[2010] UKFTT 418 (TC)

TC00688
Appeal numbers:  LON/2005/1293 & 1294

VALUE ADDED TAX – Zero-rating – Food – Food of a kind used for human consumption – Beverage – Lucozade Sport – Taxpayer producing and selling sports drink containing carbohydrates and electrolytes – Designed to provide energy to persons engaged in high intensity sport and exercise – Whether product zero-rated as food or standard-rated as beverage – Value Added Tax Act 1994, Sch 8, Gp 1, excepted item 4

FIRST-TIER TRIBUNAL
TAX CHAMBER
 
	GLAXOSMITHKLINE SERVICES UNLIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS 	Respondents

				TRIBUNAL: 	 SIR STEPHEN OLIVER QC
						 JOHN COLES

Sitting in public in London on 13-16, 19 and 20 July 2010

Roderick Cordara QC and Edward Brown, counsel, for the Appellant 

Nicholas Paines QC and Alan Bates, counsel, instructed by the General Counsel for the Commissioners of HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.	Glaxosmithkline Services Unlimited (“GSK”) appeals against a ruling of HM Revenue and Customs as to the liability of one of its products “Lucozade Sport”.  The product is sold as a drink, namely Lucozade Sport Isotonic Drink, and as a powder, namely Lucozade Sport Isotonic Drink Mix.  In a letter of 4 November 2005 HMRC ruled that the product was standard-rated in both forms.  

Background

2.	It is common ground that Lucozade Sport Isotonic Drink (which we refer to as “Lucozade Sport”) is a drink and that Lucozade Sport Isotonic Drink Mix (which we refer to as “the Drink Mix”) is a powder for mixing Lucozade Sport drinks.  The issues are whether, as HMRC contend, Lucozade Sport is, in the words of Group 1 of Schedule 8 to VAT Act 1994, a “beverage” and that the Drink Mix is a product for the preparation of a beverage within the meaning of Group 1.  GSK maintains that, despite being a drink, Lucozade Sport is not a beverage.  

3.	Lucozade Sport, as a drink, is available in still orange, lemon, mixed citrus, lemon and lime, pink grapefruit and mixed berry flavours.  At the time of the decision Lucozade Sport was available ready to drink and sold in bottles, cans and “sports packs” (food pouches) by specialist retailers, fitness centres, supermarkets and convenience stores.  Lucozade Sport is also available in other presentations such as Lucozade Sport Lite.  This appeal does not extent to those other products.

4.	The Drink Mix is a powder to which water is added to produce a drink.  The product is available in 500g packages and 36g sachets.  It is supplied through the Lucozade Sport website and specialist retailers.  

The relevant legislation

5.	Schedule 8 of VAT Act 1994 provides for the zero-rating of:

“GROUP 1 – FOOD 
The supply of anything comprised in the general items set out below, except – 

(a)	…
(b)	a supply of anything comprised in any of the excepted items set out below, unless it is also comprised in any of the items overriding the exceptions set out below which relates to that excepted item.

General items
Item No.

1.	Food of a kind used for human consumption.

Excepted items
Item No.

1.	…
2.	…
3.	Beverages chargeable with any duty of excise specifically charged on spirits, beer, wine or made-wine and preparations thereof.
4.	Other beverages (including fruit juices and bottled waters) and syrups, concentrates, essences, powders, crystals or other products for the preparation of beverages.

NOTES:

(1)	“Food” includes drink.”

The positions taken by the parties

6.	GSK’s case is that the products are liquid food or functional food.  In both forms the products are zero-rated by Schedule 1 Group 1.  They are not “excepted” by Note 4 as being “other beverages … products for the preparation of beverages”.  Specifically, GSK say, the products are sources of nutrition for use in conjunction with exercise: they are, as the message on the label states, a “body fuel”.  (The expressions “liquid food”, “functional food” and “body fuel” do not, GSK stress, have any special meanings in the context of the legislation.  Rather, they are used as convenient shorthand expressions for distinguishing the types of product in question here from “beverages”. ) 

7.	HMRC say that the products are within Excepted Item 4 of Group 1, being either beverages or products for the preparation of beverages.  They are therefore standard rated products.  They do not cease to be beverages because they are sports beverages.  Moreover, because the evidence shows that they are commonly consumed outside the context of sport and exercise, that reinforces the conclusion that the products are not beverages. 

