What poppadoms really tell us about indirect taxes

A January ruling on a snack food’s tax treatment generated a massive and immediate response – from the tax profession as well as from headline writers and armchair psychologists. After a British legal tribunal ruled that Walkers’ Sensation Poppadoms are technically crisps (i.e., potato chips for U.S.-based readers) and therefore subject to VAT. 

The tribunal judges also noted that “nominative determinism” – a psychological term for name-driven outcomes (e.g., a boy named Forest who grows up to become a park ranger) – holds no sway in the tax realm: Calling a poppadom a poppadom does not prevent it from qualifying as a crisp. 

The light-hearted news coverage the ruling sparked is all in good fun, I suppose, unless you’re a part of Walker’s tax group and now must contend with a substantial new tax liability. Still, I found that this ruling, and the response to it, also demonstrated serious points about indirect tax compliance: 

• Indirect tax determination and compliance are inherently complex: The tribunal’s ruling boiled down to the specific amounts of potato granules, potato starch and modified potato starch that Sensations Poppadoms contain as well as the degree to which those portions reconciled with guidance in the Schedule 8 (as well as Note 5) of the UK’s Valued Added Tax Act of 1994. Your average snack food eater probably hasn’t considered this complexity – or the fact similarly involved tax determinations must be performed across countless product categories and transactions that cross multiple national borders and tax jurisdictions. This complexity explains why tax compliance needs to occur at the “speed of commerce” in our interconnected world. 
• Interpretations of indirect tax rules have high stakes: Walkers maintained that its Sensations Poppadoms were not crisps, but rather a restaurant food that requires further preparation, making them exempt from VAT. Crisps are included on a list of snack foods subject to the indirect tax, as The Guardian reported: “Under the complex tax rules, foods on that list attract 20% VAT, which can mean a multimillion-pound bill for sellers.” 
• Indirect tax compliance has broad implications on businesses: When you step back and consider the number and variety of news outlets and online publications that covered the ruling – major daily newspapers, business publications like the Financial Times, tax and accounting sites, food and beverage industry publications and more – you get a sense of the far-reaching impacts that indirect tax compliance exerts across industries, geographies and business groups.  

The VAT treatment of Walkers’ Sensation Poppadoms underlines the complexity and the high stakes involved in indirect tax compliance. Beyond the humorous headlines and the delight of wordplay, it reminds us of the need for tax agility in businesses – both to adapt to intricate tax laws and to contend with their wide-ranging ramifications across diverse sectors.