Anyone with small children knows how easy it is to walk into a linguistic trap if one ever tries to justify a decision as to why one child has been allowed to do something the other was not. What seems a fair and reasonable explanation will quickly be defeated by the aggrieved child, who will point out loopholes, counter-examples, and apparent logical inconsistencies in the parental position. It does not help that what is a fair swap or equal material goods is a matter of very broad opinion…
Similarly, by allowing different rates of (and exemptions from) VAT, the state inevitably creates grey areas concerning who qualifies for the different rates or exemptions. Famously, disputes over whether particular items of food are cakes or biscuits (a distinction children would rightly scorn) have been fought in the highest court in the land, with many millions of pounds at stake, but still the law on the point seems not to be settled.
One more recent example is the VAT travails of the company Snugglebundl Ltd. It sold a baby blanket-like item that landed it in a bundle of trouble with the Revenue, and although the company ultimately succeeded before the First-Tier Tribunal, it was left to carry costs (including irrecoverable opportunity costs) of no small magnitude for any small business, providing yet another example of the pitfalls of well-intended exceptions to the rules.
The case concerned zero rating of VAT for children’s clothing. If the “Snugglebundl” was an item of such clothing, it would be zero-rated. If, on the other hand, it was a “blanket” rather than an item of clothing, it would not be. The rationale for zero-rating children’s clothing is presumably to assist financially straightened parents. But presumably such parents also have to buy children’s blankets, so immediately one senses another distinction which would not impress a lay person (or a child for that matter).
The tribunal referred to two decisions of the old VAT Tribunal (Mothercare Ltd v CCE (LON/76/177) and Little Rock Ltd v CCE (LON/77/121). Both decisions followed the House of Lords’ guidance on statutory interpretation in Brutus v Cozens  AC 854. They considered the “purpose” of the item in question to be crucial. The tribunal in the present case also followed Brutus and held that it was appropriate to consider whether, as a matter of ordinary usage, the product could aptly be described as “designed as clothing … for young children”.
That approach meant considering the meaning of the word “clothing”. The word “designed” was intended to refer collectively to the phrase “as clothing or footwear for young children”, rather than simply to the phrase “for young children”. Whether “designed as clothing” or not, the Snugglebundl was clearly “designed” for young children and was not suitable for older persons. Therefore, the question was whether it was designed as clothing.
After referring to the dictionary definition of “clothing”, the tribunal held that the word referred to items, generally made of fabric, that were worn (tribunal’s emphasis). It was clear that clothing could serve other purposes without ceasing to be clothing, as the Revenue’s own guidance (Notice 714) acknowledged by referring to items such as sailor’s lifejackets. On the other hand, just because something was worn, that did not make it clothing: a brooch or a climbing harness, for example, would be “worn” but in no sense “clothing”.
Thus, since the Snugglebundl was designed for a combination of purposes, including moving a baby around with minimal disturbance, the crucial question was whether as a matter of ordinary language it could also properly be said to be “designed as clothing”. Having examined the product itself, the tribunal held that it was. While it clearly had other functions as well, that was sufficient to conclude that it should be regarded as “designed as clothing for young children”. The appeal was therefore allowed.
The Cost of Victory
Snugglebundl Ltd might have emerged victorious, and recovered the disputed VAT, but it still had to bear unrecoverable costs, chiefly in the form of the opportunity cost for its co-founder having to spend time on the case rather than running the business (estimated at £35,000).
Therein lies the well-known if impossible to quantify cost of exemptions. Those who can afford to contest marginal cases may benefit from exemptions. Those who cannot afford the advice or the time to research the position themselves may not – even if their cases are just as worthy as those who can.
Would it not be simpler for there to be no exemptions to VAT, and for the government to try and manipulate citizens’ behaviour or assist the needy by other means? There is nothing new in such a suggestion; it is a core tenet of the Rule of Law that legislation is general and equal in application.
In theory no exemptions would be a preferable option, but then of course whatever alternative was devised by the state (compensation funds, increased welfare benefits, whatever) would need its own set of rules – potentially (perhaps inevitably) containing its own set of grey areas, and with other associated administrative costs.
Perfection will therefore remain an aspiration. But the inevitability of complexity and uncertainty means that, if nothing else, each exemption should be introduced only when there is a clear and pressing need, rather than on the legislator’s vote-buying whim.
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by James Wilson, Senior Editor, Bloomberg BNA
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