Summary of decided cases relevant to the issues

8.	The term “beverage” as found in Schedule 1 Group 1 is used in its ordinary English sense.  The application of Group 1 is not, as Toulson observed in HMRC v Procter & Gamble UK [2009] STC 1990, paragraph 63, “a scientific question”.   And, as Warren J pointed out in paragraph 35 of the judgment in Kalron Foods v HMRC [2007] STC 1100 at 1108, the question whether a product is a beverage is a question of fact with the consequence that where (as has been the case here) HMRC have determined that the product is a beverage, the onus is on the taxpayer both to establish the primary facts on which it relies so as to displace that conclusion as well as to establish that its product is not a beverage.  In paragraph 58 of the Kalron judgment, Warren J advises that caution should be “exercised in placing major reliance on any supposed distinction between drinks and beverages”.  

9.	The Tribunal decisions on beverages have followed the approach taken in Bioconcepts Ltd v Customs and Excise Commissioners (1993) VAT Dec 11287 in which the Tribunal were referred to the Oxford English Dictionary definition of a “beverage” as – 

“Drink, liquor for drinking, especially a liquor which constitutes a common article of consumption”.

Dealing with the former wording of Item 4, which referred to manufactured beverages, the Tribunal in Bioconcepts directed themselves that they had “to decide whether as a matter of ordinary usage the words “manufactured beverage” and “beverage” covered or applied to “Bio-Light”.  The Tribunal went on to reason that the meaning of “beverage” in ordinary usage – 

“… covers drinks or “liquors” that are commonly consumed.  This is the primary meaning in the Oxford English Dictionary.  Liquids that are commonly consumed are those that are characteristically taken to increase bodily liquid levels, to slake the thirst, to fortify and to give pleasure.”

10.	In Unilever Bestfoods UK Ltd v Revenue and Customs Commissioners (2007) VAT Dec 20016 the Tribunal described the Bioconcepts” approach as “workable and producing an intelligible set of results” (paragraph 31).  They further explained at paragraph 28 that:

“The purpose of the Tribunal in Bioconcepts of including “to fortify” as an example of a liquid characteristically consumed as a drink (and consequently a beverage) was to recognise as beverages liquid products taken to enhance energy.”

We should add that the Tribunal in Bioconcepts was not (as Warren J inferred in Kalron, at paragraph 61) attempting to lay down an exhaustive definition of what a beverage is.

11.	Further Tribunal cases show examples of products that are not commonly consumed or do not have the characteristics of liquids that are commonly consumed.  The Bio-Light fluid in Bioconcepts was one.  The “creatine” products in the Science in Sport Ltd [2000] V&DR 195 decision were rejected from the scope of beverages because they were barely palatable and were best taken in conjunction when mixed with food.  As regards the Science in Sport “(“SIS”) product based on carbohydrate”, the Tribunal accepted that something consumed only by athletes and sports people for nutritional purposes was nonetheless “commonly consumed”; the Tribunal decided that the product, a powder, was excluded from being a beverage because it was not “for the preparation of beverages” but for the preparation of food supplements and it was “incidental” that they were consumed in liquid form.  The Soya milk products were excluded by the Tribunal from the scope of beverages in Alpro Ltd v Revenue and Customs Commissioners (2006) VAT Dec 19911 because they did not have the characteristic of liquids commonly consumed: they neither slaked the thirst nor increased bodily fluids and gave no distinct pleasure to the consumer.  The “Knorr Vie Shots” manufactured by Unilever, in Unilever Bestfoods UK Ltd v Revenue and Customs Commissioners (2007) VAT Dec 20016, were found to be drinkable food; they were too concentrated to slake the thirst or replace bodily fluids and were not characteristically consumed to fortify.

