The Core (Swindon) Ltd v Revenue & Customs (VAT - ZERO-RATING : Food, etc)

Factual and Procedural Background

This appeal concerns a decision by HM Revenue and Customs ("HMRC") dated 26 October 2016, which denied the Appellant's application to zero-rate its supplies of juice cleanse programmes ("JCPs") for Value Added Tax ("VAT") purposes. HMRC held that the JCPs were standard rated as beverages under excepted item 4, Group 1, Schedule 8 to the Value Added Tax Act 1994 ("VATA"). The Appellant challenged this decision, which was upheld on reconsideration and review before being appealed to the First-tier Tribunal.

The Appellant is a juice bar and health café located at 4 Devizes Road, Swindon, SN1 4BJ, owned and managed by the founder who has a background in juice bar marketing and production. The JCPs consist of fresh drinkable products made from juicing raw fruits and vegetables, marketed and sold as multi-day meal replacement programmes. Customers typically replace meals with four servings of juices and smoothies daily over several days.

Individual juices and smoothies are also sold separately on the premises, treated as standard-rated beverages for VAT purposes. The appeal focuses solely on the VAT treatment of the JCPs, not the individual juice or smoothie sales.

Two preliminary procedural applications were made prior to the hearing: one by HMRC regarding whether the Appellant had previously admitted the individual juices were standard rated beverages and whether it could resile from that position; and one by the Appellant objecting to certain documents introduced late by HMRC, which were excluded as amounting to litigation by ambush.

Legal Issues Presented

1. Whether the juice cleanse programmes supplied by the Appellant constitute beverages subject to standard rating or food subject to zero rating under the Value Added Tax Act 1994.
2. Whether the JCPs can be distinguished from the individual juices and smoothies sold separately for VAT purposes.
3. The correct application of the multi-factorial test for classification of food and beverages for VAT, including the relevance of how the product is marketed, the consumer's purpose in purchasing, and the product's use.

Arguments of the Parties

Respondents' Arguments

• The products should be treated as standard-rated beverages because the Appellant has consistently treated them as such for VAT purposes, including individual juices and smoothies sold separately.
• The JCPs cannot be considered in isolation from the individual products since they contain the same components.
• Binding precedents (such as Kalron Foods Ltd v HMRC) establish that fruit and vegetable juices are standard-rated beverages.
• The burden of proof lies with the Appellant to show that the JCPs are not beverages.
• The JCPs do not comply with specific regulations governing meal replacement products, undermining the Appellant's argument that they should be zero-rated as meal replacements.
• Health and nutritional labelling arguments raised by HMRC were noted but ultimately disregarded by the Tribunal due to unclear relevance.

Appellant's Arguments

• The classification should focus on the consumer's perspective, including how the product is marketed and consumed, not solely on the product's physical characteristics.
• The JCPs are marketed and purchased as meal replacements, not as beverages.
• The Appellant treated the products as standard-rated out of caution, not admission of their true VAT status.
• Pricing differences between JCPs and individual products indicate the JCPs are a distinct product.
• VAT treatment can differ for identical products depending on how they are sold and the consumer's purpose (citing examples such as salt and bicarbonate of soda).
• The multi-factorial test from Procter & Gamble and the Bioconcepts criteria (purpose of consumption) support a zero-rating for the JCPs.
• HMRC internal manuals acknowledge that complete meal replacement drinks can be zero-rated, supporting the Appellant's position.
• Binding precedent in Kalron Foods is distinguishable because the products there were not sold or purchased as meal replacements.

Table of Precedents Cited

Court's Reasoning and Analysis

The Tribunal undertook a detailed multi-factorial assessment as required by the authorities, focusing on the statutory framework in Schedule 8 to the VAT Act 1994 and relevant case law. It emphasized that the key question was whether the JCPs were beverages (and thus standard rated) or food (zero-rated), noting that food includes drink in the legislation.

The Tribunal rejected HMRC's position that the JCPs should be treated the same as the individual juices sold separately, emphasizing that the appeal concerned the JCPs alone. It found that the JCPs were marketed and purchased as meal replacements, supported by evidence from the owner, customers, and marketing materials. The Tribunal noted the JCPs are consumed alongside water and herbal teas, not as thirst-quenching or pleasure-giving beverages.

The Tribunal applied the Bioconcepts criteria, concluding the JCPs did not satisfy the tests for beverages because purchasers did not buy them to increase bodily fluid, slake thirst, fortify quickly, or for pleasure. It also applied the "unexpected guest" test from Innocent, finding it unlikely that the JCPs would be offered as a beverage in social situations.

The Tribunal distinguished the binding precedent in Kalron Foods on the basis that the JCPs were specifically sold and bought as meal replacements, unlike the products in Kalron. It found HMRC's reliance on the Appellant's prior VAT treatment of the products circular and irrelevant to the classification issue.

The Tribunal also noted that HMRC's arguments based on nutritional labelling and compliance with meal replacement regulations were either irrelevant or unsupported by sufficient evidence.

Finally, the Tribunal accepted the Appellant's submission that VAT treatment can differ for identical products depending on how they are sold and the consumer's purpose, supported by internal HMRC guidance acknowledging zero-rating for certain meal replacement drinks.

Holding and Implications

The Tribunal ALLOWED the appeal.

The core holding is that the Juice Cleanse Programmes supplied by the Appellant are not beverages for VAT purposes but are zero-rated foods sold as meal replacements. This decision directly affects the VAT treatment of the Appellant's JCPs, entitling them to zero rating rather than standard rating.

No new legal precedent was established beyond the application and clarification of existing principles to the facts of this case. The decision underscores the importance of considering the marketing, consumer purpose, and use of products in VAT classification disputes.