Nesquik fruit powders are flavoured powders with added nutrients that are designed to be added to milk. The taxpayer submitted a claim for just over £4 million on the basis of its analysis that such products should be zero rated. The UK’s zero rating of food is a complex area. VATA 1994 Schedule 8 Group 1, Excepted item No 4 standard rates ‘powders for the preparation of beverages’. However, products that fall under this excepted item can be zero rated under a number of Items overriding the exceptions. Overriding Item No 6 zero rates ‘Milk and preparations and extracts thereof.’ The First-tier Tribunal (FTT) concluded that the powder did fall under Excepted item No 4, but did not fall within item overriding the exception No 6, because it did not contain or be comprised of milk. The powder was therefore considered to be standard rated.
The main arguments were:
Meaning of beverages – the taxpayer essentially argued that as milk is a zero rated beverage (under items overriding the exceptions, No 6), a product used for the preparation of such a zero rated item should fall outside excepted Item 4. The FTT agreed with HMRC that Item 4 must be not be interpreted as being subject to overriding Item 6. The FTT considered there were a series of three steps in determining the liability of food - the third step, items overriding the exceptions, only comes into play if the product falls under the relevant excepted item (step 2). Having reached the view that the product falls within excepted Item 4, Item 6 of the items overriding the exemption does not zero rate the product because the powder itself does not comprise or contain milk.
Meaning of ‘powder or other product for the preparation of a beverage’ – the taxpayer argued that the powder is used in in conjunction with a zero rated beverage and does not play a part in creating a new beverage. There is already a beverage (the milk), which the powder merely flavours. The FTT disagreed concluding that the rule does not depend on the product being the only or main ingredient in the beverage (other than the liquid) or at what stage it is added. The FTT added that the provisions potentially capture any product which is for use or addition at any stage in the process of getting the beverage ready for consumption.
Social policy and fiscal neutrality – the taxpayer argued that its interpretation was supported by social policy and fiscal neutrality. The FTT could not see that milk and milk drinks are zero rated due to a social policy of encouragement of milk drinking due to its health benefits. On fiscal neutrality, the FTT noted that in determining whether supplies of goods meet the same needs of the consumer the question is whether their use is comparable and whether the differences between them have a significant influence on the decision of the average consumer to buy one set of goods or the other. However, despite acknowledging the similarities with zero rated chocolate Nesquik powder, the FTT agreed with HMRC that flavour is likely to be key to the consumer in deciding which powder to buy. Many consumers would view a chocolate product as different to a fruit flavoured one. The taxpayer’s appeal was dismissed. To access the decision click here.