12.	With those decisions in mind the right approach, we think, is to conduct an all-round examination of the particular product and then to address three questions.  First, applying criteria of the sort recognised in Bioconcepts, we ask whether the products are within the scope of the expression “beverage”.  The second question is whether the product is a “drink”.  There are some products that are consumed in liquid form such as a chilled soup on a summers day that may refresh, rehydrate and be a pleasure to consume and yet are not appropriately described by the noun “drink”.  There is, as already noted, no dispute that Lucozade Sport is a drink.  Here we are invited by GSK to go one step further and determine whether the design and use of the present products as sources of nutrition in the course of exercise save those products from being classed as beverages because the features of refreshment, rehydration and the sense of pleasure are incidental to their nutritional properties.

13.	GSK’s case leads to the third question which we interpret, more specifically, as this.   Given that the product is a “drink”, are its nutritional values of such significance as to outweigh and make incidental its other features, e.g. as a means of refreshment or rehydration or as a source of pleasure, that it falls into the category of food/drink to the exclusion of beverage?  HMRC say that this is not a proper question, because once the product is found to be a beverage, applying Bioconcepts tests, that is the end of the enquiry no matter how nutritious the product may be.  Bearing in mind that the Bioconcepts tests are illustrative rather than exhaustive, the third question is, we think, a legitimate enquiry to pursue.  Moreover, having regard to the amount of evidence presented to us by GSK (seven witnesses and fifteen lever arch files), we will address the third question as one of fact.

14.	Our findings, based on the evidence which is summarised later in this decision, can be summarised as follows:

(i)	the noun “drink” does properly describe the product in its liquid form: 
(ii)	applying the Bioconcepts criteria, the drink is a beverage and
(iii)	though the product (in both its liquid and its powder forms) has evident nutritional features, these do not re-characterise it as something other than a beverage such that it is to be classed (to use GSK’s words) as “functional food”.

15.	Before examining the evidence and making findings of fact, we need to address two points taken by GSK that, it says, go to the correct approach to interpreting the words of Group 1 of Schedule 8. 

16.	We were referred to European Directives relating to food.  We see these as irrelevant to the question of whether Lucozade Sport is a food or a beverage.  This is because as a matter of EC law the terms “food” or “foodstuff” are treated as including beverages and we note in this connection that the term foodstuffs includes rehydration drinks. Consequently drinks with possibly no nutritional value are treated as foodstuffs. The European classification is not therefore of any assistance in determining whether or not Lucozade Sport is to be classed as a beverage.

17.	GSK say that a clear social policy has been engaged and that Parliament intended to afford zero-rating to the vast majority of food products.  In particular, it is said, Parliament chose to include foods (including foods that are consumed as drinks) which, by reason of their nutritional contents, can reasonably be considered to rank as liquid foods and not as beverages.  In common with Warren J in Kalron (paragraph 10) we find nothing in the structure and content of Group 1 that can be construed as a statement of the policy.

The evidence

18.	GSK called witnesses to provide a picture of the products, their nature and their uses.  The witnesses were:

(i)	Professor Sean Strain, an expert in human nutrition at the University of Ulster, who addressed the functionality of the products;
(ii)	Professor Ron Maughan, an expert in sports and exercise nutrition at the University of Loughborough, addressed the specific sports and nutritional aspects of the products;
(iii)	Mr John Brewer, formerly of GSK and now of the University of Bedfordshire, addressed issues regarding the design of the product, the target market and its compliance with anti-doping regulations;
(iv)	Mr Richard Ross, Director of Compliance and Regulatory Affairs of GSK, addressed the composition and labelling of the products;
(v)	Mr Simon Kemp, Vice President Marketing and Innovation at GSK, addressed the marketing of the products;
(vi)	Mr Simon Rhodes, a senior employee of the Advertising Standards Authority and expert in marketing, addressed GSK’s marketing of the products;
(vii)	Dr Anna Casey of the Defence Academy of the United Kingdom at Cranfield University and an expert in human metabolic physiology, addressed the use of products by UK military personnel as part of their Operational Ration Packs.

