Do you need to charge VAT on packaging?

HMRC policy

HMRC’s published guidance in paragraph 8.2 VAT Notice 700 (see The next step ) is very clear: “ normal and necessary packaging, including ordinary tins, bottles and jars, is treated as part of the goods which it contains. ”

In other words, the VAT rate for the packaging follows the same liability as the goods, even if your customers might be able to use the packaging for other purposes, e.g. storing nuts and bolts in a jar. So, if your goods are zero-rated, the full selling proceeds are zero-rated.

Trap. HMRC’s manual accepts that fancy jars and bottles, even if ornate, are normal packaging. But there is an exception for Kilner jars, which are heavy duty jars with wired lids used for preserving fruit and vegetables; these are standard-rated.

Beyond normal and necessary

The challenge is to stand back and ask when your customer buys your goods are they paying for more than just the goods, i.e. there is special packaging which has a value in its own right? This issue would only create a potential problem if the goods in question were either zero-rated or subject to 5% VAT.

A clue about whether you might need to apportion your output tax is to consider the selling price of the item in question. For example, if you are selling 50 teabags (zero-rated) in a container that is made of porcelain, charging £10 for the complete package, the customer is clearly paying for more than the zero-rated teabags. You would need to apportion your output tax in this situation.

Trap. With the teabags example, HMRC might argue that this is a single standard-rated sale of the caddy and that the teabags are incidental and should be ignored. It might be worth you adopting a prudent approach with your costings in such situations and treat the sale as wholly standard-rated.

How to apportion

Any method can be used as long as the result is “fair and reasonable”. There are two common methods of apportionment:

Cost ratio - you calculate the cost of each item to ascertain the standard and zero-rated costs - apply this percentage to your selling price.

Single goods pricing - if you sell one of the items for £X, as a stand-alone item, and the other for £Y, you can use this ratio to calculate the VAT you owe on your mixed supply, e.g. X/X+Y.

Example. A ceramic cheese dish (standard-rated) is sold with French cheese (zero-rated) for a single price of £20 including VAT. The cost of the cheese is £2 and the dish £5 + VAT. Output tax payable on a cost ratio basis will be £6/£8 x £20 x 1/6 VAT fraction = £2.50.

Trap. As the example shows, the relevant figure for the purchase of the standard-rated item includes VAT. This is because the ratio is being applied to a selling price that also includes VAT.