Kalron Foods Ltd v Revenue & Customs [2006] UKVAT V19738 (24 August 2006)

 19738
VAT – ZERO-RATING  -  food, etc  -  whether “Zumo Fresh Blend” a beverage  -  yes  -  product consumed as a beverage notwithstanding its status as food  -  observations as to position where product constitutes both food of a kind used for human consumption and a beverage  -  product supplied as an excepted item and hence not zero-rated  -  appeal dismissed     

MANCHESTER TRIBUNAL CENTRE

KALRON FOODS LTD			Appellant

- and -

THE COMMISSIONERS FOR
HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

Tribunal:	Michael Johnson (Chairman)
John Lapthorne FCMA

Sitting in public in Birmingham on 26 July 2006

Peter Webb, VAT Consultant with Powrie Appleby LLP for the Appellant

Sara Williams, counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents 

	© CROWN COPYRIGHT 2006

DECISION

1.	This appeal concerns the correct classification for value added tax of supplies of products by the Appellant under the description “Zumo Fresh Blend”.

2.	The “Zumo Fresh Blend” process is the liquefaction of fresh raw fruit and/or vegetables into a thick drink, not unlike a cold soup in consistency.  This process is performed by a special machine, demonstrated to us at the tribunal hearing.  The resultant product is retailed by the Appellant to the general public at an increasing number of outlets in England.   It is sold to the public in disposable takeaway cups. 

3.	As food of a kind used for human consumption, the supply of “Zumo Fresh Blend” should be zero-rated for VAT pursuant to section 30(1) and Schedule 8, group 1, item 1 of the Value Added Tax Act 1994 (“the Act”), unless the supply is of an “excepted item” which is not overridden by “items overriding the exceptions”, as group 1 provides.  If the food constitutes an “excepted item”, not so overridden, then its supply attracts VAT at the standard rate.  

4.	Note (1) to group 1 provides that “food” includes drink.  It is not, therefore, decisive whether or not “Zumo Fresh Blend” constitutes a drink.  What is decisive is whether the product constitutes excepted item 4, viz a beverage (including fruit juices).  In that case, the supply will be standard-rated.

5.	It is not contended that “Zumo Fresh Blend” is affected by the items overriding the exceptions contained in group 1, specifically item 4 of those items, viz tea, maté, herbal teas and similar products.  It is common ground that the product does not fall within the items overriding the exceptions.  

6.	The single issue that the tribunal has to decide is whether supplies of the product fall within item 4 of the excepted items.  If they do, as contended by H M Revenue and Customs (“HMRC”), then such supplies are properly standard-rated; if they do not, as contended by the Appellant, then the supplies are properly zero-rated, being supplies of food of a kind used for human consumption.

7.	Mr Webb, appearing for the Appellant, called as his principal witness the franchise development manager of the Appellant, Mr Anthony Round.  Mr Round gave his evidence on oath.  He was cross-examined by Ms Williams, appearing for HMRC.  We also had the assistance of Mr Ronak Dalal, director of the Appellant.  He was not sworn, but oversaw the demonstration to the tribunal of the machine used to liquefy the fruit and/or vegetables constituting the “Zumo Fresh Blend” product.  They were the only witnesses for the Appellant.  For her part, Ms Williams called no witness.

8.	We were provided by Ms Williams with a folder containing copies of relevant documentation.  Mr Webb provided us with a “menu” of varieties of “Zumo Fresh Blend”, and an extract from the website, www.smoothiebar.co.uk.  The only authority cited to us, by Ms Williams, was the tribunal decision in Grove Fresh Ltd v H M Revenue and Customs (2005) VAT Decision 19241, a decision of Dr Brice (Chairman) and Mrs Albuquerque, sitting in public in London on 5 August 2005.

9.	The following appear to us to be the facts.

10.	The product is supplied at what are known as “Zumo Fresh Smoothie Bars”.  These are retail outlets with counters on which are colourfully displayed different kinds of raw fruit and vegetables.  Behind the counter, a “menu” of “Zumo Fresh Blends” is prominently displayed.  Customers order a blend from the “menu”.  This may be a blend of 100 per cent orange, 100 per cent carrot, etc, or a blend constituting a mixture of different fruits, of different fruits combined with vegetables, or of different vegetables.  The “menu” is not exclusive:  customers may order any available fruit or vegetable, or combination of one or more fruits or vegetables, that they wish.

11.	The order is then blended specifically for each customer on the spot.  The machine used resembles a large metal liquidizer, into which the fruit and/or vegetables are fed, one by one, and pulped by the machine.  The process discards any parts of the fruit or vegetable that are unsuitable to be liquefied for consumption, leaving a thick drink containing not just the juice of the fruit or vegetable, but also the rest of the fruit or vegetable itself, in drinkable form.  