19.	HMRC called Mr John Taylerson, a Chartered Marketer and a Fellow of the Chartered Institute of Marketing, to address questions as to the extent to which the products are purchased and consumed for their alleged functional benefits of a scientific nature, rather than for the more general benefits of refreshment and rehydration that can be obtained from many common beverages.

20.	The evidence that is summarised in this Decision is drawn in part from the oral evidence given by the witnesses and in part from the reports on the products contained in written evidence made available to us.  The evidence before us was so extensive that we have necessarily been selective.

The look of Lucozade Sport

21.	Lucozade Sport, the drink, is usually sold in plastic bottles each containing 500mls.  The bottle is immediately recognisable from the label, its typeface and layout.  The larger type is used to display the name “Lucozade Sport”; in smaller type are the words “Body Fuel” and the flavour (e.g. raspberry).

22.	At the back of the bottle are, among others, the following messages:

“At Lucozade Sport we push top athletes to their limits to develop products that are proved to give you an Edge.  
Lucozade Sport Body Fuel has been scientifically formulated to deliver:

FUEL – Drink before and during your session to provide carbohydrate to fuel your muscle and maintain performance for longer.

Whatever your sport we can make a difference.”

“Best served chilled”

“Lucozade Sport products are tested for banned substances.”

23.	There are lists of ingredients and of nutritional information.  (The functional benefits of the product, e.g. its isotonic nature, are not explained on the pack.)

24.	The bottle has a waist and its top has a cap with a non-drip function that can be opened and shut with the teeth.  Those features enable consumption of the liquid (which can be seen through its transparent plastic covering) while exercising or, for example, while driving a vehicle.

25.	On the outside of the bottle are images of people in sporting postures.  

The Sports Drink Market

26.	Sports drinks (which include the present products) make up 3% of the total UK soft drinks market and of that 3% the present Lucozade Sport products represent about two-thirds.  The total soft drinks market in the UK in the twelve months to March 2009 was valued at over £6,000m. 

The Products : their ingredients

27.	The main ingredients of Lucozade Sport, the drink, are carbohydrate, electrolytes and water.  The main ingredients of the Drink Mix are carbohydrate and electrolytes.  The carbohydrate content of Lucozade Sport is 6.4g per 100mls.  The carbohydrate comprises various monosaccharides and disaccharides which are approximately 3.5g per 100mls, comprising sucrose and maltodextrin (a polysaccharide), which is a polymer of glucose.  The products also comprise lower quantities of electrolyte salts which are principally sodium and potassium.  There are miscellaneous preservatives, flavourings and colourings.

28.	The total carbohydrate content is much less than that of soft drinks and fruit juices, both of which typically contain some 10%.  Energy drinks typically contain 15-20% carbohydrate.   50% of the carbohydrates are non-sugars, being maltodextrin which has the function of keeping the osmolality of the product to an isotonic level.  (Osmolality is a measure of the number of particles (dissolved solids) in a solution: this is “isotonic” where it equates to that of body fluids.  Were the osmolality of the product to be greater than isotonic, the body’s ingestion process would be delayed and fluid would move from the body to the gut before absorption of the sugars takes place; this movement of water out of the body during exercise would contribute to dehydration.)

29.	Electrolytes in the form of sodium and potassium, are included to aid glucose and water absorption in the small intestine, to replace the salt lost in sweat, to help stimulate thirst, thereby maintaining the drive to drink, and to retain ingested fluids in the system.

