VAT liability decision on powder based zero-rated sports drinks is successful

In a timely reminder for those in the sports and health drinks sector to consider the VAT liability of their products, the First Tier Tribunal (Tribunal) has upheld a claim by Global by Nature Ltd for the repayment of VAT accounted for on supplies of powdered supplement products on the basis that they should have been zero-rated.

“Sports drinks” are an exception to the general rule that supplies of food and drink products are zero-rated for VAT. This exception is contained in Item 4A within Group 1 of Schedule 8 to the Value Added Tax Act 1994 which reads:
 
“Sports drinks that are advertised or marketed as products designed to enhance physical performance, accelerate recovery after exercise or build bulk, and other similar drinks, including (in either case) syrups, concentrates, essences, powders, crystals or other products for the preparation of such drinks.”

Global By Nature is in the business of importing, distributing and selling organic products. The appeal concerned three powdered vegan food supplements, marketed under the brand “Sunwarrior”. 

Global By Nature had been accounting for VAT on the supplies of its Sunwarrior products but subsequently submitted an Error Correction Notification to HMRC claiming repayment of output tax totalling approximately £800,000 on the basis that the Sunwarrior products should have been zero-rated. HMRC’s view was that the Sunwarrior products were “sports drinks” and therefore standard rated. Global By Nature appealed that decision to the Tribunal.

It is important at the outset to understand a little more about the Sunwarrior products. There were three products – “Classic”, “Plus” and “Warrior”, with all three being powdered food supplements primarily consisting of a plant protein source and other added items (depending on the exact product and flavour).

The Tribunal’s decision

In allowing the appeal and upholding the repayment claims, the Tribunal found that none of the Sunwarrior products were sports drinks and that the supplies of those products were zero-rated. 

The Tribunal found that, while the relevant exception in the VAT Act 1994 refers to sports drinks which are advertised/marketed in a certain way, the provision does not itself define “sports drink”. Based on the various definitions of “sports drink”,  discussed during the hearing, the Tribunal concluded that such drinks “contain a significant amount of carbohydrate”. In determining what is significant, they placed some reliance on the Canadian Paediatric Society Position Statement, which referred to sports drinks as containing between 5g and 14g of carbohydrate per serving. 

Looking at the products in question,  the   carbohydrate/sugar content in all three products was 1g or less per serving. The Tribunal noted at paragraph 76 “On any view, this is not “high percentage” and it is way below the range given by the Canadian Paediatric Society of between 5g and 14g per serving” They went on to conclude “We find as a fact that the Products do not contain the significant levels of carbohydrate found in sports drinks, and are therefore not “sports drinks”.”

Although not directly relevant in this case, given that the products were found not to be “sports drinks”, the Tribunal provided some useful commentary on the advertising and marketing aspect of the Item 4A definition    set out in the VAT Act, 1994.   Assuming the products were in fact sports drinks, two of the products (Classic and Plus) were found to not fall within Item 4A whilst one (Warrior) was found to fall within Item 4A. 

In respect of Classic and Plus, the messaging to consumers via the packaging, advertising and marketing of the products appeared to be designed to provide healthy nutrition to people generally. 

However, in respect of the “Warrior” product, the focus of the marketing was much more on the protein aspects of the product and less on the general health and wellbeing aspects. There were significantly more references to lean muscle and a focus on delivering results for energy, endurance and recovery and this was reflected in the pictography.

This is a particularly interesting case as it represents the first appeal before the Tribunal dealing with the interpretation of item 4A   of the VAT Act 1994. However, this is a theme we see within similar case law, with the marketing and advertising of a product being an important consideration for the Tribunal and higher courts in considering the correct VAT liability of a product. 

The Tribunal’s approach in the current appeal   serves as a reminder of the fact sensitive nature of these types of appeals, with significant analysis placed upon packaging, including key words used, the size and placement of texts and pictography.

Comment

This success for the taxpayer should serve as a reminder to other businesses involved in the manufacture, distribution or supply of similar products to reconsider the VAT liability of their products and the opportunities to make repayment claims where they have overpaid VAT. 

Kennedys Tax Disputes and Investigations team are well placed to advise on VAT classifications and have significant experience in submitting successful repayment claims, liaising with HMRC and also bringing proceedings before the Courts and Tribunals where necessary.

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