Shots supplier drinks in zero-rating decisionby
The distinction between a drink and a beverage led to thrills and spills in this VAT-liability case concerning turmeric health shots.
For the average person, the distinction between a drink and a beverage may seem trivial, but this is an area of excitement for VAT specialists. From a VAT perspective, the connotations of this are huge. Where products are categorised as a drink (but not a beverage) these fall within the definition of food and are subject to the zero rate of VAT as a result. But where they fall to be beverages, they fall into an “excepted item” and the standard VAT rate of 20% applies.
Essence of the case
So how do you differentiate between a drink and a beverage, you may ask? The decision in the case of Innate-Essence Ltd (t/a The Turmeric Co) vs HMRC provides some insight. The Turmeric Co supplies different flavours of turmeric shots for the natural health benefits that can be obtained from turmeric, black pepper and other ingredients. Grant Thornton and Max Schofield of Devereux Chambers argued on behalf of the taxpayer that while the turmeric shots may be a drink, they were not in fact a beverage, an argument that the first tier tribunal (FTT) agreed with. The reasoning for this was based on a number of tests, established by an abundance of case law in this area.
In order to determine whether a drink is a beverage, it is necessary to take into account a multitude of factors including the purpose of the product, how it is marketed and what it is actually used for. The “beverage test” considers whether the purpose of consumption of the product is to increase bodily fluids, quench thirst, provide a short-term boost (in other words to fortify) or give pleasure. Importantly, any one of these factors may be present but if the purpose of consumption is not one within the beverage test, then the test is not satisfied. By way of example, Calpol, the medicine for children, is clearly designed to taste nice to encourage children to take it – but it is certainly not (intended to be) consumed for pleasure, and certainly wouldn’t be classed as a beverage under the beverage test.
Unexpected guest test
Another test to be applied is the “unexpected guest test”. This test considers whether it would be appropriate to offer this product to a visitor popping in for a drink. If the answer to this is no, then it is unlikely that the product will be a beverage. Ultimately all of the above factors need to be considered when determining whether a product is a drink or a beverage and the courts are keen to reach short practical answers.
In respect of the Turmeric Co’s products, it was found that while the products did, by their nature, increase bodily fluid levels and quench thirst, this was not the purpose of consuming the turmeric shots. After all, there are numerous other products on the market that fulfil these purposes far more thoroughly and for a much cheaper price. Similarly, the turmeric shots had no, or minimal, quick boost ingredients such as caffeine or sugar, and the website and customer reviews prove that the benefits of these products are not felt immediately. Rather, the shots are consumed for their purported long-term benefits that are seen following regular consumption of the product.
The questions of whether the shots would be drunk for pleasure and whether they would be appropriate to serve to an unexpected guest can be dealt with in a simple fact – the turmeric shots are evidenced to be an acquired taste. This is not a personal view but one shared by many customers as well as one of the founders of the company.
The upshot (no pun intended) of these arguments, is that the Turmeric Co’s turmeric shots are drinks but not beverages, and therefore can now be zero-rated. This is, of course, an over-simplification of a set of arguments distinguishing between drinks and beverages for the purposes of VAT – however it appears that the boundaries between these two definitions are becoming (slightly) clearer with every case.
Grant Thornton has got several more food and drink cases heading to the tribunal in the coming months – so watch this space as the law develops further.
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Daniel Rice is a VAT Director in Grant Thornton’s Bristol office, specialising in the Food, Financial Services and Property sectors, but with a particular interest in the weird and wonderful world of the VAT liability of food and drink products. Follow Daniel on Twitter @itsnotVATsimple