Function of the Products

30.	The carbohydrate ingredient is a source of energy.  Supplementing the limited stores of carbohydrate in the body during exercise can improve performance.  The combination of different forms of carbohydrate in Lucozade Sport is designed to ensure that the carbohydrate is readily available to the muscle when ingested during exercise and that this carbohydrate is oxidised rapidly.

31.	Maltodextrins are not sweet to the taste.  There is therefore a need to make Lucozade Sport palatable by adding flavourings to the product, being sugars such as glucose, fructose and sucrose.  Nonetheless Lucozade Sport is not as sweet as normal soft drinks.  The perception of the sweetness of the product will depend on the extent to which the particular exercise or sport has progressed at the time of consumption.  

32.	The function of the electrolyte content has been noted.  The correct combination of sugar (especially glucose) and sodium is critical to the ability of the product to enhance performance while exercising the body.

33.	Water is an essential vehicle that enables carbohydrates to be digested rapidly and thereby made available to the body.  The aim is to achieve the correct balance of salt and water.   Ingestion of plain water causes a fall in the sodium concentration and osmolality of the body through it and quenches the sensation of thirst before fluid losses have been fully replaced.

Presentation of the Product of the Point of Sale

34.	We learnt from the publication by ‘Engage Research’ headed “Lucozade Brand Understanding – Debrief” that Lucozade Sport is predominantly purchased at large and small supermarkets, local shops and petrol/service stations as compared with gyms.  At motorway stations and convenience stores Lucozade Sport occupies significant space on shelves and in refrigerated cabinets.  It frequently appears alongside other common beverages such as carbonated soft drinks, Ribena, bottled water and other Lucozade products (such as Lucozade Energy).

35.	In common with other manufacturers of soft drinks, GSK (as “category champion”, to use Mr Taylerson’s words) will have influence over the method of stacking at retail outlets.  We were shown a GSK “planogram” addressed to retailers.  This contains the words”

“Please ensure that you adhere to this planogram at all times.  This layout has been specifically designed to maximise your sales through the Glaxosmithkline vendor.”

The planogram has a photograph of a shelf layout with Lucozade Energy on the top shelf, Lucozade Sport on the second and third shelves, “Hydro” on the fourth shelf and at the bottom “Ribena”.  There is then a box with a message to the retailer – “which products do I need to order?”:  there are then set out certain recommended quantities of Lucozade Energy, Lucozade Sport (predominantly the orange flavoured variety), of Hydro and of Ribena.  The planogram layout is merely a recommendation and Lucozade Sport is usually displayed with a wider variety of competing items.  Sometimes the powders for Lucozade Sport (and brands of other manufacturers) are placed on the higher shelves.  

36.	A photograph of a supermarket display showed Lucozade Sport stacked above other Lucozade Sport products next to which were ciders and “Red Bull” and on the other side were soft drinks and fruit cordials.  In conclusion on this point, we quote Mr Taylieson’s words: “… Supermarkets, etc, do not put stuff on shelves unless it sells.”

Evidence that consumers buy Lucozade Sport for its functional benefits

37.	This is relevant if the nutritional content and the “functional food” benefit are to take Lucozade Sport out of the “beverage” class and leave it, for VAT purposes, as a food/drink.  

38.	The evidence is focussed on the third question referred to in paragraph 13 above. We approach this with Warren J’s warning in Kalron Foods in mind that – “Some caution must be exercised in placing major reliance on any supposed distinction between drinks and beverages”.

39.	The functional benefits claimed for Lucozade Sport are specifically its isotonicity and the effect of the electrolytes in replacing substances lost through sweating.  Professor Maughan endorsed the claim saying that those functional benefits have a real utility in athletic performance terms within the context of high intensity athletics or sport.  Lucozade Sport, he said, is intended to be consumed during exercise and after the equivalent to 10 kilometres of a race.  If so, Lucozade Sport will improve performance.

