"Under UK law, no Value Added Tax (VAT) is charged on biscuits and cakes ? they are "zero rated". Chocolate covered biscuits, however, are subject to VAT, currently 15%. McVities classed its Jaffa Cakes as cakes, but in 1991, this was challenged by Her Majesty's Customs and Excise and the case ended up before the courts.[5] This may have been because Jaffa Cakes are about the same size and shape as some types of biscuit, and particularly because they are commonly eaten alongside, or instead of, traditional biscuits. A question that the court asked itself was "what criteria should be used to class something as a cake?"
McVities defended its classification of Jaffa Cakes as cakes, producing a 12" (30 cm) Jaffa Cake to illustrate that its Jaffa Cakes were simply miniature cakes.[6]
McVities argued that a distinction between cakes and biscuits is, among other things, that biscuits would normally be expected to go soft when stale, whereas cakes would normally be expected to go hard. It was demonstrated to the Tribunal that Jaffa Cakes become hard when stale. Other factors taken into account by the Chairman, Potter QC, included the name, ingredients, texture, size, packaging, marketing, presentation, appeal to children, and manufacturing process. Potter ruled that the Jaffa Cake is a cake. McVities therefore won the case and VAT is not paid on Jaffa Cakes.[7]"
Hope that clears things up