Nestle UK Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 22 February 2016 |
| Neutral Citation | [2016] UKFTT 158 (TC) |
| Date | 22 February 2016 |
| Court | First-tier Tribunal (Tax Chamber) |
Judge Harriet Morgan, Member Gill Hunter
Mr Roderick Cordara QC, instructed by PricewaterhouseCoopers, as Counsel appeared for the Appellant
Ms Eleni Metrophanous, instructed by the General Counsel and Solicitor to HM Revenue and Customs, as Counsel appeared for the Respondents (“HMRC”)
Value added tax – Whether supplies of Nesquik fruit powders are zero-rated as food of a kind used for human consumption within Value Added Tax Act 1994 (“VATA 1994”), Sch. 8, Grp. 1 – Scope of exception from zero-rating for powders for the preparation of beverages – Consideration of the application of social policy and fiscal neutrality principles – Appeal dismissed.
The First-tier Tribunal held that Nesquik fruit powders were not zero-rated as “supplies of food of a kind used for human consumption” within VATA 1994, Sch. 8, Grp. 1.
This was an Appeal by Nestle against a refusal by HMRC to repay output tax of some £4m that Nestle considered had been incorrectly accounted for and paid over to HMRC on two of its products: Nesquik strawberry and banana flavoured powders (“Strawberry Nesquik” and “Banana Nesquik” and referred together as the “Product”) between 2008 and 2012.
The appellant made the repayment claim on the basis that supplies of the Product were zero-rated under Value Added Tax Act 1994 (“VATA 1994”), s. 30(2) as supplies of “food of a kind used for human consumption” within VATA 1994, Sch. 8, Grp. 1 (“Grp. 1”).
Grp. 1 provides that:
1) zero-rating applies to a supply of anything comprised in the general items set out in Grp. 1, one of which is “food of a kind used for human consumption” (food includes drink per note 1 of the Group.);
2) except a supply of anything comprised in any of the excepted items listed in Grp. 1 (therefore making them standard rated);
3) unless it is also comprised in any of the items overriding the exceptions listed in Grp. 1 which relates to that excepted item (thus returning them to zero rating).
The Product was a flavoured powder with added nutrients for adding to milk.
There was no dispute that it was “food of a kind used for human consumption”.
The issue was whether or not the Product fell within the excepted items in Grp. 1 as a “… powder … for the preparation of beverages” (“excepted item 4”), which would revert to a VAT standard rating.
Nestle argued that supplies of the Product were zero-rated as the Product was not within excepted item 4, for two reasons:
1) “Beverages” was to be construed as excluding “milk and preparations and extracts thereof” being an overriding item which relates to excepted item 4 (“overriding item 6”). The Product is for adding to milk to be consumed as a milk drink which is excluded from being such a “beverage”. Thus it fell into overriding item 6 and would be zero rated.
2) The Product was not in any event “for the preparation of beverages” as adding the Product to milk does not create a “beverage” but merely flavours the milk.
Thus the Product could only be zero-rated within overriding item 6, according to Nestle.
In response, HMRC's position was that, on the plain meaning of the provisions, the Product fell within excepted item 4 as “powder … for the preparation of beverages”.
HMRC asserted that the term “beverages” is not to be read as subject to overriding item 6.
The overriding items did not, in HMRC's submission, operate as interpretative provisions in that way. Rather, if the Product falls within excepted item 4, as HMRC considered it did, supplies of the Product would be excluded from excepted item 4 only if the Product itself fell within overriding item 6.
HMRC asserted that the Product was not within overriding item 6 as it is did not contain any milk.
HMRC also held that the addition of the Product to milk creates a distinct beverage which was sufficient for it to be regarded as “for the preparation of beverages”.
The FTT held that although the legislation is couched in a number of steps, it was necessary to look at the provisions holistically to form a view as to the intent of Parliament. It was clear from overriding item 6 that Parliament intended that milk and flavoured milk drinks (being preparations of milk) are not subject to tax.
The Judge said that when looking at the provisions in their totality, it cannot really have been the intention of Parliament to tax this type of product when its only function was, when added to zero-rated pure milk, to make a flavoured milk drink.
The wording of the provisions supported this construction:
Nestle tried to argue that when the Product was added to milk, the drink that remains was milk (and thus could fall into item 6), but on the evidence presented to the FTT, was not supported by the Product itself or its marketing.