40.	We cannot tell from the evidence what proportion of consumption of Lucozade Sport is consumed in the course of high intensity athletics or sport of that nature.  We know from market research statistics that a significant proportion of Lucozade Sport consumers are not “sports participants”, where that expression connotes persons claiming to participate in sport of some kind on one or two occasions a week.  Sport participators falling within that expression constitute 69% of Lucozade Sport consumers and account for 80% of Lucozade Sport volume sales.  On that basis 31% of Lucozade Sport’s current consumers do not regularly participate in any sport and  one-fifth of sales are to such persons.

41.	To the same effect are findings from research conducted by Milward Brown in a paper headed “Lucozade Sport Power to Sales Analysis Presentation”. This contains a table headed “For Lucozade Sport, as well as sport participants, we also have buyers that are fans”.  This table states that although “sports participants” are the “primary target” for Lucozade Sport, a “secondary target” are the “armchair enthusiasts” who comprise over a quarter of the Lucozade Sport customer base.  For this latter group of Lucozade Sport consumers, Lucozade Sport “is more of a general purpose drink, competing against other drinks such as waters, juices and carbonated soft drinks”.  It follows from this that the link between considerations of the product’s isotonicity and sales cannot be established for consumers in the armchair enthusiast class.  

42.	We have two observations on the evidence summarised so far.  First, we do not know what actual proportion of total consumption of Lucozade Sport is by athletes performing at the high intensity required by Professor Maughan to make them beneficiaries of its isotonic function.  Moreover, as we will demonstrate, even those sports people who aspire to high intensity activities consume Lucozade Sport in the course of ordinary day-to-day activities. Secondly, a significant proportion of consumption of Lucozade Sport is by armchair enthusiasts.  The armchair enthusiast drinks Lucozade Sport because of its association with sport and its image, exemplified by elite athletes, of “giving you an Edge”.  It follows, we think, that there is not a persuasive link between Lucozade Sport’s Isotonicity and the sales of the products.

43.	The “image over functionality” appeal of Lucozade Sport is apparent from the responses of consumers when asked why they tried the product.  The presentation by “Engage Research” referred to above shows that 33% of people asked why they first tried the products chose the answer – “Just thought I would try it” while “Made a difference to my performance” was the chosen answer of only 13%.  A further analysis in the Engage Research presentation states that 28% of sports participants purchased some brand of sports drink.  The inference must be that the other 72% are drinking other liquids such as bottled water, self-bottled tap water or juices when participating in sport.  

44.	All those features show the power of the Lucozade Sport brand and its association with high performance sport as the attraction to customers, rather than the isotonicity of the product.

45.	Relevant to the question whether, as GSK contend, Lucozade Sport’s nutritional function, as a source of energy, makes it food in liquid form, are two further lines of enquiry.  To what extent is Lucozade Sport consumed while participating in sport or other vigorous exercises?  The counterpart to that is whether a significant number of consumers drink Lucozade Sport when not engaging in these activities.

46.	The evidence shows that a significant proportion of consumers (including “sports participants”) drink Lucozade Sport when not engaging in sport or any exercise.  

47.	The “Engage Research” study concluded that:

“Frequent drinkers of Lucozade Sport drink it on all sorts of occasions as well as sport.  They clearly have a lot of energy needs and drink Lucozade Sport at work, lunch (home and work), taking a break etc, i.e. really quite general usage.  Great for volume but encroaching into Lucozade Energy territory”.  

This indicates that Lucozade Sport operates within a wider beverages market and not just within a narrow sporting segment of the population.  (The reference to Lucozade Energy in the above quotation refers to a product which GSK concedes to be a beverage.)

48.	 We accept that people with energy needs at the level identified by Professor Maughan (e.g. the equivalent of 10 kilometres of competitive running) are the real beneficiaries of Lucozade Sport’s functional advantages; but the evidence shows that the message is taken up by a much wider section of consumers from within the market for soft drinks.  An earlier report of 30 March 2005 (admittedly one based on a questionnaire filled in at home and so perhaps skewed to home consumption) evidences this.  This report showed that 20% of consumers surveyed said that they would drink Lucozade Sport “when in need of refreshment”, 18% “when thirsty”, 27% “for everyday lulls in energy/concentration” and 11% “when driving long distances”.  A 2008 (“TNS”) study of the lifestyles of Lucozade Sport consumers indicates that these “tend to point to those living active hectic lives rather than those necessarily into sport”.

