On 14th February, 2018, the Upper Tribunal (UT) dismissed Nestle’s appeal against the decision of the First Tier Tribunal (FTT) that its fruit flavoured milk powders are subject to the standard 20% VAT rate in the UK, even though the chocolate flavoured powder enjoys the zero rating.
Nestle manufactures ‘Nesquik’; a milk flavouring powder that comes in three flavours: strawberry, banana and chocolate. The powders contain either strawberry or banana flavouring or cocoa and are added to milk to change its flavour.
In the past, the strawberry and banana flavoured powders have always been taxed at the standard VAT rate. On the other hand, the chocolate flavoured powder has been subject to the zero rate since it contains cocoa, a zero-rated food that falls within the “exceptions to the excepted items” under Group 1 Schedule 8 of the UK VAT Act.
At the 2016 FTT hearing Nestle had sought the Tribunal to find that its fruit flavoured powders also fell within the scope of the zero rating. Nestle had lost that case hence its appeal to the UT.
At the UT, Nestle reiterated two of the arguments it put forward in the original hearing: firstly, that the strawberry and banana flavoured powders should be taxed at the zero rate because Nesquik encourages the consumption of milk which is zero-rated.
Further, Nestle argued that for Nesquik to fall under “excepted item 4” to the zero rate of the UK VAT Act, its product must be a powder used “for the preparation of” a beverage and argued that this expression requires the creation of a “new” drink. Nestle maintained that this is not the case because adding Nesquik to milk, a drink zero-rated under UK legislation, only alters the flavour and colour of the milk but does not result in a new beverage that warrants its own separate VAT treatment.
The Tribunal rejected both these arguments and upheld the FTT’s decision. At this moment, it is unknown if Nestle will again appeal the matter to a higher court.
This result joins a long line of decisions throwing the eccentricities and inconsistencies of the UK VAT treatment of food supplies into sharp relief. It is sensible to seek advice from the outset when making new supplies to ensure that the correct VAT treatment is applied.