Does VAT on food need the rulebook?

Business
HMRC

Few areas of UK tax law generate quite as much debate, confusion and litigation as the VAT treatment of food. For decades, taxpayers, advisers, courts and HMRC have wrestled with questions that often seem absurd on the surface. Is a Jaffa Cake a cake or a biscuit? Why are some milk-based drinks zero-rated while others are standard-rated? Why can the same product attract different VAT treatment depending on how it is packaged, marketed, or consumed?

Basic food is zero-rated by default, while confectionery, soft drinks, and other “luxury” products are standard-rated. Innovation in the food industry keeps testing that line, and considerable time and money, for advisers, HMRC and the courts, is spent working out where new products sit within categories that were never built for today’s market.

HMRC rejected a turmeric shot manufacturer’s VAT claim in October 2020. The First-tier Tribunal didn’t rule until April 2023, two and a half years later, over whether a 60ml shot drank for its curcumin content counted as a beverage (Innate-Essence Ltd (t/a The Turmeric Co) v HMRC). The sum at stake was £80,730.52.

The tribunal found for the company: the shots were consumed for health and wellbeing, not to “slake thirst”, so they fell outside the legal definition of a beverage and stayed zero-rated.

Why does this topic keep ending up in court?

As mentioned above, basic food is zero-rated by default. The VAT legislation then lists standard-rated exceptions to that treatment, including beverages, and then – somewhat confusingly – carves exceptions back out of those exceptions. Looking specifically at beverages, whether a product falls inside or outside that list usually comes down to HMRC’s four-part “beverages test”: is it a drinkable liquid, commonly consumed, taken to increase bodily fluid, slake thirst, fortify or provide enjoyment.

A tribunal set that test in 1993, before turmeric shots or protein drinks existed as retail categories. Every new, innovative, product that doesn’t map onto it becomes a candidate for a court case.

The turmeric case mentioned above isn’t an outlier. Chocolate Nesquik is zero-rated. Strawberry and banana Nesquik are standard-rated, because the fruit powders counted as “a powder for the preparation of beverages” while the chocolate version qualified for a separate cocoa override (Nestlé UK Ltd v HMRC [2018] UKUT 0029 (TCC)). Nestlé’s argument that all three flavours simply encouraged milk consumption failed, and the dispute cost a reported £4m.

If our VAT specialists were to redesign the system from scratch, they would start here…

What would a simpler rule look like?

Reverse the starting point. Standard-rate food and drink by default, then zero-rate only what meets a narrow essentials test: ingredients bought for cooking, plus a short list of basics such as bread, plain milk and unflavoured water. A bar of chocolate is confectionery whichever way you look at it. A flavoured water is standard-rated because it’s bought for enjoyment, not necessity, which is the same principle HMRC has been reaching for through the “slake the thirst” test, just without thirty years of case law to get there.”

Greg Mayne, VAT Partner, Price Bailey

Or should VAT leave food alone altogether?

My instinct is simpler still. Zero-rate everything you’d buy to take home and eat or drink, and stop trying to draw a line between products at all. Keep the boundaries that already work, catering and restaurant meals stay standard-rated because that’s a service, not a product, and alcohol keeps its own duty regime, but nothing else needs a rule. It removes the marshmallow-sized disputes in one move, because there’s no product-level boundary left to argue about.

The catch is that it isn’t quite a clean line either. You still need to decide where takeaway ends and catering begins, and where low-alcohol drinks sit, so some ambiguity survives even here. But it’s a far smaller set of edges than fighting over every new product, and the VAT revenue it gives up would need replacing. I’d do that the way the Soft Drinks Industry Levy already does, by taxing sugar, salt and fat content directly, rather than trying to tax it indirectly by deciding which foods count as a treat.”

Charlotte Anson, Tax Director, Price Bailey

What should food and drink businesses do now?

None of this changes what applies today, and until HMRC or the Government revisits the legislation, any business bringing a new product to market is working within a testing process built for a narrower range of products than the one that exists now, and one that was based on historical norms that may not reflect modern day living

Our VAT specialists at Price Bailey can review new or existing product lines against current HMRC guidance before a classification question turns into a dispute, rather than after.

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information on this page is intended as a general guide only. While we work to keep our content accurate and up to date, we cannot guarantee that it reflects the position at the time you are reading it. No responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm. For more information on our editorial process, click here.

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