49.	A reasonable inference from the above is that Lucozade Sport’s association with sport has the effect in marketing terms of getting through to consumers who drink it when not engaging in intensive exercise.

50.	We find from a TNS report (Lucozade Sport TNS World Panel Usage Follow-ups) that 29% of consumption of Lucozade Sport is in-house while 33% is for “lunch boxes”.  (“Lunch box” for this purpose means out of home self-catered occasions.)  This leaves 38% of consumptions as being out of home non-lunch box consumption.  How much of the out of home consumption takes place in the context of high performance sporting activity (i.e. the 10 kilometre race equivalent)?  We heard evidence from one witness who told us that his wife puts a bottle of Lucozade Sport in her child’s lunchbox on days when school sporting activities take place.  That may be characteristic of one form of out of home consumption, but we were not persuaded that school sporting activities are usually at the 10 kilometre race equivalent. The figures suggest is that consumers of Lucozade Sport participating in high intensity sport or exercise account for a significant part of the total consumption.  The evidence does not however satisfy us that Lucozade Sport is either mainly purchased or mainly consumed on account of its nutritional ingredients.

51.	The points that we have highlighted are drawn from a large volume of material.  Some concerned research into “in-house occasions” and these highlight the opportunity for Lucozade Sport encompassing “habit consumption at home”.  This further indicates that GSK’s marketing is aimed at a wider section than those engaged in high intensity sport.  

The relevance of the SIS decision

52.	Our conclusion on the question of whether Lucozade Sport is purchased and consumed for its nutritional function of providing energy to sustain high intensity sport or exercise is that while a significant proportion of consumption may be for that purpose, the overall consumption fulfils a wider range of needs. That conclusion on the facts contrasts Lucozade Sport from the products considered in 1997 by the VAT and Duties Tribunal in the SIS case.  In paragraph 33 of that decision the Tribunal makes a finding that the products, while commonly consumed, are only consumed “by the athletes, sports people and others who characteristically take them for nutritional purposes”. That is evidently not the position as regards Lucozade Sport.

Applying the Bioconcepts criteria

53.	With those findings in place we turn now to the initial question of whether, measured by reference to the Bioconcepts criteria, GSK can satisfy us that the products are to be excluded from the scope of the word “beverage”.

54.	To what extent is the product consumed to increase liquid levels?  Here we have the evidence of Professor Maughan who said in the course of his oral evidence:

“Water is an essential part of the functionality of the product, not just as a delivery mechanism but also to replace the water that has been lost during exercise. …  Drinks consumed during exercise should provide a source of carbohydrate and should replace water lost through sweat”.

Both statements were endorsed by Professor Strain.  Then we have GSK’s “Ingredients Bible” which, at page 822 says in respect of Lucozade Sport that it can “help enhance fluid absorption, retention and improve exercise performance by providing a special combination of carbohydrates and electrolytes.  The enhanced state also stimulates drinking to help athletes match fluid intake to sweat output”.  

55.	With those pointers in mind we are satisfied that rehydration is one of the main purposes for which Lucozade Sport is commonly consumed.

56.	Is Lucozade Sport commonly consumed to slake thirst?  We heard from Dr Casey how Lucozade Sport in powder form is provided as part of the daily operations ration pack for soldiers involved in high level activities in intense heat in Afghanistan.  On the sachets is found the message “Combat your thirst”.  Mr Kemp, GSK’s Vice President (Marketing and Innovation), said that a competitor of Lucozade Sport was the free water provided in the gym.  Both those features indicate that Lucozade Sport, in common with water, is drunk to assuage the thirst. 

