If you thought the VAT rules took the biscuit in defining jaffa cakes as…cakes, here is a case that distinguishes between different flavours of milk drinks. Daniel Rice explains why this is important.
Every now and then, when I have a relatively quiet week, I stop and think: “most of the big VAT issues must have been dealt with by now”. Then along comes an Upper Tribunal case about the VAT treatment of Nesquik (a powder designed to flavour milk).
Not just Nesquik in general either, but specifically the banana flavour and the strawberry flavour. Because “Nesquik” as a concept is clearly too broad for the VAT rules to deal with as a whole.
This case is based around whether the strawberry and banana Nesquik products should be subject to zero-rated or standard rated VAT. For clarity, chocolate Nesquik is already zero-rated. In case you think this topic is pedantry personified, there was £4m of VAT at stake to make the argument worthwhile.
Some might say Nestlé were trying to milk the VAT system for all they could, but the arguments they used certainly had some merit.
Nestlé put forward two primary arguments:
· A: milk does not constitute a ‘beverage’ for VAT purposes; therefore, Nesquik cannot be considered a “preparation of a beverage”.
· B: even if milk is considered a beverage, Nesquik merely adds flavour/colour to the milk, but does not result in the creation of a new beverage. This was compared to sugar being added to coffee and Worcester sauce added to tomato juice simply to enhance the existing beverage.
Roderick Cordara, for Nestlé, also argued that the purpose of the zero-rating is to encourage and facilitate the consumption of milk (especially by children). Furthermore, it was suggested that parliament cannot have reasonably intended an ingredient that is to be added to a zero-rated drink, which if sold pre-prepared would be zero-rated, not to be zero-rated.
Finally, Cordara stressed the lack of consistency, given that chocolate Nesquik powder is zero-rated and the banana and strawberry flavours being standard rated – yet didn’t appear to have pushed the consumer perception argument.
A mere mortal such as myself may have sympathies with Nestlé’s arguments – but they were each rejected by the tribunal. The main grounds for rejection being that:
· A: milk does constitute a beverage, and
· B: the product has the sole purpose of the preparation of a beverage. The comparisons with both sugar and Worcester sauce were rejected because these products have many other uses, whereas Nesquik has the sole purpose of being mixed with milk and drunk.
The tribunal also suggested a “political fury” if milk had been taxed when it has historically been such an important part of the national diet, however, this gives no indication that VAT reliefs should apply to additives that flavour milk. Overall, the Tribunal found that there is nothing in the history of VAT law or case law that indicates a legislative desire to zero rate all preparations of milk.
The appeal was thus dismissed – so strawberry and banana Nesquik both remain standard rated. For now.
Amazingly, fiscal neutrality, the right for similar supplies to be treated the same for VAT purposes, was not argued at the Upper Tribunal. Fiscal neutrality is a tough argument to win, but when allied to the consumer perception test, it's one that has merit.
This case also highlighted some wider discrepancies surrounding VAT on foods:
(1) fruit salad is zero-rated; smoothies made from fruit are standard rated;
(2) oranges are zero-rated; fruit juices are standard rated;
(3) turnip crisps are zero-rated; potato crisps are standard rated;
(4) chocolate cake is zero-rated; chocolate-covered biscuits are standard rated (hence the jaffa cake argument);
(5) frozen yoghurt is standard rated; yoghurt which is frozen but is to be eaten once defrosted is zero-rated.
Whilst considering the above list, I realised it’s no wonder several of my recent meetings have started with clients declaring “I hate VAT”.
I spend a worrying amount of my working life arguing about the vagaries of VAT in the food and beverage world – and as the sector continues to innovate and bring more weird and wonderful products to market, more and more arguments are likely to arise.
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Daniel Rice is a VAT Associate Director in Grant Thornton’s Bristol office, specialising in the Food, Financial Services and Property sectors, but with a particular interest in the weird and wonderful world of the VAT liability of food and drink products. Follow Daniel on Twitter @itsnotVATsimple