Although the Upper Tribunal's (UT's) judgment in Nestle [2018] UKUT 29 concerns the VAT treatment of milk flavouring powders (Nesquik), the interpretation of VATA 1994 Sch 8 Group 1 will be of wider application. Anything concerning Nesquik is perhaps no great issue and would only interest readers who have young children. However, the importance of the case is the general application of the zero-rate of VAT and the oddities and anomalies that this area of legislation gives rise to.

By way of background, it was accepted by HMRC that chocolate Nesquik is zero-rated because it contains cocoa which falls within Group 1 under 'items overriding the exceptions'. However, HMRC did not accept that zero-rating applied to strawberry and banana Nesquik.

HMRC was successful at the First-tier Tribunal (FTT). On appeal, Nestle put forward two arguments:

  • milk does not constitute a 'beverage' for VAT purposes, therefore Nesquik cannot be considered a 'preparation of a beverage'; and
  • even if milk is considered a beverage, Nesquik merely adds/changes the colour/flavour of milk but does not create a new beverage.

On the latter argument, the comparison of Nesquik to items such as sugar (added to coffee) and Worcester sauce (added to tomato juice), in that neither 'created a new beverage', was rightly given short shrift; the key question was whether what results from  the use of the item is a beverage or not.

Previously, the FTT found that only a substance whose sole use was 'for' the preparation of beverages and which had no other use would be caught by the excepted items. Neither party attempted to persuade the UT of such a narrow interpretation as it was not relevant; however, this does raise a question over items which could be used for the preparation of beverages, but also have other uses. This was the position with sugar and Worcester sauce, as the UT correctly commented.

Many will note the absence of a fiscal neutrality argument and the (unsuccessful) attempt by the taxpayer for a purposive interpretation of the wording of the excepted items. The taxpayer also contended that Parliament could not 'sensibly have intended that an ingredient to be added to a zero-rated drink (milk) to create a drink that if sold in pre-prepared form would be zero-rated, should be taxable'.

The UT dismissed the appeal and confirmed that a 'step by step approach is required' when Group 1 is concerned. One must first consider whether the item in dispute is within the general items. Then one must consider whether it is included within the excepted items. Finally, one must consider whether the item overrides the exceptions (as chocolate flavoured Nesquik does).

The only certainty from the judgment is that it will not be the last appeal on the inconsistent regime of Group 1

 Understandably, the UT did not try to defend the indefensible and confirmed that Group 1 'does not represent a perfectly logical and consistent regime'; an understatement if ever there was one. For example, milk is zero-rated, as is a ready mixed milk drink flavoured with Nesquik (because it would be preparation of milk). Many will also be aware of the numerous disputes in this area whereby similar items are treated differently for the purposes of VAT. One need only consider chocolate cakes (zero-rated) and chocolate biscuits (standard-rated), and more recently, turnip crisps which are zero-rated, as opposed to potato crisps, which are standard rated.

The only certainty from the judgment is that it will definitely not be the last appeal on the inconsistent regime of Group 1. VAT issues may have been clarified in a number of ways over the (almost) 30 years since perhaps its most famous case (United Biscuits (UK) Ltd v C & E Comrs (1991) VAT Decision 6344, concerning Jaffa Cakes), however the irregularities and peculiarities of Group 1 mean that it is not one of those areas.

If permission is granted for an appeal to the Supreme Court, one can only hope for greater consistency in this area. However, given that this is not the only contentious issue relating to VAT and food (see supplies of catering, and takeaways), one should accept that in a pre-Brexit landscape, this subject is full of pitfalls and requires due care and attention. Food for thought for one's next trip to the supermarket.

Originally published in Tax Journal.

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