12.	The resultant product, a cold, uncarbonated drink, is allowed to “settle” for a short period, and is then handed over in a plastic cup, with a lid if required, with or without ice as the customer prefers, and with the option of taking a straw.  The thickness of the product is such that it is not always suitable to be consumed through a straw.  Typically, the product is not consumed at the outlet – although some outlets have a small number of kiosks or tables and chairs to sit at – but is taken away by the customer for consumption elsewhere.

13.	The concept is advertised to be unique, and it is in our opinion clearly distinctive.  It lies in the customer being offered a ready-to-consume drink, individually made for the customer on the spot, containing only the goodness of natural fruit and/or vegetables, with nothing added and nothing taken away, except what is inedible.  The product is prepared and sold at a “bar” that is unlike other bars in the marketplace.  As the practical expression of a good idea, the product has a fresh attractiveness, both in content and in presentation.

14.	We tasted a fruit blend and a vegetable blend.  Both were unlike anything we had previously experienced in flavour.  Although quite thick, the products were not difficult to drink.  The colour was not such as to be off-putting.  The result was a refreshingly healthy drink.

15.	The machine used to make the product is of American manufacture.  The Appellant’s right to market the “Zumo” brand in England arises from a “master” franchisor located in Ireland.  The Appellant is not limited to the use of this particular machine, but has chosen it as the best it can find for the purpose. 

16.	The Appellant also retails a yoghurt-based product called a “Zumo Fresh Smoothie”.  We are not concerned with that product, whose VAT treatment has been agreed with HMRC.

17.	For the Appellant, Mr Webb submitted that the expression “food” contained in item 1 of group 1 of Schedule 8 of the Act should bear its normal, everyday meaning.  In the present case, he said, the product in issue is a soft form of food.  This is distinct from a beverage, which has been described, in VAT Notice 701/14/02 (May 2002) at paragraph 3.7 as a liquid “commonly consumed to increase bodily liquid levels, to slake thirst, to fortify or to give pleasure”.      

18.	Mr Webb submitted that the product is not a beverage in that sense.  Rather, it is a product suited to eating, just as a cold soup is for eating, despite its liquid consistency.  Moreover, the contents of the product are health-giving.  The product constitutes a portion of fruit and/or vegetables of the sort that the government urges all of us to consume five times per day.  Indeed, the product may well be the preferred method of consumption for those who have difficulty masticating, such as people with dental problems.  

19.	In short, Mr Webb said, this was a unique product, not suited to classification within item 4 of the excepted items in group 1, but entitled to zero-rating, because it was undoubtedly “food” within the meaning of item 1 of group 1.  He said that there was no distinction in that respect between the different items on the Appellant’s “menu” – all were food, and none were beverages such as a straightforward fruit juice would be.   He urged us to allow the appeal.     

20.	For HMRC, Ms Williams submitted that whether or not the product constituted a healthy drink was neither here nor there.  That was irrelevant.  Furthermore, she said, it was irrelevant whether or not the product might amount, in effect, to a meal replacement.  

21.	Ms Williams identified four factors that she submitted to be relevant:  (1) the ingredients of the product – she submitted that, according to that factor, the product could be either food or a beverage; (2) the manufacturing process – it would be strange, she submitted, if that were to affect the VAT treatment one way or the other, since all that had happened was to put the food through a machine; (3) appearance and taste – applying those criteria, the product was not a soup; and (4) marketing and packaging – the product was presented as a freshly-squeezed drink/ beverage.  

22.	Ms Williams said that the physical quality of the product was not a defining factor.  She posed the question:  although the product is a healthy one, is it properly described as a beverage?  She answered this in the affirmative.  She cited the Grove decision (supra) with regard to the treatment by the London tribunal of the question whether the product might be a cold soup, such as “gazpacho”.  In that regard, we note that, at paragraph 32 of its decision, the tribunal in Grove said this:

“We agree that the texture and viscosity of the gazpacho soup differed from that of the Appellant’s products; the texture was more granulated and the taste more bland.  We agree that the gazpacho could be drunk from a wine glass or tumbler but that is not the intention; the intention is that it should be eaten as a soup.  In our view almost any food could be eaten with a spoon from a soup plate but the intention is that the Appellant’s products should be drunk.  They are beverages and not soups and are marketed as such.”

