digestives? Millionaires don't care. But your average mum working to make ends meet might have to settle for the plain ones. Food is food.

Every time a politician tries to fix this mess, the public erupts into outrage. Remember the 2012 “Pasty Tax” fiasco? When George Osborne tried to remove the “cooling down” loophole for baked goods, the nation revolted. The Sun ran a front-page campaign titled “Who VAT All the Pies?”, Greggs customers threatened to riot, and Osborne was forced into a humiliating U-turn. 

What should happen? In an ideal world, VAT would be simplified and applied fairly across the board, rather than pretending that the difference between a cake and a biscuit is a matter of national importance. As mentioned, food is food. Reducing VAT is also an effective tactic to help grow the economy (UK, and Europe in general, has some of the highest rates of VAT in the world...compared to 2.9% to 7.25% sales tax in the US...and 0% in Hong Kong). But the political appetite for tax reform is about as strong as a soggy biscuit. 

And so, as we queue for our morning coffee, some of us unknowingly paying tax for daring to enjoy a warm croissant, others smugly dodging VAT with a chilled frappuccino, the absurdity continues. But for now, at least all our cakes are still VAT-free so feel free to order away! After all, cakes have been deemed as one of life's necessities.