Confectionery giant Nestlé’s has lost its appeal to the Upper Tribunal over the VAT rating of its milkshake powders which leaves it facing a £4m tax bill for the strawberry and banana flavours, which are standard rated, but not the chocolate version which is zero rated for VAT
The appeal was brought by Nestlé against an original 2016 ruling by the First Tier Tribunal (FTT). [Nestlé UK Ltd and the Commissioners for Her Majesty’s Revenue and Customs,  UKUT 29, Appeal number: UT/2016/120].
The FTT found in favour of HMRC on the grounds that the fruit flavoured powders were ‘a powder for the preparation of beverages’ and therefore covered by the exception from zero-rating for such products. Hence they remain standard rated and no retrospective claim for over-declared output tax is permitted.
Nestlé argued at the Upper Tribunal that strawberry and banana Nesquik should be zero rated on the basis that they encourage milk drinking and that milk is zero rated.
They also made the case that for VAT purposes these flavours should be treated the same as the chocolate flavour powder as they are, in essence, the same.
Both HMRC and Nestlé accept that chocolate Nesquik should be zero rated on the grounds that the product contains cocoa butter which is zero rated as a food and so falls within the list of ‘exceptions to the excepted items’ within the UK’s zero rating provisions.
However, the Upper Tribunal upheld the FTT’s original decision. It pointed out that there are number of other apparent anomalies with the VAT system. These include the fact fruit salad is zero rated while smoothies made from fruit are standard rated, and that chocolate cake is zero rated while chocolate biscuits are standard rated.
In its findings, the tribunal stated: ‘It does not seem to us that the anomalies which arise on the basis of the FTT decision require any answer other than that Parliament has chosen to zero rate certain foods, generally because they were everyday foods, tax on which would be "particularly sensitive” for much of the population, and has chosen not to zero rate others. ‘
Nor did the tribunal agree that adding flavoured powder to milk created a new or different beverage which should be treated differently for VAT purposes. The judges therefore concluded that the FTT had made the correct decision, and VAT is payable on the strawberry and banana flavours of Nesquik.
Report by Pat Sweet