23.	Ms Williams accordingly urged us to dismiss this appeal.

24.	In considering our decision in this appeal, we are mindful that, as a unique concept, the retailing of the Appellant’s “Zumo Fresh Blend” products deserves to be regarded in a unique way.  We must form a view as to the nature of the supplies made by the Appellant that is untrammelled by what other suppliers have done, seeing that their methods have not been emulated by the Appellant.

25.	Thus, the Grove case is not a valid precedent, because it concerned the supply of vegetable juices.  We are not dealing with the supply of juices; the products in this case are the whole of the fruit and/or vegetables, in drinkable form, save for the discarded inedible bits.  

26.	It is a feature of the present case that there is nothing to show that the “Zumo Fresh Blend” products have been presented and purchased as either food or a beverage.  They have been presented in a unique way: neither as a meal replacement, nor as a drink like a fruit juice or cola.  Similarly, they have been purchased by a special kind of customer: a customer who values the product for its unique properties, different from those of products one could get in an ordinary bar, cafeteria or pub.

27.	We therefore think that Mr Webb is right that the classification of these products presents a fresh problem.

28.	As mentioned above, note (1) to group 1 of Schedule 8 of the Act provides that “food” includes drink.  It must therefore be envisaged that there are drinks which qualify for zero-rating as “food” despite the excepted items, in particular excepted item 4.  Although that is explicable by item 4 of the items overriding the exceptions, tea, maté, etc being drinks, these tribunals have held that liquid products that a consumer takes for nourishment, such as powders to which water has been added, amount to “food” when drunk, and that these are not beverages.

29.	It is everyday experience that foods are liquidized in one’s kitchen and consumed as sauces or dressings, or in place of “solid” food by the young or disabled.  Mr Webb must be right that if that happens, or if an item amounts to a soup, it is not a beverage.  A food is not a beverage simply because it is presented in liquid form.

30.	On the other hand, approaching the problem of classification from the opposite direction, there exists a wide range of drinks which are beverages notwithstanding their nutritional effect.  Thus, spirits, beer, wine and other dutiable drinks are classified as beverages by item 3 of the excepted items in group 1 of Schedule 8 of the Act.  Many of these drinks are the result of the distillation or fermentation of natural ingredients, such as malted barley or grapes, and can be consumed in place of solid food (although that is not something that one would advise).    

31.	Item 4 of the excepted items in group 1 moreover shows that products for the preparation of beverages are treated in the same way as the prepared beverages themselves.  The distinction between food and beverages thus extends to the raw materials for beverages, whether or not having the appearance of food.

32.	We therefore think that Ms Williams is right when she submits that the physical quality of the product is not the defining factor.  We think that there must be many products which are capable of being both food and beverages.  That is recognized by group 1, which takes the form it does because that is so.  In other words, group 1 assumes that the excepted items would be food, but for the exceptions.  That is particularly true seeing that “food” is defined to include drink.

33.	It is at this point, we think, that Mr Webb’s logic breaks down.  His submissions assume, we think, that the “Zumo Fresh Blend” products are food and that they are not beverages.  What he says about the health-giving properties of the products and their feeding properties may well be right – indeed they appear to us to be right – but that does not prevent the products being consumed as beverages.   The Appellant has the difficult task of demonstrating that the products are not beverages, when (as it seems to us) they may well be drunk as such.        

34.	To take a simple example.  Say that it is lunchtime in the city, and one friend says to another, “Let’s go down to the pub for a beer”.  The friend replies, “I’m off alcohol, I would rather go down to the Smoothie bar and have a ‘Zumo’”.  So the first friend is persuaded to go non-alcoholic, and they both end up buying takeaway “Zumo Fresh Blends”, in effect as a beverage substitute.

35.	In this appeal there is nothing to indicate that it is not in that context that the products are commonly sold.  Equally there is nothing to indicate that the products are sold as a food substitute.  What is, however, clear is that the products could constitute both food and beverages.  As the burden of proof rests on the Appellant to show that the products are not beverages, the Appellant is in difficulties on the facts that the tribunal has been able to find.

36.	We therefore conclude that it was in order for HMRC to classify these products as beverages.  The Appellant has not been able to show that that classification was wrong, so it follows that the appeal is lost.

37.	This appeal is therefore dismissed.

38.	We think that this appeal has presented a tricky problem of classification that has fully merited an appeal to this tribunal.  That being so, our provisional view as to costs is that, although HMRC have succeeded in the only issue for decision, it would be right for us to make no order as to costs.  The appeal may however be restored before us by either party for the limited purpose of argument as to costs, if our provisional view as to costs is unacceptable and agreement cannot be reached.

MICHAEL JOHNSON
CHAIRMAN
Release Date: 24 August 2006
MAN/06/188