The FTT held that the Product produced a drink that is very different from milk. In particular, it more than doubled the sugar content of the milk, resulting in a single drink of the Product accounting for 26% of a child's GDA of sugars. The Product was also enhanced with, in particular, magnesium, iron, folic acid, vitamin C and vitamin D.
The idea that it helped encourage children to drink milk did not assume that the drink was similar to milk but that it contrasted milk. The assumption was that it stopped milk tasting or looking like milk.
Nestle also submitted that its interpretation of the provisions was clearly supported by social policy objectives and fiscal neutrality considerations.
Nestle argued that the product should be zero rated because of its health benefits.
But the FTT referred to the Marks & Spencer plc v C & E Commrs ECASVAT(Case C-309/06) [2008] BVC 577, in which the ECJ referred to the social objectives pursued by the UK's legislation in zero-rating food as being in “not making the final consumer pay VAT on everyday items of food”.
The Judge said: “This justification to us makes more sense, in terms of the food and drink items covered by zero-rating, than a policy based on health benefits (albeit that some of the items classed as everyday food for this purpose may happen to have particular health benefits whereas some do not)”.
In terms of the social policy objectives, the FTT held that it could not see that milk and milk drinks were zero-rated due to a social policy objective of the encouragement of milk drinking due its health benefits.
In terms of the fiscal neutrality considerations, the FTT accepted that it was established in case law that, fiscal neutrality under Community law would stop member states treating similar goods and supplies of services, which are thus in competition with each other, differently for VAT purposes due to the potential for market distortion.
Nestle argued that there were two relevant comparators for supplies of the Product: the market for flavoured milk products where it was accepted that supplies of Chocolate Nesquik, which the appellant also sold, were zero-rated and supplies of ready-made milk drinks sold by competitors which were also accepted to be zero-rated.
The FTT rejected that view saying that on close analysis, the Product was significantly different from those other products.
For all the reasons set out above, the FTT held that the Product is a “powder for the preparation of beverages” within the meaning of excepted item 4 and was therefore standard rated for VAT.
It said: “We have not based this on any need to give a strict or narrow construction to zero-rating provisions but rather on the natural and ordinary meaning of the words used. We do not consider that the appellant's interpretation comes within a fair interpretation”
[1] The appellant appealed against HMRC's decision to refuse a claim for the repayment of £4,004,000 of output tax the appellant considered it had over declared on sales of Nesquik strawberry and banana flavoured powders (“Strawberry Nesquik” and “Banana Nesquik” and together the “Product”) in the periods 09/08 to 06/12. HMRC made their decision on 15 October 2012 and upheld it on review on 10 July 2013.
[2] The appellant made the repayment claim on the basis that supplies of the Product are zero-rated under sub-s 30(2) of the Value Added Tax Act (“VATA”) as supplies of “food of a kind used for human consumption” within Group 1 of Part II of Schedule 8 VATA (“Group 1”). Group 1 provides that:
1) of anything comprised in the general items set out in Group 1, one of which is “food of a kind used for human consumption”,
2) except a supply of anything comprised in any of the excepted items listed in Group 1,
3) unless it is also comprised in any of the items overriding the exceptions listed in Group 1 which relates to that excepted item.
[3] The Product is a flavoured powder with added nutrients for adding to milk. There was no dispute that it is “food of a kind used for human consumption”. The issue was whether or not the Product falls within the excepted items in Group 1 as a “powder for the preparation of beverages” (“excepted item 4”).
[4] The appellant argued that supplies of the Product are zero-rated as the Product is not within excepted item 4, in outline, on two bases:
1) “Beverages” is to be construed as excluding “milk and preparations and extracts thereof” being an overriding item which relates to excepted item 4 (“overriding item 6”). The Product is for adding to milk to be consumed as a milk drink which is excluded from being such a “beverage”.
2) The Product is not in any event “for the preparation of beverages” as adding the Product to milk does not create a “beverage” but merely flavours the milk.
[5] In summary HMRC's view was that, on the plain meaning of the provisions, the Product falls within excepted item 4:
1) The term “beverages” is not to be read as subject to overriding item 6. The overriding items do not operate as interpretative provisions in that way. Rather, if the Product falls within excepted item 4, as HMRC...
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