57.	Professor Maughan questioned whether consumption to “fortify” was a characteristic of a beverage.  But he nonetheless accepted that Lucozade Sport does fortify.  He agreed with Professor Strain’s evidence that the sugars in Lucozade Sport would fortify in the sense of giving a feeling of energy.

58.	Is Lucozade Sport commonly consumed for the pleasure it gives?  The Information Sheet published by GSK on its website in 2004 says under the heading “Usage Guidance”:

“Lucozade Sport is a delicious and refreshing drink suitable for consumption by all healthy children and adults.”

An “Energy Research” analysis shows that 67% of sports participants and 63$% of non-sports participants said that they drink Lucozade Sport because it is “hydrating”.  Its “refreshing” also scores highly (55% and 55%), as did “Like the flavour” (55% and 53%).  These tend to establish that consumers drink Lucozade Sport for hydration, refreshment and pleasure.  Those items of evidence are confirmed by our own impression.  We had the opportunity of consuming Lucozade Sport in the intense heat of a tribunal hearing room with no air conditioning and no windows.  We found it to be refreshing and it gave us pleasure.

59.	It follows that, taking the Bioconcepts approach, Lucozade Sport comes within the scope of the word “beverage” in Group 1 of Schedule 8.

60.	Reverting to the question of whether the nutritional contents of Lucozade Sport have the effect of re-characterising the product as something other than “beverage”, e.g. as “functional food”, or “liquid food” (to use GSK’s expression), we think that the evidence shows that this is not the case.  GSK has not established to our satisfaction that sales of the product to consumers result in Lucozade Sport being mainly consumed for the nutritional values in the circumstances identified by Professor Maughan. On any reckoning a significant portion of the sales are to armchair enthusiasts and, even where the product is consumed by dedicated sports people, they consume part of their purchases in circumstances when they are not performing high intensity sport or exercise.  It follows that the nutritional values of the product do not outweigh its attributes as a source of pleasure or a means of rehydration or refreshment.  Lucozade Sport consequently remains a beverage for the purposes of Group 1 of Schedule 1.

The Public Notice (VAT Notice 701/14)

61.	GSK invites us to reach a different conclusion on the strength of the contents of the Public Notice.  This Notice was published by HMRC in 2002.  It is still in force.  It sets out conditions that will enable sports products to be treated as zero-rated.  

62.	Condition 1 is that the product “is aimed at supplying energy to enhance performance and/or enhance recovery after exercise and both the package and advertising of the product reflect this.”

63.	Condition 2 is that it is not primarily marketed as a soft drink.

64.	Condition 3 is that its primary purpose is the provision of energy … but not rehydration.

65.	Condition 5 is that it has as its main ingredient (other than water) “carbohydrate the majority of which is not sugar”.

66.	We are not of course bound by the wording of the Public Notice.  However, we note that the packaging of Lucozade Sport refers to the product as “proven to give you an Edge” and says “Drink before and during your session to provide carbohydrate to fuel your muscles and maintain performance for longer”.  Those words can fairly be said to satisfy Condition 1.  Condition 2, which demands that it should not be primarily marketed as a soft drink is scarcely satisfied when, as we have already observed, Lucozade Sport is marketed alongside soft drinks of all varieties in retail outlets of all types.  Regarding Condition 3, we have already found from the evidence of Professor Maughan and Professor Strain that rehydration is one of the primary purposes and ranks as such together with the provision of energy.

Conclusion

67.	For all those reasons we have concluded that GSK has not satisfied us that Lucozade Sport falls outside the scope of the expression “beverage” in Group 1 of Schedule 8.  We therefore dismiss the appeal.

68.	HMRC asked for their costs of the appeal.  We think this is justified in all the circumstances and we award them their costs accordingly.

69.	This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

SIR STEPHEN OLIVER QC
CHAMBER PRESIDENT
RELEASE DATE: 3 September 2010